Close to retiring? Beware of student loan debt

Allworth Co-CEO Scott Hanson shares a word of caution about the burden of carrying student loan debt into retirement.

Amidst all that we as a country have been through in the last 16 months, there’s a little-known debt explosion wreaking havoc on the finances of millions of people over 50: student loans.

Yes, really.

And there are several reasons why.

The first (which I’ll touch on briefly) is akin to the “silver lining” of this story, and that is, more and more retirees, and people over 50, are heading off to college to follow lifelong dreams, focus on new passions, or merely to keep those synapses young.

True, there is a lot of career retraining and pursuit of advanced degrees among the over 50 set, and, to be sure, it can get wildly expensive. Still, however, that’s an investment in yourself. (Plus, tuition can be much cheaper for older students. For savvy researchers, there are numerous grants, foundations, and substantial discounts available.)

Conversely, by far, the most-concerning reason that I’m seeing student loan debt for people over 50 skyrocket has to do with parents taking out loans to pay the tuition of dependent children.

Unfortunately, the student loan industry is a financial minefield for parents who are trying to put their offspring through school. Not only are interest rates for Parent PLUS program loans roughly 4X the rates at which students are able to borrow, these loans also come with steep origination fees.¹ The interest rates are high enough, in fact, that if only the minimum payment amount is applied each month, the accrued interest can easily outpace the payment principal and the loan amount just keeps growing.¹

This has led to a massive and badly timed debt load for people who are either planning to retire soon, or who have recently retired.

But just how bad is it?

With 8.7 million Americans over the age of 50 now carrying student loan debt ($44,000 on average), there are now tens of thousands of people who aren’t scheduled to pay off their loans until they are in their 90s.

And those numbers are growing fast. In fact, the average amount for student loan balances for people over-50 has actually doubled in just the last four years.¹ 

And that’s alarming.

Plus, student loan debt isn’t like other types of debt.

First, unless it is paid in full, the debt is pretty sure to stay in place. That’s because federal loans are backed by the government, and while occasionally they might get discharged in bankruptcy, the scenarios upon which that is possible are few and far between. (Social Security will take 15% of your benefit amount to pay a student loan if you are in default.)  

A few weeks back I wrote about the various ways a grandparent could help pay for a grandchild’s college education. If you’ve saved well, there’s some good information there, and much of what I wrote applies to parents, as well.

The key is to avoid the loans altogether, including by declining to act as a co-signer, because co-signing is, in the eyes (and under the law) of both the bank and the federal government, the same as taking out the loan yourself.

So, if you are considering taking out a loan in your name for your child, what should you do?

First, as everyone’s situation is unique, before you take on any debt, schedule an appointment with your advisor. I have worked with dozens of clients who were able to finance college for a child, and, through some creative planning, were able to do so without personally taking out student loans.

Second, remember, debt is the thief of retirement dreams. If you have student loan debt, while there are various income driven, graduated, and extended payment options to help you lower your payments and principal and get that loan paid off, consider that, even someone who is 65 years of age, and who has, say, $1 million in retirement savings but carries $100,000 in student loan debt, could quickly find themselves in serious financial trouble if only a few things break the wrong way.

As with everything related to finance and retirement, the key is to have a plan and to understand all your options. At this stage in your retirement preparation, you don’t have the time to recover from financial setbacks.  

We are seeing an explosion in student loan debt for people over 50. Think before you borrow. And, at the risk of parroting myself, please speak with your advisor before you take out a loan.

^{1 https://www.bloomberg.com/news/articles/2021-06-17/student-loan-growing-share-of-1-7-trillion-debt-pile-held-by-older-americans?srnd=premium&sref=kmlxXSC0}