Of the $1.2 trillion in student loan debts that are outstanding, more than 16% of it is that of people over the age of 50 – according to the New York Federal Reserve Bank.
It has been known for some time that student debt can be a real problem for the young. It can cause them to delay buying a home, working multiple jobs or even defaulting on their loans. But it can also impact older Americans, too.
People over the age of 50 are getting near retirement age. This means that having to struggle with student loan debts can really be more of a problem compared to young people that graduated recently. We know of one 62-year-old woman that would like to retire soon. Unfortunately she still owes more than $70,000 on her student debts from loans she got 40 years ago. This couple does not own their home and has minimal savings. The fact that when you factor in her student loan debt their debt worth is less than zero.
The problems just compound
If you are facing retirement, you’ll have to make a change in your financial planning. You will be transitioning from earning money and working to being on an income that’s fixed and consists of your retirement accounts and payments from Social Security. This can be tough. If you add student loan payments to this, it becomes even tougher.
It’s the Roach Motel of debt
You might have seen or heard commercials for a product called the Roach Motel. Its slogan is, “roaches check in but they never check out.” Unfortunately, student loan debt is like that. If you or your spouse has debts from the 1970s or 1980s, you just can’t “check out.” These debts will come back to haunt you. In the event you just forgot about your loans or didn’t make your payments, you could see your tax refunds and Social Security checks and garnished to repay your debts. The US government can get really ugly when it comes to student loan debts and garnish as much as 15% of your benefits to repay your debt. If you’re living on a fixed income, this can be a large amount. When you add these reduced benefits to the increased cost of medical expenses, the cost of living and even more, this could leave you in a serious financial condition.
Don’t borrow to finance your kids’ education
You could have paid off your student loans and think that all this doesn’t apply to you. But you could be in your 40s or early 50s and thinking about getting some parent PLUS loans to help finance your kids’ college educations. So even if you repaid your own student loan debt, you need to be careful or you could be getting yourself right back into debt and just before retirement.
As you might guess, this just isn’t good common sense. As you become closer to retirement you need to be paying off any remaining debts and saving as much money as you can. What you shouldn’t be doing is taking on new loans to pay for you childrens’ educations. It will just make it that much tougher to make ends meet when you’re living on a fixed income.
There is no just solution
If you’re in your 50s and still owe on your student loans, there is no real solution to this. There have been laws passed recently or updated that can help people better understand the consequences of the student loans they got back in the 70s or 80s. However, many of them weren’t in existence when you were taking out your student loans. This means that you, like many others, may not have known exactly what it meant to get student loans, how your would repay them or the fact that they can never be discharged – even through bankruptcy. This is the reason why many seniors are seeing a lot of debt rearing its ugly head as they reach Social Security age.
Work till you’re 75?
Unfortunately, if you’re over 50 and in this condition the only real solution is work as many years as possible so you can pay off your debts. This could actually mean working until you’re 70 or older. Of course, the longer you avoid taking Social Security the more time it will be before it could be garnished by the federal government. Plus, it provides additional time where you could be earning and paying off your student debts.
If you’re in your 20s or 30s and facing a load of student debt, one of the best moves you can make is to increase your student loan payments. As an example of this, if you’re on 10-Standard Year Repayment and owe $25,000 at 5% your payment would be roughly $265 a month. However, if you were to up that payment to $300, you would have your loan paid off in eight years and seven months. And if you were to boost it to $350 a month, it would be paid off in about seven years.
What to do before you boost those payments
However, experts say that there are three financial things that you need to do before you increase your student loan payments.
The first of these is to make sure you’re saving for retirement. If you’re working for a company that offers a 401(k) with an employer match, take advantage of it. While it’s great to get that student loan debt paid off, you’re doing it at the cost of leaving “free” money on the table. And if your employer does match your contributions, make sure you contribute up to that match as no amount of extra repayment on that student loan will make up for the money you’re leaving behind.
Get rid of high interest credit card debt
Second, before you boost your student loan debt payments make sure you pay off any other high interest debt, which is typically credit card debt. However, it could be a car loan or even a private student loan. But don’t make more than the minimum required payments on your lower interest loans until you’ve gotten rid of the higher interest ones that are costing you more money. For example, if you have a credit card with an interest rate of 9.9% it just makes good sense to pay that off first with any extra cash you have rather than your student loans which are typically at 6.8% or less.
Have an emergency fund
Another thing you need to do before you start boosting the monthly payments on your student debts is to create an emergency fund. This is to cover unanticipated events like unexpected medical costs, an automobile accident or the loss of your job. If you don’t have an emergency fund and suffer one of these calamities, you would most likely have to finance it through credit card debt or a personal loan, which means laying on more debt. In a worst-case scenario if you were to lose your job would you be able to support yourself and make the minimum payments on your student loan debts until you find another job? In most cases the answer to this will be “no.” So, don’t start making those extra payments on your student debts. Instead, take the cash and put it into an emergency savings account until you have the equivalent of six months’ living expenses.
Once you’ve done all this, you can start boosting your student loan payments and get out from under that load of debt.