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3 ways student loan debt can wreck your retirement

Whether you're considering a return to school in midlife or thinking of co-signing a student loan for a grandchild, it's smart to think ahead.

By Credit.com Dec 19, 2013 5:28PM

This post comes from Gerri Detweiler at partner site Credit.com.


Credit.com on MSN MoneyIt's tough enough to deal with student loan debt you can't pay when you're a 20-something, but imagine dealing with it when you're in your 60s or 70s. "This population often gets ignored because people hear the words 'student loans' and they think 20-year-olds," says Persis Yu, a staff attorney with the National Consumer Law Center.


College graduate © Alys Tomlinson/Creatas Images/JupiterimagesIt's a big -- and growing  -- problem. Americans age 60 and older owe roughly $43 billion in student loan debt and more than 10 percent are 90 days or more delinquent.


There are some unique challenges that older Americans, many of whom are partially or fully retired, face.


1. The upside is limited.  A higher education is often seen as a way to improve job prospects and increase earnings, either in one's current career or in a new one. Indeed, the Pew Research Center reports that the typical college graduate earns an estimated $650,000 more than the typical high school graduate over the course of a 40-year career.


But for retirees with student loan debt, the picture is much different.

"There are four potential sources of education debt for retirees," observes Mark Kantrowitz, publisher of FinAid.org:

  • Undergraduate/graduate student loan debt from decades past
  • More recent undergraduate student loan debt
  • More recent graduate student loan debt
  • Education loan debt borrowed (or co-signed) on behalf of a child or grandchild

He believes this last group is driving a lot of the increase in debt for older Americans.

"It seems unlikely that much of this debt would have come from undergraduate student loans from decades in the past, since fewer students borrowed 30+ years ago and the average debt at graduation was much lower," says Kantrowitz. Crunching available data, he concludes that "most of the retirees with education debt borrowed or co-signed that debt to help their children or grandchildren pay for college. Much fewer borrowed to pay for their own education."


Some borrowers may have gone back to school at an older age to get a degree with the hopes of earning more. Indeed, during the recent recession some schools were reporting a significant increase in enrollment by students age 50 or older. But even if these grads come out of retirement to work, they have less time to reap the rewards of a degree. As the Pew report points out: "a dollar earned at the start of someone's working life is more valuable than a dollar earned toward the end of that person's working life."


2. There are fewer options for digging out. Student loans are extremely difficult to discharge in bankruptcy, and there is no limit on how long federal loans can be collected. As a result, borrowers may feel like they are in a virtual debtor's prison. This may be especially true of those in the later years of life who see no way to pay those debts off in their lifetimes.


One of the best programs for handling unmanageable student loan debt, for example, is the Income-based Repayment program (IBR), which allows students with federal loans to apply for payments that are based on their incomes. Any remaining balances will be forgiven after 10 years for those who work in public service jobs, or after 20 to 25 years for all others.


But IBR is not retroactive. Forgiveness occurs only after the required number of payments are made while enrolled in the program. And it is not available for Parent PLUS loans or for private student loans, though there are efforts to change that.


Yu, the attorney with the NCLC, points out that PLUS loans may be eligible for the Income-Contingent program, which is fairly similar to IBR, if they have been consolidated into a Direct Consolidation Loan on or after July 1, 2006.


Loans co-signed for a child or grandchild will always be private student loans, Yu points out, "and they are another animal." Unlike federal student loans there are statutes of limitations on private student loan debt, so if that time period runs out before the lender gets a judgment, the borrower should be able to raise the statute of limitations as a defense if they are sued. Still, that doesn't make the debt go away.


3. Your retirement income may be at risk. While Social Security is out of reach of most creditors, when it comes to federal student loans, Social Security income may be at risk. An increasing number of retirees are finding that part of their Social Security income is being taken to offset their student loan debt.


Even those with what would seem to be ample retirement savings may find themselves dipping into those funds -- or taking on debt -- to help their children or grandchildren with college loan payments. "Education debt is actually a problem within a problem for retirees who constitute one of the fastest (if not the fastest) growing debt-encumbered demographics today," says Mitchell Weiss, a financial services executive and author of "Life Happens: A Practical Guide to Personal Finance from College to Career," "in large measure because fixed income investment returns have been absolutely pummeled over past several years."


He provides this example: "Consider a couple that managed to accumulate $1 million during the course of their individual working lives. A few years ago, that $1 million would have probably returned $50,000 or $70,000 in interest and dividends each and every year. Today, however, that same $1 million may only be returning $20,000 or $30,000, leaving them with a $30,000 to $40,000 shortfall. Has their cost of living declined by a commensurate amount? I don't think so. . ."


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