Don’t Let Student Loan Debt Hurt Your Retirement (Dec. 2023)

Dont Let Student Loan Debt Hurt Your Retirement

The cost of education is rising, and, more than ever, students are taking out loans to fund their education. A growing concern is that the burden of paying off these loans severely hampers students’ ability to save for retirement. In fact, a recent study found that by the time college graduates reach their 30th birthday, those who don’t have student loans will have saved twice as much for their retirement as those who are paying off student loans.

The sheer size of most student loans means consumers are stuck paying them off for years, if not decades. Most people have to choose between channeling a good percentage of their income toward paying down this debt or saving it up for retirement. And many of them choose to pay off their student debts to preserve their credit over saving for their retirement.

Student Loan Defaults Can Hurt Your Social Security Benefits

Defaulting on your student loans will not only hurt your credit but it can shrink your Social Security benefits as well. As things stand today, Social Security is a huge part of the retirement plans for millions of Americans. In June 2018, about 43 million retirees — and around 3 million of their dependents — benefited from an estimated $63.2 billion in Social Security benefits. The average monthly benefit for retirees was roughly $1,413 at that time.

These benefits or monthly payouts make up the only kind of income that about 33% of elderly Americans depend on, according to the Social Security Administration. It’s safe to say that these benefits are important. However, if you default on paying back your federal student loans, the government may very well recoup its money by garnishing your Social Security benefits.

United States Government Accountability Office Social Security Offsets Report

The Government Accountability Office reported that, for the 2015 fiscal year, about 114,000 older student loan borrowers had their Social Security disability, retirement, or survivor benefits garnished due to defaulted federal student loans. Nearly all (95%) of borrowers over the age of 65 in default received retirement or survivor benefits during that time.

Even though the Debt Collection Improvement Act of 1996 only allows for the garnishment of up 15% of your benefits, 15% is still quite a bit of money – especially when it’s your only source of income. If you don’t have other kinds of savings, like a 401(k) or investment income, then it can be difficult to make ends meet with money being withheld from Social Security benefits every month to pay off defaulted student loans.

How to Keep Student Loans from Ruining Your Retirement

A report shows that the number of people over 60 years old with mounting student loan debt has quadrupled in the last decade. Tuition is getting more expensive and wages aren’t keeping up with inflation.

If you’re one of those people with student loan debt and you are looking for a way to safeguard your retirement plans, here are a few things you can do:

Make Tough Priority Choices

The one thing that every parent wants is to provide their child with a good education. It’s one of the best ways to ensure that they prepare for life as an adult. To do that, most parents start saving for their children’s college education. The issue is that it may keep you from being able to save for your own retirement.

Your kids, as important as they are, will have options once they’re ready for college. Your kids can apply for scholarships, get their own student loans, or maybe even pay for school themselves by holding a job while they take classes.

The point is, as great as it would be to support your kid through college, it’s more important to ensure that you can be financially secure when you retire. You may not have as many options as they will, so be sure to start by saving for your retirement and paying off your student loans first.

Look Into Loan Forgiveness

A number of public service jobs will qualify for federal student loan forgiveness, cancellation, or discharge. While these programs are only available to graduates with federal student loans, they can be a huge savings to those who can qualify.

Chart of Student Loan Forgiveness, Cancellation & Discharge Options

The exact qualifications — including the length of time you must hold an eligible position — will vary based on the program. In addition to work-based programs, some student loans can be forgiven, canceled, or discharged due to issues like death, bankruptcy (rarely), or a closed school.

Make Student Loan Repayments Part of Your Monthly Budget

The problem with student loans is that monthly payments are extremely high. Many people treat student loan repayment as an afterthought. This means people leave their student loan repayments until the last possible minute as opposed to starting to pay them off as soon as they get any source of income.

The idea is to treat your student loan repayments the same way you would treat your rent or your mortgage. If you don’t pay those things on time, the penalties can be devastating.

If you include your repayments in your monthly budget, you’ll find that you quickly look for ways to make it work. You can move things around to accommodate the extra bill and before you know it, repaying your student loan debt will become a habit. This can help you get ahead of it all.

Refinance Your Student Loans

Student loans come with hefty compounded interest rates that make it more difficult to pay them off in a timely manner. If you have good credit, you may be able to refinance your student loans for a lower interest rate and lower monthly payment. One option is consolidating them all into one payment. This is one of the best ways to free up some cash for other things such as saving for retirement.

Be sure to check your credit reports and scores before you start looking for a refinance loan so you know what to expect.

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If you have federal student loans, be sure to consider all of your repayment options before you refinance. That’s because you can only refinance student loans with private loans — there are no federal student loan refinance loans. So, if you refinance a federal student loan with a private loan, you will no longer be eligible for the various federal repayment programs.

Find Ways to Subsidize Your Income in Retirement

Earning income during retirement is another way to ensure you have what you need without being entirely dependent upon retirement savings or government benefits. Some options to consider:

  • Start an online business, such as becoming an Amazon Affiliate
  • Get a gig-based job, like becoming a rideshare driver
  • Give lessons for something that you do well
  • Consult with companies related to your previous career

The most important thing is to have a budget and to stick to it no matter what. You may have to forego some of life’s luxuries such as eating out every night or buying that $100,000 sports car you always wanted when you turned 45. But once you put a system in place you can rest easy knowing that your student loans won’t mess up your retirement.

Your Student Loans Don’t Have to Outlast Your Career

If you used loans to pay for your degree, you begin the seemingly endless chore of paying off your student loans almost the moment your graduate. And, while it can seem like your best option is to funnel money toward your loans until they go away, it’s important to know your priorities.

Yes, paying off student loan debt is a good goal — but it shouldn’t surpass your retirement savings goals, or your everyday budgetary goals. Instead, make sure you find a place in your finances for both student loan repayment and retirement savings, as well as everyday emergency savings. With a well-balanced budget, student loans don’t have to eat into your retirement income.

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