Be aware of the risks before you sign a loan agreement
The Consumer Financial Protection Bureau (CFPB) reports that the number of student loan borrowers aged 60 or older increased by at least 20% between 2012-2017. In addition, over 75% of states experienced at least a 50% increase in student loan debt. These two numbers, taken together, suggest a troubling trend that could lead to economic hardship for millions more Americans over the coming years if they are forced to repay their student loan debt after retirement.
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Why it Happens
The majority of seniors with student loan debt didn’t take out loans to pay for higher education. According to the CFPB, 73% of those with student loan debt owed by older adults borrowed money for their children or grandchildren. Only 27% claimed they borrowed loans for themselves or their spouses.
If the loan recipients do not honor their agreed-upon payments, co-signers can be in trouble. They are responsible for the payments as though the loan was their own.
Student loans and social security
Your monthly benefit cannot fall below $750, but up to 15% can be garnished from your Social Security payments to pay off student loan debt. The garnishment can only be done up to two years after a loan default. This gives you plenty of time to contact the loan provider to change the repayment plan.
Advantages and Disadvantages of Repayment of Loans After Retirement
Pre-retirees with student loan debt often face the following consequences:
- They are forced to work past the traditional retirement age. They may not have enough Social Security and other retirement income to pay for their living expenses or the loan payment.
- They risk their retirement savings. According to the Association of Young Americans and the AARP, 31% of baby-boomers claim that loan debt has hindered their retirement savings efforts or caused them prematurely to dip into their nest eggs.
- They delay seeking healthcare. According to AYA/AARP, approximately 9% of seniors delay seeking treatment because of student loan debt.
- These people have credit problems. Credit Sesame reports that older adults with student debt of at least $40,000 may have difficulty getting new loans to finance their home repairs, buy cars, or pay for other large expenses. AYA/AARP also found that 32% of those with student loan debt remained unpaid and prevented them from buying houses.
- They are unable to support their families. Over 25% of boomers claim that student loan debt has prevented them from helping their families in financial need.
- Social security benefits are being garnished. According to the American Seniors Association, if a retiree is unable to repay federal student loans on time, lenders may garnish a portion or a part of their Social Security benefits.
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How to Reduce Student Loan Problems?
There are many positive steps you can take before, during, and after taking out a student loan.
- Be Honest Before Borrowing
Talk to your co-borrower before you sign a loan agreement. They will help you determine the amount of money that you need and set a realistic payment schedule. Talk to your co-borrower about scholarships, colleges at a lower cost, and other options that might help ease your debt burden.
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- Prepare a Contingency Plan
Be sure to check your finances before you sign anything. Seek out family members who can offer a safety net and make sure they put it in writing.
- Monitor the loan
You should ensure that you receive regular statements from your loan servicer detailing the amount owed, any payments made, the interest rate and the date of repayment. If you don’t receive the information you need on a timely basis, or if you are being harassed by calls or letters, you can file a complaint with CFPB.
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- Learn about your repayment options
If you are experiencing financial hardships, deferment or forbearance programs may allow you to temporarily stop paying your payments. You may be able to pay lower payments if you consolidate multiple student loans.
Other repayment options include Income-Based Repayment, Income-Contingent Repayment and Pay As You Earn. Some programs will forgive any balance if it is not paid within 20 years or you die.