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I am in big trouble. My husband and I have a combined student loan debt of $190,000 and we were planning to retire in six months.
My husband wants to sell our home and pay off the debt. If we do that, we won’t have much for a down payment for another house, so we won’t have a low mortgage payment. If we don’t sell, we can afford the student loan payments. But we will be very limited with no extra money left to save for emergencies.
Help. I have many sleepless nights trying to find the best solution to this.
-H.
Dear H.,
If you could make a serious dent in your balance by working another year or two, that’s something to seriously consider. But the reality is that $190,000 is a lot of money. Delaying retirement by a couple years may not be enough to make significant headway.
About 20% of federal student loan debt is held by people 50 and older. Telling millions of people like you and your husband that they have to work forever simply isn’t a viable solution.
I reached out to Betsy Mayotte, president and founder of the nonprofit The Institute of Student Loan Advisors, to discuss strategies for people approaching retirement with serious student loan balances. She’s advised thousands of student loan borrowers about the best way to deal with their debt. She emphasized just how common your dilemma is.
“I think a lot of people don’t realize that student loan debt is not just a young person’s issue anymore,” Mayotte said. “I get questions similar to this one all the time.”
The options you have available depend on a couple of factors. First of all, are these federal loans, private loans or a combination of the two? Second, if you have federal loans, is the debt from your own education, or did you take out Parent PLUS loans for your kids? While a lot of Baby Boomers are in debt because they paid for their children’s education, many have loans because they went back to school during the Great Recession, according to Mayotte.
Only in rare occasions are student loans dischargeable in bankruptcy. You probably wouldn’t be a good bankruptcy candidate since it sounds like you have decent home equity.
Unfortunately, there aren’t any great relief options if you have private loans. Selling your home and downsizing so that you can pay off your balance, or at least a large chunk of it to make your payments more affordable, may be your best option.
But if you have federal loans, you have several options. Instead of paying off your loans, a better alternative may be to get your monthly payment as low as possible, even if that means you’ll never be completely out of debt.
If you have federal loans, including Parent PLUS loans, Mayotte suggests looking into a program called income-contingent repayment. You’ll need to consolidate your loans to enroll. The advantage is that your payment will be 20% of your disposable income, which will presumably be lower once you retire.
“They reapply every year and if their income goes down, the payment goes down,” Mayotte said. “If their income goes up, the payment goes up. If they still have a balance at the end of 25 years, the balance is forgiven.”
You have even more options if you have federal loans that you took out for yourselves, including income-based repayment, Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE). These programs make your loan payments as low as 10% to 15% of your discretionary income, and they also offer forgiveness at the end of the repayment period, which is between 20 and 25 years.
Traditionally, the balance forgiven on all the federal student loan programs I mentioned has been treated as taxable income for the year the debt is forgiven. But thanks to COVID-19 relief measures, any balance that’s forgiven between now and 2025 isn’t treated as taxable income. Moyette wouldn’t be surprised if Congress eventually extends that tax break. But if you choose to enroll in a program that offers forgiveness, she suggests preparing for the worst but hoping for the best, since 20 to 25 years is a long way off.
If you incurred any of this debt for your children, it may also be time to look beyond relief programs and ask your kids if they can help you with the payments. “That’s a difficult conversation but sometimes that’s a conversation that needs to be had,” Moyette said.
Assuming you have options to lower your monthly payments, it’s really about your personal preference. If you think you’d sleep better knowing that you don’t have this balance hanging over you, it may be better to downsize and pay it off, even if that means having a mortgage payment.
But there’s nothing wrong with treating this debt like a chronic condition that has no cure, yet can still be managed. If you can make peace with carrying this debt and you’re able to limit the damage to your monthly retirement budget, that may be your best option.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].
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