Student Loan Debt: A Lingering Burden for Aging Americans

When the growing problem of student loan debt is discussed in media reports, most of us assume the borrowers in question are young people in their 20s and 30s. But new government research has revealed that the number of Americans aged 60 and older who are still saddled with unpaid student loans has risen precipitously in recent years.

According to the Federal Reserve Bank of New York, approximately two million older Americans currently have outstanding student loan debt, up from 700,000 in 2005.1 That number includes both longstanding loans, which were used to finance their own educations, as well as recent loans taken out to fund a family member's college degree. In dollar figures, older individuals collectively are on the hook for $43 billion in debt -- up from $8 billion in 2005. 1

For those in this population who are already retired and living on a fixed income, the burden of paying off old loans -- some of which carry interest rates as high as 8% or 9% -- can potentially put them at financial risk. Per legislation passed by Congress, federally funded student loans taken out on or after July 1, 2013, carry a fixed, reduced interest rate of 3.86% (5.42% for graduate student loans). 2 A proposal currently being considered by Congress would allow individuals holding pre-July 2013 loans to refinance their debt at today's lower rates, which proponents of the bill estimate would provide relief for some 25 million Americans. 1

Other government data suggests that roughly one-third of seniors with outstanding student loan debt have defaulted on their loans and are seeing their Social Security checks garnished each month as payment. According to current law, the government cannot reduce Social Security benefit payments below $750 a month as a way to reclaim delinquent payments owed to the federal government, including student loan payments. 3 With an average monthly benefit amount of just over $1,200, it is easy to see how automatic reductions in benefits could put retirees in financial jeopardy.

Clearly, the effect of lingering student debt poses a significant challenge to the financial well-being of all -- but those in or nearing retirement face heightened hardship and risk to their financial future. Fortunately there are alternative, hardship-based repayment programs such as the following that may potentially provide assistance for those who have difficulty repaying a loan.

•Borrowers looking to reduce their payments can choose an income-based plan in which payments are tied to a portion of their income, but eligibility is contingent upon income documentation. The newest of these plans, Pay As You Earn, requires borrowers to pay roughly 10% of their income above the poverty line. After 20 years, any balance still outstanding is forgiven.

•Another type of plan that requires less documentation allows borrowers to extend and/or gradually increase their incremental payments, but in so doing, incur more interest.

Source(s):

1.  The New York Times, "Student Loan Debt Burdens More Than Just Young People," September 12, 2014.

2.  Reuters, "Congress finally votes to cut student loan interest rates," July 31, 2013.

3.  U.S. Social Security Administration, Program Operations Manual System (POMS), "GN 02410.300 Benefit Payment Offset (BPO)," September 3, 2013.

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Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

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