Older Americans: The new face of student loan debt

By Personal FinanceFOXBusiness

How to avoid lingering debt in retirement

Barron’s associate publisher Jack Otter offers advice on what retirees can do to avoid lingering debt as they enter into their golden years.

Seniors are facing a serious financial crisis in their golden years: student loan debt. The Consumer Financial Protection Bureau (CFPB) says the number of older consumers with student loan debt has quadrupled over the last decade and the average amount they owe has also dramatically increased. The CFPB says this makes people age 60 and older the fastest growing age-segment of the student loan market. Karen and Jack are two of those unfortunate individuals.  (Their names have been changed to protect their identities.)

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Karen's grandson did not adequately prepare for the $20,000 out-of-state private college he decided to attend. When the tuition bills started pouring in, he turned to his grandmother for help. Despite her limited income, she felt she couldn't say no. Karen is not sure of how many loans or what kind of loans were put in her name. But soon after her grandson started attending school, the letters demanding payment began. She was able to defer the payments, but the relief was only temporary.

The American Seniors Association (ASA) is among the organizations sounding the alarm about older Americans and student loan debt. When retirees are unable to make payments on time, part of their Social Security checks may be garnished. The ASA says garnishment makes the financial situation for seniors even worse as many of them rely heavily on Social Security.

That’s exactly what happened to Karen. She has no 401(k), pension or retirement savings. Social Security is her only source of income and she could not afford to pay. Upon graduation, Karen’s grandson did not take responsibility for any of the loans.  Deferment was no longer an option and eventually, the loans went into collections. The government also began garnishing a portion of her already slim Social Security check, putting her further below the poverty line. The CFPB says nearly 40% of student loan borrowers 65 and older are in default.

“Seniors don’t account for having to pay off the debt when they cosign loans,” says Madison Miller, student loans analyst at ValuePenguin. “They are not prepared for when they get older. We don’t want to say, no you shouldn’t do this, but the main thing is to understand the risks you are taking and how prevalent student loan default is.” 

Student loan lawyer Adam Minsky says there are options for consumers after they default on student loans.

“It’s often possible to resolve and cure a federal loan default and restore those loans back to good standing again,” he says. “It’s also possible to get onto a payment plan that’s tied to the borrower’s income which could wind up being very affordable. There may also be options for discharge or loan forgiveness in some cases as well.”

Minsky says borrowers of private loans don’t have the same options as they do with federal loans, but they may have the flexibility to negotiate a settlement. Karen recently received a letter from a collections agency offering to settle one of her loans for about a fifth of what is owed. She’s wondering if the letter is legitimate. 

“It’s really important not to jump at something and understand the options,” says Minsky. “That may mean having an expert review it.”

ValuePenguin’s Madison Miller stresses that settling student loan debt can be risky. She says Karen should first make sure the agency contacting her is legitimate. Miller also notes that the final amount owed may be different from what is offered, as the terms of the settlement still need to be negotiated. Karen could also face hefty fees and taxes on the debt. But Miller says it’s better to settle the debt than not to pay it at all.

Before seniors find themselves in the same position as Karen, Stephen Dash, chief executive officer and founder of Credible.com and Ken Ruggiero, chief executive officer of Goal Structured Solutions say families need to have frank discussions. What is the return on investment for the student’s expected college degree? What is the total cost of the college they want to attend? How does that compare with their ability to repay the loans? Dash and Ruggiero say parents and grandparents need to take the emotion out of the situation and think before they sign. They shouldn't be afraid to say no if it doesn't make sense.

With the latest collections letter on the table in front of her, Karen is asked if she regrets helping her grandson.

"He didn't have anyone else who could help him," she says stoically. "No, I don't regret it.”

While a majority of older student loan borrowers have loans that are used to finance a child or a grandchild's education, the CFPB says almost a third of borrowers take out loans for their own or their spouse's education. This is where we find Jack.

In 2008, when Jack was 55-years-old, he retired from his job as an Episcopal priest. Jack and his wife debated what to do with the rest of their lives. His wife dreamed of being a hospice nurse, while Jack wanted to obtain a license in counseling to help people recovering from addiction. They both took out $90,000 in loans and attended school at the same time. The goal was upon graduation, his wife would pay off the student loans with the earnings from her nursing career and he would support the family. Unfortunately, his wife was unable to handle the grueling nursing schedule and the work that was necessary for her to become a hospice nurse.  Now at age 65, Jack is working three jobs to pay off the student debt not only for him and his wife but also his daughter when she attended college.

“Student loans can prevent people from being financially able to retire, causing them to work well into old age,” says Kat Tretina, writer at Student Loan Hero. “For those who do retire with student loans, their debt can stretch their budgets thin, making it difficult to afford the essentials.”  

Jack says he’s an example of why seniors should avoid taking on student loan debt so late in life.

“There are more risks involved than if we had been 25 or 30 years old,” he says. “We live on a tight budget. I can pay the mortgage and put food on the table, but we don’t have a lot of extra money for emergencies, for unexpected expenses, for vacations or anything like that. We have two children who have needed financial support and I have been unable to help them, which has been a big disappointment."

Credit Sesame says the average senior’s student loan debt clocks in at $40,096. Adrian Nazari, founder and chief executive officer at Credit Sesame says while the number is alarming, most people don’t realize how student debt can also affect their ability to obtain new loans. He says seniors can end up in a financial bind if they need credit to buy a car, repair their home or deal with any critical expenses.

“Understanding some of the basics of borrowing, what could happen potentially to their credit and future borrowing ability are some of the key things people should know before taking on any debt,” Nazari says. “There needs to be simple understandable student loan education for seniors.”

Jack will finish paying off all of the student loan debt in 9 years. He will be 75-years-old. When he is asked how he feels about the year 2027, Jack lets out a big sigh.

“It will be the year of emancipation and freedom,” he says. “We will have the cash flow to enjoy retirement more and do what we would like to do. But until then, that’s not really possible.”

Linda Bell joined FOX Business Network (FBN) in 2014 as an assignment editor. She is an award-winning writer of business and financial content.  You can follow her on Twitter @lindanbell.