One of the growing threats to a comfortable retirement -- other than not saving enough -- is being hobbled by college loans in your seventh decade.
Although student debt mostly flies under the radar for retirees, it has become a problem because debt collectors can garnish Social Security payments. According to a recent study by the Government Accountability Office, this debt can force retirees dependent upon Social Security into poverty.
Since college loans can be discharged in court only in cases of serious disability, they can follow you the rest of your life. That’s also the case for those who co-sign for debt. Parents and grandparents who want themselves or family members to earn a college degree can get trapped in student debt during their most vulnerable times. Doing the right thing can be a financial disaster.
College loans taken on by older Americans have nearly quadrupled in the past decade, reports the Consumer Financial Protection Bureau (CFPB). Parents and grandparents have assumed about $67 billion of this debt, most of it held by those over 60. Some 40 percent of these borrowers are in default, the highest nonpayment rate for any age group.
When I first started researching college debt issues while writing a book some three years ago, it wasn’t hard to find Americans in their 60s struggling in retirement because of college debt. They had either co-signed loans for their children or taken it on themselves to help them secure higher-paying jobs.
While the percentage of those over 60 carrying college debt is still small relative to the 44 million Americans holding these loans, the fact that nearly 3 million borrowers are unable to have financial security in retirement is a troubling trend. Social Security payments, a primary source of income for 70 percent of retirees, can be “offset” for loan payments. Those who default on student loans can see their retirement benefits reduced.
The sacrifice for retired borrowers, though, can also be life-threatening. The CFPB noted that retirees with outstanding loans are more likely to skip “necessary health care needs such as prescription medicines and doctor’s visits because they could not afford it.”
Making matters worse, older borrowers often report that loan servicing companies create roadblocks to lower payments while collection firms “use aggressive and hostile tactics.” Those companies have created a raft of difficulties for borrowers.
The CFPB and Illinois attorney general recently sued Navient, the largest loan servicing company, for allegedly creating ”obstacles to repayment by providing bad information, processing payments incorrectly, and failing to act when borrowers complained.” The company said the suits were “politically driven” and “unfounded.”
There’s also a fundamental flaw in how this credit is doled out. The consequences of taking on debt that can rarely be forgiven over a lifetime isn’t discussed much in high school or in college financial aid offices.
Do borrowers and co-signers fully understand the drawbacks of taking on this debt in dollars and cents? Figuring out monthly repayment relative to expected income should be a required exercise for anyone contemplating college loans.
“Prospective co-signers would benefit from lenders and school financial aid officials providing counseling and/or effective information and communication regarding the liability that a co-signer undertakes,” the CFPB report concluded. “Co-signers need to understand the obligation before they sign.”
In the interim, you’re on your own to negotiate directly with lenders and the companies that service loans. Federal loans can be modified for lower monthly repayment. For instance, you can base repayments on your income. If you’re unable to pay because of physical issues, you may also qualify for “Total and Permanent Disability Discharge” of federal loans, although lots of red tape is involved.
What will help retirees pummeled by college debt? Borrower-friendly proposals would allow for forgiveness or no-interest refinancing, although they’re unlikely to gain traction in the Republican-dominated Congress.
President Donald Trump proposed capping college loan repayments at 12.5 percent of income and privatizing the federal loan system, which wouldn’t help retirees much at all. It might trigger even more aggressive repayment practices.
Betsy DeVos, Mr. Trump’s nominee for education secretary, said she had no experience running a bank, much less the government’s $1 trillion loan portfolio. As the wife of a billionaire, her children didn’t need college loans, nor was she aware of how much college borrowing has increased in recent years.
During her Senate testimony, DeVos said student debt had increased “980 percent over the past eight years.” Senator Al Franken, D-Minnestoa, who was questioning her at the time, noted that the correct rate of increase was 118 percent.
What was sorely lacking in the Senate hearings was any significant mention of what has triggered the college loan crisis in general. Not only is the cost of college rising unabated but the loan system has enabled borrowers to paper over the affordability gap with loans whose repayment can last for decades.
Why worry about the cost of college -- and pressure institutions to provide grants instead of loans -- when anyone can get instant credit and colleges don’t have to worry about repayment?
Yet college loans are not like buying a used car. If you can’t pay back the car loan, the vehicle is repossessed. Defaulting on a student loan means ruined credit -- and you still have to pay it back.