By Marcia Mantell, RMA
It seemed like a good decision at the time. Your son or daughter got into the college of their dreams. They were one step closer to getting on a strong path for their future.
The costs to attend college were high. Really high. But, that’s ok. You received information from the college about paying tuition, room, board, and fees through the Parent PLUS loan program, a specific type of higher education loan offered by the federal government directly to parents. They’re easy to obtain if you have a good credit score. With a click of your mouse, the loan process is complete. You repeat this multiple times as your child completes his or her undergraduate program.
Before long, it’s time to start paying back those loan obligations.
College Debt and Retirement Don’t Mix
Because many parents take out these loans in their 50s and 60s, it’s easy to reach retirement age with a sizeable debt obligation. This is debt individually owed by the parent. And the obligation to repay is fully on the parent. That can have serious implications on parents who are now on the doorstep of retirement.
Betsy Mayotte, president of TISLA (The Institute of Student Loan Advisors, Plymouth, MA shares, “I hear from older parents who want to retire but are stuck paying down student debt. They simply cannot afford to retire. They put several children through college. Some loans were paid off before retirement, but now they have years of repayments to go. They are overwhelmed that retirement will be delayed or significantly altered.”
How Many Parents Used Federal PLUS Loans for College?
A staggering number of parents near or in retirement have outstanding debt obligations they incurred for their children’s educations. All in, some 11% of parents whose children go to college pay tuition and expenses with federal PLUS loans, according to Enterprise Data Warehouse as of March 2021.
In fact, over 2.3 million parents ages 62 and older collectively hold $93 billion in federal student loan obligations. That’s an average loan size of $39,000. But averages belie the facts:
- 29% of parents owe more than $40,000.
- 10% of parents owe more than $100,000.
- For parents who owe more than $40,000, their average outstanding loan amount is a staggering $105,000.
Parents between ages 50 and 61 should be in their “super save” years for retirement. Instead, a whopping 6.3 million are managing outstanding debt on their Parent PLUS loans. Fully one-third of these parents owe more than $40,000 and 11% owe more than $100,000. They are trying to dig out of an average loan balance of $102,000.
What’s the Cash Flow Crunch Look Like?
For parents who are carrying $100,000 in outstanding student loan debt into retirement, their repayment obligation is over $1,100 per month. This assumes the 2021 average PLUS loan interest rate of 6.28% and a 10-year repayment schedule.
Let’s put the significance of a loan repayment in perspective. The average payment from Social Security is about $2,000 per month. The maximum payment in 2021 is about $3,100 for someone who had a high-earning career. Paying back student loan obligations can eat up one-third to one-half of a parent’s Social Security payments for the first ten years of retirement.
And it’s important to keep paying those loans. Unbeknownst to many, Social Security benefits may be garnished if someone owes money to the federal government. Delinquent debts owed to the Department of Education, where Parent PLUS loans originate, can be docked from Social Security payments.
Temporary Repayment Relief Ends Soon
During the COVID-19 crisis, Congress passed the CARES Act -- Coronavirus Aid, Relief, and Economic Security Act of 2020. In this law, loan repayments were suspended and interest rates dropped to 0%. The relief was only for those repaying federal student loans, including Parent PLUS loans, not private loans or credit cards. And, the suspension was only temporary. Coming soon, as of February 1, 2022, borrowers must restart their loan payments.
For parents on the cusp of retirement, the relief was indeed welcome. For parents who retired or lost jobs due to COVID-19, adding back college loan repayments is not in the cards.
Mayotte adds, “Many retired parents who reach out to me report that payments on these loans are unaffordable now that their income is lower than when they were working. They are between a rock and a hard place and are looking for any options to adjust monthly payments.”
Loan Repayment Options and Forgiveness Programs
With repayment requirements starting again, parents who are now retired or were planning to retire may have a few options to reduce monthly payments.
“There are several options parents can explore,” Mayotte explains. “They won’t work for everyone, and there is a cost to stretching out payments over longer time periods. But, it’s generally worthwhile to check out various options.”
- Extended repayments are available in certain situations. Parents consolidate their outstanding federal loans and request an extended repayment option. Generally, this option allows repayment of the outstanding balance of PLUS loans over longer time periods (as many as 30 years) and lowers monthly payments.
- The income-contingent repayment (ICR) plan is available for most consolidated federal PLUS loan borrowers. Repayments are capped at 20% of discretionary income, which may be lower once a client is in retirement. After 25 years of making qualified payments, any remaining debt is forgiven.
- The Public-Service Loan Forgiveness program may apply to parents who work for government or many non-profit employers. The criteria can be tricky, but worth the effort to have remaining loan balances forgiven after 120 payments.
- Disability discharge applies if a parent becomes disabled. Federal loans, but not many private loans, carry an “out clause” if the debtor becomes disabled. If the loan holder becomes eligible for Social Security Disability Insurance or becomes unable to work due to physical or mental impairment, their loan may be forgiven.
- Transfer the parent loan to the adult child is a possibility only if the parent refinances the loan with a private lender, which is generally discouraged by experts. This transfers the loans to the child but takes them out of the Federal loan system. The net effect is that repayment and forgiveness options come off the table.
Parent PLUS loans aren’t the only way parents structured higher education payments for their children. They also used a variety of other borrowing options pay for their children’s higher education:
- 18% of parents use private loans available from banks, credit unions, and financial institutions.
- 6% of parents choose home equity lines of credit.
- 8% of parents use credit cards.
Unfortunately, many parents also raided their IRAs or 401(k)s to help pay for their children’s college. In these cases, parents took a big chunk out of their retirement savings by:
- Withdrawing from their traditional IRAs for college costs (even though they avoided the 10% early withdrawal penalty);
- Tapping Roth IRAs; and
- Using loans or hardship provisions from employer retirement savings plans.
Most of the time, these assets are never replaced, and any growth potential is lost.
A Recipe for Retirement Disaster
Parents strive to do the best they can to support their children. Especially when it comes to helping them with college costs. But, when taking on over-sized debt is their only option, their ability to retire on time and comfortably can become out of the question.
“There is a lot of activity in Washington these days around student loan repayments. It’s almost all centered on the student borrower,” Mayotte says. “But, keep your eye out over the next couple of years on the Parent PLUS loans. There is growing acknowledgement that entering retirement with significant student loan debt is a recipe for disaster.”
You can find more information about PLUS loan repayment options and information for your student borrower at https://freestudentloanadvice.org/. It’s free, unbiased, and comprehensive.
About the author: Marcia Mantell, RMA®
Marcia Mantell is the founder and president of Mantell Retirement Consulting, Inc., a retirement business development, marketing & communications, and education company supporting the financial services industry, advisors, and their clients. She is the author of “What’s the Deal with Retirement Planning for Women?” and “What’s the Deal with Social Security for Women?” and blogs at BoomerRetirementBriefs.com.
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