Tips for Student Debt Imperils Retirement Savings

You can add retirees and retirement savers to the growing list of Americans who must tackle the rising amount of student debt as they try to save for retirement. There is now more student loan debt than credit card debt, and this trend doesn’t seem to show any signs of slowing. Even more disturbing is the growing number of retirees who still carry student loan debt. Those who face this dilemma are at an increased risk of not only outliving their assets, but also facing a shortfall in their retirement savings as they are forced to put more money towards debt payments.

Retirees Have More Student Loans Than Ever
A 2017 report from the Consumer Financial Protection Bureau (CFPB) showed that borrowers over age 60 carry about $66.7 billion in student loan debt. Back in 2005 over 700,000 senior households were responsible for student loan debt, but that figure quadrupled by 2017 to 2.8 million people. And according to the CFPB, this age cohort is growing the fastest when it comes to segments of the population with student loans to pay off. Student debt among retirees may be left over from efforts to finance their own education, but many people are also taking on debt to provide an education for their children or grandchildren.

Also worrying is the fact that senior borrowers are much more likely to default on their loans than younger households. Just over 10% of borrowers ages 25 to 49 default on their loans. The default rate for seniors is 27% and over 50% for borrowers age 75 and above. And those in this category who default on their loans may find themselves facing a difficult dilemma.

The federal government has the authority to collect unpaid loan payments after 425 days from the due date by seizing tax refunds or garnishing wages or other income. Social Security benefits can also be garnished with short notice to the debtor. And this type of offset has grown by an astonishing 500% since 2002, with the number of garnishments rising from about 6,000 to 36,000 in 2013. The amount that can be garnished equals the lesser of the excess above $750 or 15% of the monthly benefit, but that can be enough to substantially disrupt the budgets of many senior households. This can also severely impact their credit scores, which can prevent them from saving money by refinancing their homes or consolidating their debt.

Starting out With Student Loans
College graduates who start with large student loan balances can also handicap themselves financially. Although this is often unavoidable, large loan payments can deprive young borrowers of the ability to begin saving for retirement and buying a house. And, of course, this is the best time for them to do this because their plans and accounts will have decades to grow. Although student loans may be a student’s only alternative when it comes to paying for college, they come with a high opportunity cost that can stretch out over their lives.

The Center for Retirement Research at Boston College has created a mathematical measure that quantifies how well Americans are prepared for retirement called the National Retirement Risk Index (NRRI). This index uses information culled from the Federal Reserve’s survey of consumer finance. The information reveals that the average household carried about $31,000 of student loan debt in 2013, and just over half (about 56%) of all Americans have a substantial chance of running low on funds during retirement. While this finding does not create a definitive lineal relationship between student loan debt and retirement security, the financial effect of making student loan payments for 20 years after graduating from college can be easily seen.

For example, a college graduate who owes $60,000 in student loans at 3% interest will have to pay $332.76 per month for 20 years to get that paid off. If that amount was instead diverted into a Roth IRA that grows at 6% for that same time period (with no further contributions after 20 years), then the student would have almost $600,000 of tax-free money by age 65. No poll or study is necessary to see the enormous impact that student loan debt can have on a borrower’s retirement preparedness.