By Marcia Mantell, RMA
It seemed like a good decision at the time. Your son or daughter has entered the college of their dreams. They were one more step towards a solid path for their future.
The costs to attend university were high. Really high. But it is okay. 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 are easy to obtain if you have a good credit rating. With the click of a mouse, the loan process is complete. You repeat this several times as your child completes their undergraduate program.
Before long, it’s time to start paying off those loan obligations.
University debt and retirement don’t mix
Since many parents take out these loans in their 50s and 60s, it is easy to reach retirement age with significant debt. This is an individual debt of the parent. And the obligation to repay rests entirely with the parent. This can have serious consequences for parents who are now on the threshold of retirement.
Betsy Mayotte, president of TISLA (The Institute of Student Loan Counselors, Plymouth, MA shares, “I hear from older parents who want to retire but are forced to pay off student debt. They simply cannot afford to retire. They put several children in college. Some loans were repaid before retirement, but they now have years of repayment left. They are overwhelmed by the fact that retirement will be delayed or significantly changed. “
How many parents have used federal PLUS loans for college?
A staggering number of close and retired relatives have unpaid debts incurred by their children’s education. In total, about 11% of parents whose kids go to college pay tuition and expenses with federal PLUS loans, according to Enterprise Data Warehouse in March 2021.
In fact, over 2.3 million parents aged 62 and over collectively hold $ 93 billion in federal student loan bonds. That’s an average loan of $ 39,000. But the averages contradict 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, the average amount of their outstanding loan is $ 105,000.
Parents aged 50 to 61 should be in their “super savings” years for retirement. Instead, 6.3 million people manage the outstanding debt on their Parent PLUS loans. At least one-third of these parents owe more than $ 40,000 and 11% owe more than $ 100,000. They’re trying to tap into an average loan balance of $ 102,000.
What does the cash flow crisis look like?
For parents with $ 100,000 in student loan debt until retirement, their repayment obligation is greater than $ 1,100 per month. This assumes the average 2021 PLUS loan interest rate of 6.28% and a 10-year repayment schedule.
Let’s put the importance of a loan repayment into perspective. The average Social Security payment is around $ 2,000 per month. The maximum payout in 2021 is around $ 3,100 for someone who has had a well-paying career. Paying off student loan obligations can absorb one-third to one-half of a parent’s Social Security payments during the first ten years of retirement.
And it is important to keep paying these loans. Unbeknownst to many, Social Security benefits can be foreclosed if someone owes the federal government money. Past debts owed to the Department of Education, where Parent PLUS loans originate, can be deducted from Social Security payments.
Temporary repayment relief ends soon
During the COVID-19 crisis, Congress passed the CARES – Coronavirus Aid, Relief, and Economic Security Act of 2020. In this law, loan repayments were suspended and interest rates fell to 0% . The relief only affected those who paid off federal student loans, including Parent PLUS loans, and not private loans or credit cards. And, the suspension was only temporary. Soon, as of February 1, 2022, borrowers will have to start their loan repayments again.
For parents on the eve of retirement, relief was indeed welcome. For parents who have retired or lost their jobs due to COVID-19, the addition of university loan repayments is not an option.
Mayotte adds: “Many retired parents who contact me tell me that the repayments of 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 all the options to adjust the monthly payments. “
Loan repayment options and forgiveness programs
As repayment requirements begin again, parents who are now retired or considering retiring may have a few options to lower their monthly payments.
“There are several options that parents can explore,” explains Mayotte. “They won’t work for everyone, and there is a cost to spreading payments over longer periods. But, it’s usually worth checking out various options.
- Extended refunds are available in certain situations. Parents consolidate their unpaid federal loans and ask for an extended repayment option. Generally, this option allows the repayment of the outstanding balance of PLUS loans over longer periods (up to 30 years) and reduces the monthly payments.
- The Income-Based Repayment Plan (ICR) Federal Consolidated PLUS Loan borrowers are available to most borrowers. Refunds are capped at 20% of Discretionary Income, which may be lower once the client is retired. After 25 years of qualifying payments, any remaining debt is canceled.
- The Public service loan forgiveness program may apply to parents who work for the government or many nonprofit employers. The criteria can be tricky, but it’s worth it to have any remaining loan balances written off after 120 payments.
- Disability discharge applies if a parent becomes disabled. Federal loans, but few private loans, have an “exit clause” if the debtor becomes disabled. If the loan holder becomes eligible for Social Security disability insurance or becomes unable to work due to a physical or mental impairment, their loan may be canceled.
- Transfer the parental loan to the adult child is only possible if the parent refinances the loan from a private lender, which is generally discouraged by experts. This transfers the loans to the child but removes them from the federal loan system. The net effect is that the options for reimbursement and remission are no longer considered.
Parent PLUS loans aren’t the only way parents have structured graduate 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 have also raided their IRAs or 401 (k) to help pay for their children’s college. In these cases, parents withdrew a large portion of their retirement savings by:
- Withdraw from their traditional IRAs for tuition (even if they avoided the 10% early withdrawal penalty);
- Exploit Roth IRAs; and
- Use loans or provisions for hardship employer retirement savings plans.
Most of the time, these assets are never replaced and all potential for growth is lost.
A recipe for retirement disaster
Parents strive to do their best to support their children. Especially when it comes to helping them with school fees. But, when taking on oversized debt is their only option, their ability to retire on time and comfortably may become out of the question.
“There is a lot of activity in Washington these days around student loan repayments. It’s almost all focused on the student borrower, ”says Mayotte. “But, keep an eye out for Parent PLUS loans over the next couple of years. It is increasingly recognized that retiring with significant student debt is a recipe for disaster. “
You can find more information about the PLUS loan repayment options and information for your student borrower at https://freestudentloanadvice.org/. It’s free, impartial and comprehensive.
About the Author: Marcia Mantell, RMA®, NSSA®
Marcia Mantell is the founder and president of Mantell Retirement Consulting, Inc., a retirement business development, marketing, communications and education company that supports the financial services industry, advisors and their clients. She is the author of “What’s the Deal with Retirement Planning for Women”, “What’s the Deal with Social Security for Women” and blogs on BoomerRetirementBriefs.com.
You might also like:
Ask the hammer: Should I focus on paying off a Parent PLUS loan?