Retirement may be years away, but it’s never too soon to start planning for it. If you borrowed money to pay for college for yourself or your child, you might wonder what happens to student loans when you retire.
Student debt doesn’t disappear because you reach retirement age. However, you could have some federal student loan debt forgiven if you’re enrolled in an income-driven repayment plan or meet other requirements. If you have student loans, it’s helpful to consider where that debt fits into your retirement planning picture.
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Student loans aren’t erased automatically when someone retires. Whether you have federal or private student loans, your obligation to repay the debt remains. A change in your employment status or income won’t change that unless you are part of an income-driven repayment plan.
Taking out student loans can affect your ability to save for retirement. It can also determine how far your income goes once you stop working.
Paying down student loans could make it harder to save consistently for retirement. You may be eligible for loan forgiveness, discharge, or cancellation if you owe federal student loans. Each program would allow you to eliminate remaining loan balances on qualifying federal loans.
For example, you might be able to get relief from your loans in retirement if you:
Public Service Loan Forgiveness (PSLF) is another option you can pursue before retirement. You’ll need to make 120 qualifying payments while working for an eligible employer to apply for PSLF. Eligible employers include government agencies and nonprofit organizations.
Retiring with student loans in default could put your Social Security benefits at risk. The federal government can garnish up to 15% of your benefits to recoup outstanding loan balances unless you’re disabled. Talking to your loan servicer can help you determine your options for addressing defaulted loans well before retirement.
What if you don’t qualify for loan forgiveness, cancellation, or discharge? Enrolling in one of these income-driven repayment plans could reduce your payments and save you more money toward retirement.
These federal student loan repayment plans can also help ease budgetary strain if you’re in retirement with student debt. You can apply for income-driven repayment through the StudentAid.gov website. If approved, you must recertify your income and household size annually.
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If your employer offers a match on their 401(k), and the employee must contribute to earn that much, we tend to recommend at least contributing the match so as not to lose out on free money. If your employer is willing to contribute to your 401(k) while the borrower pays down their loans, this can lead to a best-of-both-worlds scenario.
Laws surrounding student loans are always evolving. Some regulations work in favor of borrowers; others put them at a disadvantage.
Here are some of the most notable things to know about student loan debt and retirement from a legal perspective.
The Student Loan Relief for Medicare and Social Security Recipients Act of 2023 proposes loan forgiveness for borrowers who receive benefits under part A of title XVIII of the Social Security Act. The bill is still in committee but would allow eligible Medicare and Social Security recipients to seek forgiveness for federal student loans if passed into law.
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When it comes to balancing paying student loans and saving for retirement, it’s highly personalized. It really comes down to the interest rate on the loan vs. the anticipated market growth. Being that the market averages ~12% annually, it may behoove borrowers to invest aggressively in the market rather than aggressively overpaying their loans. Paying off a loan at a 5% interest rate is effectively guaranteeing yourself a 5% return on your money because you are lowering the principal balance further. Depending on your risk tolerance, one may take that guarantee or take the risk in the market to do better. It comes down to free cash flow and the amount of income one earns. IDR plans may allow for higher contributions to retirement accounts while your payments to student loans are low.
It’s possible to save for retirement and repay student loan debt but it does take some planning. What your plan looks like will depend on:
Reviewing your budget can tell you how much money you have after expenses for savings and student loan repayment. You then have to decide how to allocate it.
For example, say that you have $500 left each month after paying the bills. You’re 30 years old with $30,000 in student loan debt and $0 saved for retirement. Here are three ways you might put that money to work.
Now, let’s assume you earn a 7% return in your IRA and pay 5% on your student loans. Your loans have a 10-year repayment term and a $320 monthly payment. Here’s how each scenario plays out.
The last option could make the most sense if you want to work toward both goals simultaneously. Remember that when it comes to retirement, time is on your side. The sooner you start saving, the longer you have to benefit from compounding interest, even if you only initially save smaller amounts.
Once you pay off your student loans, you can reallocate that money to retirement savings. You can also benefit from contributing to your employer’s 401(k) if you have one. Even if you’re only saving enough to get the company match, that’s free money you can put toward retirement.
Increasing financial literacy around retirement and student loans can help you make the most informed decisions possible. Learn more about how student loans work.
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