27 April 2024

Student Loan Debt Could Destroy Your Retirement

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People saving for retirement (those ages 55 to 64), and retirees (ages 65 to 74) are carrying unprecedented amounts of student loan debt, according to a new LIMRA Secure Retirement Institute study. The amount of debt for pre-retirees and retirees has soared. For instance, in 1989, pre-retirees held an average of $600 in education loans and by 2013 that amount grew to nearly $8,000. The average education loan debt for retirees increased from $400 in 1989 to more than $2,300 in 2013.

The data suggests that parents and grandparents have acquired more student loan debt to help their children and grandchildren, according to LIMRA Security Retirement Institute. And that’s a problem. So what do financial planners make of this trend? And, more important, what advice do they have for pre-retirees or retirees who now have student loan debt or plan to acquire such debt?

First, avoid it if possible 

Most financial planners recommend avoiding any type of debt, including student loans for your children, if you’re close to retirement or already retired. “Don’t do it,” said Scott Hanson, a certified financial planner with Educators Financial Services, in Shoreview, Minn. By way of background, more than 40 million Americans of all ages are now repaying more than $1.2 trillion in student loan debt, according to the Consumer Financial Protection Bureau (CFPB). By way of comparison, there was $7.4 trillion in individual retirement accounts (IRAs) at the end of the fourth quarter of 2014 and $6.8 trillion in 401(k) and similar plans.

Student loan for yourself? 

Others, however, suggest that if you’re taking out a student education loan for yourself and for the right reasons, it might make sense.  If, however, you’re among those taking out a student loan for yourself, consider working longer to pay off that debt before retirement, or returning to work if already in retirement.

Look for alternatives 

There are other alternatives to get a college degree without assuming the burden of student loans, said Fillet. Also, apply for every scholarship possible and every grant possible. And don’t’ forget work. “There is no reason the student could not work especially in the summer and holidays to help defray the costs,” Fillet said.

If you must 

If you have no choice but to take out a student education loan to pay for your child’s or children’s, or grandchildren’s college education, consider that you have options, including — depending on your credit history and other factors — the Direct PLUS Loans from the U.S. Department of Education.

According to the Education Department, Direct PLUS loans are unsubsidized loans for the parents of dependent students and for graduate/professional students. PLUS Loans help pay for education expenses up to the cost of attendance minus all other financial assistance. Interest is charged during all periods.

Don’t cosign student loans 

Whatever you do, don’t sign for a student loan on behalf of your children. That would be a mistake, said Fillet.

Best advice: Start saving when they’re born 

Of course the best advice is to start saving when the child is born and continue to save for education at the same time you are saving for retirement, said Fillet.  Fillet also said parents should revisit the use of whole life insurance, which is a “wonderful savings vehicle for those who find savings difficult.” Fillet also noted that retirement should be a time of joy, and not one focused on installment payments.

Click here to access the full article on Market Watch. 

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