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Rising Student Debt Among Seniors Threatens to Wreck Their Retirement

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Financial advisors may be surprised to learn that the fastest growing age segment of student loan borrowers are those 60 and older, and nearly 40% of student loan borrowers 65 and older were in default on student debt in 2015.

These are just two of the startling statistics disclosed in a new report from the Consumer Financial Protection Bureau. 

The loans are both public and private, and about three-quarters were taken to finance a child’s or grandchild’s college education as a borrower or co-signer.  The remaining portion were used for the education of the borrower or his or her spouse.

No matter who the beneficiary is, these loans are a burden for seniors in or near retirement, many of whom also hold other debt, such as a mortgage, auto loan or credit card debt.

For example, heads of households aged 50 to 59 who had outstanding student loan debt saved less for retirement that their counterparts who didn’t have such debt, according to Federal Reserve stats quoted in the report.

In 2013, the median 401(k) savings balance was $65,000 for those consumers without student loans but $55,000 for those with such loans. The gap was even greater for IRAs: a median $56,000 balance for those without student loans versus just $31,000 for those with student loans.

Advisors usually counsel clients to make saving for retirement a priority over saving for college, but having outstanding student debt apparently can also impact retirement saving.

“Loans taken out by parents can be a major impediment to retirement, and should generally be a last resort if not avoided altogether,” says Matt Sommer, vice president and director of the retirement strategy group at Janus Capital Group.

Co-signing a student loan is also a risk for parents and grandparents, says Sommer. He suggests others ways to finance a child’s college education including choosing a community college for at least for the first two years of a college education as well as work study and student loans owed by only the student with no co-signer.

The latter are usually more available with government, rather than private, loans but there are limits to what can be borrowed.

The impact of student debt on retirees already collecting Social Security was even greater than the impact on younger seniors. Forty thousand seniors had their Social Security benefits cut in 2015 to repay a federal student loan, up from just 8,700 10 years earlier, the CFPB reports.

According to Social Security policies cited in the CFPB report, “the federal government can garnish a borrower’s wages and may offset a portion of tax refunds and many government benefits for failing to repay federal student loans.”

Overall senior borrowers of student loan debt account for a very small portion of these loans outstanding – $66.7 billion out of $1.3 trillion – but their numbers are rising along with their share of student loan debt and size of their debt burden.

From 2005 to 2015 the number of consumers 60 and older with outstanding student loan debt rose from about 700,000 to 2.8 million, and the average per-capita debt burden increased from $12,100 to $23,500. In addition, their share of outstanding student loan debt rose from 2.7% to 6.4% during the same period.

Sommer notes that the challenges for senior student loan borrowers outlined in the CFPB report “illustrate the need to work with an advisor who understands both sides of the balance sheet – the assets and the liabilities.” That is often not the case for many robo-advisors.

The CFPB report found, for example, that many senior borrowers of student loans encounter servicing problems. Co-signers complain about misallocation of payments to loans owed solely by the student borrower – loans that have no co-signers.

In addition, older borrowers complain about roadblocks and processing errors that limit their ability to enroll in income-driven repayment (IDR) plans and complain about errors that lead to cuts in Social Security benefits even though they could qualify for IDR plans.

Some seniors owing private student loans complain about threats by collectors to garnish some Social Security benefits even though by law those benefits are protected against collection in the case of defaults.

These are areas where advisors could make a difference, says Sommer. “Advisors can help individuals understand their loan statements and help ensure that processing and other errors outlined in the CFPB report are caught as soon as possible.”

The CFPB report recommends that prospective co-signers of student loans be provided counseling and communications from lenders and school financial aid officials that explain the liability they may be undertaking. The CFPB also recommends that access to income-driven repayment plans be streamlined, which could be especially helpful for older borrowers whose only source of income is Social Security.

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