Reaping Your Rewards

8 ways seniors can ease student loan debt pain


Student loan debt carried by seniors has quadrupled, but the elderly don’t have a lifetime of increasing earnings ahead to help them cope

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At a time when they should have few financial obligations, many elderly people find themselves struggling with the kind of new debt usually faced by 20-somethings: big student loans.

According to the Government Accountability Office, the amount of student loan debt carried by Americans aged 65 to 74 has quadrupled since 2010, with the total liability now topping $18.2 billion. (See “Student debt on the rise for senior citizens.”)

The problem is, student loans are designed to be mid- to long-term liabilities. While younger people have time and (theoretically) increasing earning potential in their corner, people facing retirement and active retirees do not. When paychecks cease and smaller, fixed distributions begin, hefty loan payments can become untenable. The good news is that options for relief exist. Here are eight ways senior citizens can decrease the stress and manage their student loans.

8 ways seniors can ease student loan debt pain

1. Target your funds. Prudent cash delegation becomes crucial when funds are sparse. To get it right, picture your budget as a dartboard, with the needs of the bull’s-eye always coming first. This center contains such essentials as housing, food, health care and transportation.

After that, you can aim for your most pressing liabilities: debts where the consequences for not paying are severe. Student loans exist here. Keep them current with on-time, complete payments. If you need to lower payments to remain in good standing, you might be able to do so (see tip No. 4), but for now try to stick with the original plan.

The rest of your liabilities, including credit card balances and other unsecured accounts, are next on the dartboard. If you can hit those, move on to the final circle: noncritical expenses, such as travel and gifts.

Such visualization and prioritization is effective and important, says Charles Winfrey, Jr., a Nashville, Tennessee, retirement planning expert with The Rollover Company. “All of us, regardless of age, think clearer when we are focused on our next step in life instead of our next five steps. The adage is true, ‘how do you eat an elephant? One bite at a time.’ The same wisdom applies to our financial lives.”

2. Flip the help switch. If money is so restricted that you can barely pay for what’s in the bull’s-eye, consider asking for help from one or more trusted, caring family member of means. While this can be humbling, it is worth exploring, especially if they are adult children for whom you paid higher education costs. If they can pay down some or all of your student loans, it would be their chance to return the favor. They may even be eager and honored to do so.

How do you begin such a conversation? With a straightforward, candid approach. “The best way to ask a loved one for financial assistance is to be honest with them on why you need their assistance and on how they can assist you,” says Winfrey. “I have found that one of the most receptive sentences in the English language is, ‘I need your help.'”

3. Declutter to decrease debt. In the event you have no one to turn to, Mark Kantrowitz, a student loan expert and senior vice president of the college planning company, suggests taking creative measures to reduce the balance. This way you won’t have to live with the debt forever.

One such measure is to liquidate unnecessary items. “If you haven’t touched or needed them in a year, you probably don’t need them,” says Kantrowitz. Scan your space. Your home or garage might be bursting with decades of accumulated stuff just collecting dust. Items could include excess furniture, jewelry you no longer wear or artwork not even hung on the walls. For particularly valuable items, such as antiques, contact a reputable dealer or auction house for a quote. They also may act as an intermediary between you and buyers. Other things can be sold via Craigslist, yard sales or eBay.

Certainly aging debtors, especially those on limited income such as Social Security, may be able to meet the criteria of the Brunner test.

— Jeena Cho
San Francisco bankruptcy attorney

Apply all proceeds to the student loan balance. The less you owe, the faster you’ll be debt-free.

4. Request more affordable payments. The next strategy, says Kantrowitz, is to reduce payments to a more affordable level. Standard repayment terms for most federally guaranteed student loans are 10 years, but more flexible plans exist, and some can greatly diminish your monthly obligation.

Contact the loan servicer to know what is available for you. For example, an extended plan stretches a loan repayment to 25 years, which could result in payments less than half what you’re currently sending. Other programs use discretionary income as a guideline. Depending on your circumstances, you could arrange to pay 12, 15 or 20 percent of what you bring in each month.

“You may have to accept that the loans will be with you forever,” says Kantrowitz, acknowledging that rewriting the terms not only elongates the loan, but increases the accumulated interest.

As for private loans, the initial repayment terms vary greatly from lender to lender, as do flexible repayment options. Contact the lender directly to see what is available.

5. Make the most (or least) of a garnishment. If you stop making federal student loan payments, after 270 to 360 days you will be in default. Then, not only will your credit rating suffer, but a garnishment could also be in your future. A portion of any earned wages may be rerouted to the loan holder. If you’re just living off Social Security benefits, up to 15 percent could also be intercepted.

As terrible as garnishments sound, however, the sum they take might actually be less than what you’d pay with one of the alternative repayment plans. To date, the average Social Security benefits amount is $1,294, which means the most the loan holder could claim each month would be $194. That may be feasible, but if it leaves you in a dire financial position, you can (and should) request a suspension or modification.

Mind that Supplemental Security Income (SSI) is exempt from garnishment, but not Social Security disability benefits. Retirement savings, such as what you may have invested in a 401(k), can’t be intercepted before the cash is deposited into your bank account. Once it is, the loan holder has the right to sue and possibly claim the funds due.

6. Rearrange debts with a Chapter 13 bankruptcy. Want to turn the law on your side? A Chapter 13 bankruptcy is becoming an appealing way to cope. Rob Semrad, senior partner at the Chicago law firm DebtStoppers, has noticed a trend of senior citizens coming in for help with their college debt. “Their problems are spiraling out of control because of their outstanding student loans,” says Semrad. “It impacts their financial stability and a [Chapter] 13 can get them back on stable ground.”

You may be able to include student loan debt in this court-supervised repayment plan, and arrange for very low payments for up to five years. “Chapter 13 is a really good tool,” says Semrad. “It puts people in a situation where they are paying less. If their Social Security check is being garnished, it’s lifted and that can help them survive.” Some attorneys will even set it up pro bono.

Additionally, if you still owe a student loan balance at the end of the bankruptcy-required repayment term, and repaying it causes undue hardship, you can request a discharge. It’s not guaranteed, says Semrad, but worth a try.

7. Discharge some debts with a Chapter 7 bankruptcy. Yet another type of bankruptcy that can work in your favor is the more common Chapter 7. If other financial obligations are weighing you down, discharging them can free up your cash flow, enabling you to satisfy your student loans.

Chapter 7 expert and attorney Jeena Cho, who is based in San Francisco, says that federal student loans have traditionally been hard to discharge, but possible in some cases. “The debtor must pass what is commonly known as the Brunner test,” says Cho: if you can’t maintain a minimal standard of living while paying the loans, and your circumstances are likely to persist for a significant portion of the repayment period, and you’ve made a good faith effort to repay, you may pass.

“Certainly aging debtors, especially those on limited income such as Social Security, may be able to meet the criteria of the Brunner test,” says Cho.

In short, to eliminate a federal student loan in bankruptcy, you’ll usually have to prove undue hardship, which typically is construed as a medical condition that prevents you from paying.

Discharging private loans in a Chapter 7 tends to be easier, especially if they were for unqualified educational institutions or for vocational schools, like those offering truck driving, mechanical, and beautician training.

8. Gain strength from forgiveness. And finally, do know that if you have grave physical or psychological disabilities, you may not have to repay your student loans at all, bankruptcy or no. The 2013 Department of Education disability discharge standard identifies the following criteria for forgiveness:

  • You’re a veteran, and the Secretary of Veterans Affairs has determined that you’re unemployable due to a service-connected condition. You may even qualify for a refund of student loan payments.
  • You receive either SSDI or SSI, and your next review is five to seven years from your most recent disability determination.
  • You have a doctor’s certification that you are totally and permanently disabled.

Each of these circumstances requires substantial proof and obtaining formal forgiveness can take quite a bit of time and effort, but if you qualify you should eventually be absolved of your student loans.

As for what isn’t generally recommended? Paying off student loans with home equity. While interest rates for home equity loans are sometimes lower than student loans, they’re also riskier. If you can’t repay, you put your property in danger of foreclosure. Nor do home equity loans offer the affordable, flexible payment plans that federal student loans (and some private loans) have. You would lose out on this valuable opportunity if you ever needed it. Therefore, proceed with extreme caution if you go in this direction.

While student loans can feel insurmountable, they often aren’t. You have a lifetime of experience — use what you now know to contend with these debts in the most logical, prudent way.

See related: Student loan repayment troubles? Don’t delay

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