Student Loans and Retirement: A Dangerous Combination

​Every parent wants the best for their child. It’s a natural desire. That’s especially true with regard to education, as a quality education can open up a world of opportunity. Funding that education can sometimes be difficult, though.
 
Many families turn to student loans to cover much of the tuition for college. While student loans can be a helpful tool, they can also become a serious challenge for some graduates, especially those who are entering a soft job market.
 
Student loans aren’t just an issue for graduates, though. Many parents are also feeling the sting of student loan payments. According to estimates from the Government Accountability Office, as of 2015 there were 2 million holders of Direct Plus Loans from age 50 to 64. There were an additional 200,000 Direct Plus Loan holders over the age of 65. Those numbers have more than doubled since 2005.1

Direct Plus Loans are a certain type of loan that allows a parent to borrow money to pay for their child’s education. Many parents opt for this type of loan to protect their children from student loan debt, or because they have greater borrowing capacity than their child.
 
Even if you don’t take a Direct Plus Loan for your child’s education, you could still be on the hook for student loan payments. Many loan providers require parents to co-sign for their children’s loans. If your child can’t make the payments after graduation, the burden may fall to you.
 
As you near retirement, these student loan payments can be increasingly problematic. If you’re covering some or all of your child’s payments, that’s money you can’t contribute toward retirement. You may even be forced to work longer than you’d like to continue making the payments.
 
Fortunately, there are steps you can take to ease the burden. Below are a few tips to help you minimize the pain of your child’s student loan debt and to protect your retirement:

Protect retirement as a top priority.
 
You might be tempted to pause your retirement savings so you can put a dent in the student loan balance. This could be a mistake. Your retirement could last for decades, and you could face high costs in retirement for medical care or even long-term care. Inflation will likely drive up your spending needs, too, as you advance through retirement.

If you stop your retirement contributions to focus on loan repayment, you could miss your retirement savings target. Make sure you keep retirement as a top financial priority. Set a firm amount that you will contribute to retirement every month, and don’t deviate from that amount for the sake of student loan debt.

Consider refinancing.
Many lenders know that families struggle with student loan debt. That’s why some companies offer refinancing options to those who have strong credit. You may be able to refinance your loan balance into a product with a lower interest rate, which would allow you to pay down the debt faster.
 
You also may have access to lending tools that have lower interest rates, like home equity lines of credit. If so, perhaps consider using that funding to pay down the loans so you can get a lower payment.

Be honest with your child.
Does your child understand your retirement needs and goals? Don’t assume that they do. Many young people don’t fully comprehend how difficult retirement planning can be.
 
Have a conversation with your child and show them how much money you need to save to be able to retire comfortably. You also might remind them that if you don’t save enough to retire, it could be you who needs their help in the future.
 
If they understand your needs and goals, they may be more willing to contribute their fair share to paying off the student loans. If you’re making payments on their loans, consider working out a plan in which you gradually transfer the responsibility of the loan back to them over time. That allows them to make the necessary changes to their budget, and it gives you some certainty on when your share of the payments will end.
 
Need advice on how to protect your retirement from student loan costs? Contact us at Carstens Financial Group. We can help you analyze your needs and develop a strategy. Let’s connect today.


1http://www.marketwatch.com/story/college-loans-are-making-it-harder-for-parents-to-retire-2017-02-27
 
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