I’m 75 and my husband is 83. I’ve been paying off my student loans for 16 years and the balance has gone from $200,000 to $235,000.
I’m on an income-based repayment plan and work primarily to pay off my loans. My IDR payout is $1056 as of today. I also rely on Social Security. If I default, the penalty is to attach a 15% withdrawal of my social security payments, it seems more practical to default and only pay $215 a month versus over $1,000+. Your thoughts?
The reality is that you will never get rid of these loans. You probably don’t want to work until the day you die. And even if you did, it’s still highly unlikely that you’ll get out of student debt.
But I don’t think you need to default, which would destroy your credit in addition to jeopardizing part of your social security. The best solution is to minimize your student loan repayments and then make the minimum payment. This means that you will have to accept seeing the balance climb more and more each month. Federal student loans are forgiven on the death of the borrower, so you don’t have to worry about your husband or someone else being responsible for that debt when you die.
Let me make it clear to readers that the advice I’m about to give only applies to federal loans – and since you’re on an income-based repayment plan, your loans are clearly federal. Unfortunately, those with private loans have far fewer options for relief. Anyone reading and having difficulty with private student loans should contact their service agent to see what options are available.
In your situation, I would not make any loan repayments while federal student loan forbearance is in effect. Taking advantage of 0% interest rates to eliminate as much capital as possible will make sense for some borrowers who plan to pay off their loans in full, especially if they don’t have high-interest debt. But since your goal should be to make your payments as low as possible, obviously you’ll want to pay $0 per month for as long as possible.
While forbearance is in effect, all of those $0 payments still count as one-time payments for income-driven repayment plans. You can contact your service agent to request a refund for all payments you have made since March 2020. If any of your student debt consists of private loans, use your federal loan repayments to eliminate as much of the debt as possible. balance.
It’s a short-term solution, of course. As of this writing, forbearance is set to end on August 31, 2022. I would not count on a further extension of this deadline. But considering it’s already been extended six times, I certainly wouldn’t be surprised if borrowers get another reprieve either.
In the long term, the easiest solution is to stop working. You’re on an income-based repayment plan, which means your payments are capped at 10% to 20% of your discretionary income, depending on the type of plan you’re enrolled in.
It looks like you’re making a pretty decent amount if your payments are $1,056, and I’m guessing you’re paying extra every month. If you were to retire, your discretionary income would undoubtedly decrease significantly, which would also reduce your payments, as they are based on income and family size rather than loan balance.
A family of two living in the lower 48 states with an adjusted gross income of $40,000 could expect monthly payments of between $104 and $362. The same family with $100,000 of income would pay between $604 and $1,362. But retirees who live mostly on Social Security sometimes end up with $0 payments. You will need to continue to apply for recertification each year to keep your loan in good standing.
Under income-driven repayment plans, the remaining balance of your student loan is usually canceled after 20 years, although for some plans it is not canceled until after 25 years. You’ve been making payments for 16 years already, so the discount may be in sight. Historically, canceled loan balances were taxable as ordinary income, but under the US bailout enacted in 2021 for COVID-19 relief, balances canceled through 2025 are not taxable. Some observers believe it is possible that Congress will make this pause permanent.
If you have health conditions that make it difficult to work, you may want to discuss with your doctor whether you meet the criteria for a Total and Permanent Disability (TPD) discharge. To qualify, you must be permanently unable to work. Many older borrowers meet the criteria, but don’t know they qualify. This is one of the few cases where you would be eligible for a full pardon if you meet the requirements.
The more likely scenario, however, is that you’ll need to treat these loans the same way you would treat a chronic health condition. The disease may not be cured, but you can make the symptoms manageable.
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Robin Hartill is a Certified Financial Planner and Senior Writer at The Penny Hoarder. Send your tricky money questions to [email protected]
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