How to Keep Student Loans From Wrecking Your Retirement

Student loans are not just a burden to young college grads, but to those nearing retirement age as well. Many Americans who have to choose between saving for retirement and paying for a child's college education opt for the latter.

That can be a problem. The Consumer Financial Protection Bureau reports that in 2015, $66.7 billion of student loan debt belonged to borrowers age 60 and older. Among them, 40 percent of borrowers over the age of 65 were in default. The vast majority of older Americans with student loan debt — 73 percent — borrowed to help fund a child's or grandchild's education.

The statistics don't lie; the latest obstacle threatening a comfortable retirement for Americans may very well be student loan debt. (See also: Are You Ruining Your Retirement by Spoiling Your Kids?)

Understanding what's on the line

Understanding just how much a student loan can disrupt your retirement will help you evaluate the decision before signing on the dotted line. The average college student graduates with over $37,000 in student loan debt. Given that tuition costs continue to rise at twice the rate of inflation, loan balances are likely to grow for future classes.

Before taking out a student loan for a child or grandchild, consider whether you can realistically repay the loan before entering retirement. Even if you can, understand that you may be sending hundreds of dollars every month toward that debt instead of toward your retirement account. How much will that hurt you in the long run?

Whether you co-sign for a student loan or borrow directly for your child, you will be responsible for the entire balance of the loan. If you can't afford to make those payments, and you know you will still be repaying the loan well into retirement, the best decision is not to take out a loan at all. You'd be putting yourself in a position of great financial risk by doing so.

If you default on a student loan, things can get even worse. Student loan creditors can garnish your wages, including Social Security benefits. Tax refunds can also be seized to satisfy unpaid balances. Even bankruptcy won't be a good option, as student loans can generally not be discharged. If you find yourself in a position where you're over your head and unable to pay, your outstanding student loan debt can be devastating to your financial wellbeing.

Alternatives to student loan debt

If savings, scholarships, and grant opportunities have all been exhausted, there are still ways to bring down the cost of college for your child and avoid having student loans impact your retirement savings plan. (See also: The Encouraging Truth About How Americans Are Covering the Cost of College)

1. Your child can choose cheaper schools

While your child may have their heart set on particular school, they also need to be realistic about how much it will cost to attend. Price should be as much of a deciding factor as the school itself. If your child attends an in-state school or community college, you can greatly minimize or even eliminate the need for student loans altogether.

2. Your child can earn college credit in high school

Advanced Placement (AP) is a program that allows high school students to earn college credits through specialized courses. There may be certain prerequisites to signing up for these advanced classes, and you'll have to pay a $94 fee for the exam. Additional costs may also apply for certain study materials.

If your child scores well on their AP exams, it could save them from having to take certain introductory courses in college — which in turn could slash thousands from their tuition bill. AP exams are scored on a scale of 1–5. Different colleges have their own criteria for assessing how many credits your child's test score is worth (or if they'll accept the AP credits at all).

3. Have your child commute from home

Room and board is a large portion of the overall college experience and expense. And while your kid may be eager to set out on their own, again, they need to be realistic about what's affordable, and so do you. Sabotaging your retirement savings to pay for your child's room and board is simply not a smart financial move.

Attending a college close to home, or even finding a school that offers some of its courses online, will allow your child to continue living at home and to commute to class. This way, they (and you) can better focus on paying tuition.

If they have their heart set on living on campus, taking a Resident Assistant position can allow your child to live in the dorms for free. They will have added responsibility as an RA, but the benefits can be worth it.

4. Your child can find a job

Just because your child is attending school doesn't mean they can't find a part-job to help cover education costs. While it may be a burden to hold down a job while pursuing a degree, make sure your child understands how much more of a burden it will be for either of you to carry student loan debt decades into the future. Companies like UPS and Starbucks offer tuition assistance benefits that can help defer college costs. (See also: These 17 Companies Will Help You Repay Your Student Loan)

Even a full-time position is not out of the question. Students working full-time may take longer to complete a degree, but a few more years of study can be a worthwhile trade-off for your child to graduate debt-free.

Dealing with student loans in retirement

For those still repaying student loans into or nearing retirement, the burden can be tremendous. But you do have options.

Federal student loans offer income-based repayment programs. A deferment or forbearance can be requested to conserve cash if you're experiencing a temporary financial hurdle. Consolidating loans can also help you adjust interest rates or convert your loan into one that offers more repayment assistance options. Visit the Federal Student Aid website to find more information about the repayment programs that are available to you. (See also: 4 Things You Need to Know About Deferring Student Loans)

Private student loans are a different matter. Very few private student lenders offer any form of repayment plan. If you are struggling to make payments, your best bet is to contact your lender directly and discuss what options may be available to you. If you have co-signed a private student loan, you may be able to request to be removed if the primary borrower has a good payment history and solid credit. By passing the baton to your adult child, you can return your focus to your retirement.

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