Avoid the Graying of Student Loan Debt…Downsize

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Posted by The Savvy Retiree on February 21, 2017 in Downsizing, Money Saving Strategies, Personal Finances, Rightsizing, Save Money

Tom Kerr writing on financial independence

Over the past 10 years, student loan debt in the U.S. ballooned from less than $600 billion – which was already out of control – to more than $1.25 trillion.

But beware of the student loan debt trap, because it has triggered an unprecedented crisis…not just for Millennials, but for older Americans, too.

The number of outstanding student loans owed by those who are of retirement age has quadrupled in the last 10 years. Nearly three million Americans over the age of 60 were repaying college tuition loans in 2015…a phenomenon dubbed the “graying of student loan debt.”

Just 10 years prior to that, the number of over-60 student loan debtors was only about 700,000. The size of each of these loans shouldered by retirement-aged people has also surged.

The Government Accountability Office also confirmed that nearly 40% of federal student loan debt owed by those age 65 and over is in default. As surreal as it may sound, that’s the highest student loan default rate for any age group…and the fastest-growing segment of student loan debtors is the over-60 crowd.

But unlike many other forms of consumer debt that can be discharged by declaring bankruptcy – which is not exactly a scenario you want to face when approaching retirement – it is rare for a student loan obligation to be resolved that way.

Under current law you have to go to court and engage in what is called an “adversarial process” – which means the proceedings are litigated like a trial. You should hire the most expensive lawyers you can afford…despite the risk that you may still lose your case. The majority of people do. How you manage to pay for those pricey court proceedings – after falling into bankruptcy – is beyond me.

As a result of this growing disaster, the number of seniors whose Social Security paychecks are being confiscated by the government to fulfill their student loan debt obligations increased six-fold in the 10-year period leading up to 2013.

Your Social Security benefits are already woefully inadequate, and now you are supposed to somehow retire…or manage to survive your retirement years…while having your benefit checks garnished by the government because you haven’t repaid a student loan.

As they struggle to make ends meet, many seniors who owe student loan debt become desperate…taking drastic, potentially life-threatening steps to keep their heads above water. They forego critical medical procedures, skip visits to the doctor, and stop buying and taking their prescription medications.

Adding to the complexity of this problem is the fact that many students taking advantage of these loans and the generosity of parents and grandparents don’t even understand how tuition loans work.

Last year, Bloomberg News reported that hundreds of students on college campuses around the USA were surveyed to find out how much they knew…or didn’t know…about their student loans. Only 25% of survey respondents understood how the interest rates worked. More than 90% admitted that they didn’t even know what the interest rate on their student loan was…or how long they had to repay it.

More than 70% didn’t realize the extent to which those who cosigned their loans were financially liable.

Hey, you might want to sit your kids down and quiz them, before you cosign a tuition loan. They may be doing okay in their university classes, but they could be flunking when it comes to financial literacy.

Meanwhile, the vast majority of graduates walk away with around $30,000 or more in student loan obligations. If they don’t repay them and you cosigned on one of those loans, you are the one on the hook. Debt collectors will come after you and hold your feet to the fire until you pay off every cent that’s owed…regardless of your age.

When I went back to college late in life I was able to do so without borrowing any money. I paid full tuition in cash every semester. But the only reason I had that liberty was because I had first intentionally downsized…to a simpler way of living defined by a drastically lower overhead and more income and savings.

I paid my way through more than three years of college at a great university when I was almost 50 years old. But by that time I had already earned rigorous degrees from the School of Hard Knocks…and was determined not to repeat any of those bruising lessons.

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Image: ©iStock.com/ShaunWilkinson