How to Manage Student Loan Debt in Retirement

October 14, 2014

You’ve worked hard both in the professional world and at home raising your family and retirement is just around the corner. Now it is your turn to relax – somewhat — and do the things you love and want to do. But what if you haven’t finished paying off your student loan debt?

It turns out that recently, many people are retiring with student loan debt.  Whether it was for their own schooling or to help support their children, they have a debt to pay off.  If they don’t have enough to make the payments and go into default then their Social Security can be garnished – causing them to have lower income.  So what options do you have if you are in this situation?

Recently, this problem was brought up in the Senate and has gained some media attention. Congress has no solution and might not come up with one for some time, if at all. The only way currently to get the loan forgiven in retirement is to be totally and permanently disabled or declare bankruptcy if you meet certain criteria. But as a retiree, you do have additional options.

1) You could withdraw from your retirement plan savings. Taking money from a 401(k) plan or IRA can pay down the loan in one lump sum, and there is no penalty from the IRS when withdrawals are taken after age 59 ½.  The things to remember are that it will decrease your retirement nest egg balance and may be considered as taxable income that year. If it is a Roth IRA or Roth 401(k), then the money may be withdrawn tax free as long as the account has been open at least 5 years and you’re over age 59 1/2.

2) Taking a home equity loan would also allow the retiree to pay off the student loan. The interest paid on the home equity loan can be tax-deductible when the person itemizes their deductions using a schedule A. In all fairness, the student loan does have an interest deduction, too. It is up to $2,500 of student loan interest for 2014 and for modified adjusted gross incomes below $155,000 for married filing jointly and $75,000 for an individual.

3) Refinancing the loan for a lower interest rate and a smaller monthly payment is another way to manage the debt.  This can be done for both private and federal loans (via a loan consolidation).

Having debt in our golden years is something I think none of us would prefer.  But if we do have student loans and can’t make the monthly payments or just don’t want the debt, then we do have options. Once we have that student debt under control, we can enjoy the rest of our retirement years.