If you have student loan debt, could it hinder your chances of retiring the way you want to or retiring at all? The answer to that question depends on what type of debt you have, how much student debt that you have and what your retirement timeline is. In some cases, cosigning on a student loan could have an impact on the length and quality of your retirement.
What Kind of Student Loan Debt Do You Have?
Federal student loans are somewhat more flexible than other types of student loans. If you are a teacher, you may be able to have some or all of your student loan debt forgiven by teaching in an under served area. Typically, this means that you will teach in an urban area or in an area that has a lot of low income students.
It may also be possible to enroll in an income based repayment program. This limits your monthly payments to a maximum of 10 percent of your discretionary income. After 20 years, you may be able to have the rest of your loan balance forgiven. However, it is important to note that you may have to pay taxes on any amount that is forgiven as it could be considered income.
If you are enrolled in an income based repayment program, you may not have to pay anything at all depending on how much you have left over each month after other bills and liabilities. Therefore, this may not hinder your ability to retire as you wouldn't have to put any of your extra income to a federal student loan holder. As your income generally drops during retirement and investment income may not be considered in the calculation, you might not have anything to worry about.
Those who have private student loans may not be as lucky. While it may be possible to ask for a forbearance or deferment, you will still have to account for accrued interest while you are not making payments. Therefore, you may wish to continue making payments just to keep working on the balance.
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How Much Student Debt Do You Have?
In addition to how your debt is structured, you will want to consider how much debt you have. As a general rule, every $10,000 in debt that you have will cost about $200 a month to pay off over a period of five years. Of course, that doesn't take into account your interest rate and any late or missed payment fees that are added to the balance.
If you are over the age of 50 when you accrue the new debt, you will want to pay it off in the next five years if possible. Therefore, if you have a debt of $40,000 after getting a second degree or going to grad school, you would have to pay about $800 a month if you want to pay it in 60 months.
In the short-term, you may be able to delay putting money into your 401k or IRA or put off buying a new car. If you decide to not put money into your retirement account, you will lose out on potential compounding in addition to any match that your employer may provide. Therefore, even if you can afford to pay off your debt before you retire, you will have less to retire on, which means that you may have to delay retirement or keep a part-time job during that time.
What Is Your Retirement Timeline?
If you are in your 20s and have 40 or more years left until you plan to retire, your student loan debt shouldn't have a serious impact on your retirement. While you may not be able to save for retirement as soon as you graduate, you don't need to contribute as much to get a premium return from that investment. As long as you have a few dollars a week that you can put into a 401k, you should be alright. Your main concern before age 30 is likely going to be how student loan debt determines when you can afford to buy a home or start a family.
Those who are closer to retirement may see a more immediate impact on their ability to retire. If you are 65 and haven't paid off your student loans yet, part of your retirement income is going towards that loan. Unless you have a home that you can mortgage or other assets that you can sell, it may be difficult to raise the funds necessary to take care of that debt.
Therefore, you should think carefully about taking out any type of student loans after the age of 50 unless you have a clear plan for both saving for retirement and paying your debt down quickly. You should also consider how paying student loans could impact your ability to pay for a health insurance or life insurance policy. Many people over the age of 65 choose to work part-time because it is their only option to obtain an affordable and effective policy for themselves and/or their families.
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What If You Have Cosigned For Another Student Loan?
In the event that you have cosigned on another loan, you could be held responsible for that debt if the primary borrower stops making payments. This means that if your son or daughter or grandchild stopped paying his or her student loans, you are legally responsible for paying that debt. The lender could go after your assets or garnish your wages and social security checks. Due to the impact that it could have on your retirement, it may be worthwhile to cosign on a student loan only if you know that you could repay it if need be.
Can student loan debt impact your ability to retire? Depending on your financial situation, taking out student loans could be the difference between retiring and working until you are 70 or older. Therefore, make sure that you have a plan and always put your long-term financial security first before going back to school for short-term gains that are not guaranteed.
