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People Retiring with Student Loans May Save Money with Income-Based Repayment

Mark Kantrowitz

November 21, 2011

I’m 68 years old, have worked for the last thirteen years in a state psychiatric hospital and after consolidating all my loans, have never missed a payment to Direct Student Loan in the last ten years. My original paper work says that I will need to make payments until 2031, when I’ll be 88. I would like to think about retiring sometime soon, but the payments would take 1/3 of my Social Security. Any suggestions on limiting how long I would have to pay? — E.N.

Ideally, people who are about to retire should have no remaining debt, whether in the form of student loans, credit card debt, auto loans, or mortgages. For many people, retirement means a reduction in income. Retirement benefits are needed for living expenses, not to make monthly loan payments.

Unfortunately, the obligation to repay federal student loans does not end with retirement, even though the means to repay the debt are much more limited. If a retired borrower defaults on his or her federal education loans, the federal government may offset up to 15% of the borrower’s Social Security disability and retirement benefits to repay the defaulted loans.

However, borrowers who have little or no retirement income other than Social Security retirement benefits and their federal student loan debt exceeds their retirement income should consider switching their federal student loans into the income-based repayment plan. Income-based repayment may significantly reduce or even eliminate the monthly loan payments for retired borrowers with very low income.

The current version of the income-based repayment plan caps the monthly loan payments at 15% of the borrower’s discretionary income, where discretionary income is the amount by which adjusted gross income (AGI) exceeds 150% of the poverty line. Any remaining amount owed will be forgiven after 25 years in repayment. Only payments made under the income-based repayment, income-contingent repayment or standard 10-year repayment plans count toward the 25-year forgiveness. The economic hardship deferment also counts toward the 25-year forgiveness.

If a borrower is not required to file a federal income tax return, the borrower will have to submit an Alternative Documentation of Income form to calculate a substitute for AGI. This form asks the borrower to list all taxable income the borrower is receiving, such as income from employment, unemployment benefits, dividends, interest, alimony and the taxable portion of Social Security benefit payments. Untaxed income, such as the tax-free portion of Social Security benefit payments, Supplemental Security Income, child support and federal or state public assistance is not reported.

Although a retired borrower may not live to reach the 25 year forgiveness milestone, the total payments under income-based repayment may still be significantly lower than the other options for someone on fixed income. (Note that federal education loans are discharged if the borrower dies or becomes totally and permanently disabled. So if the borrower dies before the loans are paid in full, the remaining debt will not be charged against the borrower’s estate.)


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