Should Students and Parents Who are Close to Retirement Borrow to Pay for College?
April 16, 2012
Also, older students and parents should never borrow more than they can afford to pay off in full by retirement. By the time one retires, there should be no debt remaining, regardless of whether it is credit card debt, auto loans, mortgages or student loans. There’s no new income in retirement, just savings, so it doesn’t make sense to maintain debt that charges a higher interest rate than one is earning on savings. The retirement income is needed for living expenses, so even with income-based repayment as a repayment option for federal student loans, the debt burden may be too high.
Student loans do not disappear when a borrower retires. If the borrower defaults on federal education loans, the government can seize up to 15% of Social Security disability and retirement benefit payments to repay the student loans. A 2005 US Supreme Court ruling upheld the federal government’s ability to offset Social Security benefits without a statute of limitations.
An analysis of a sample of Equifax credit report data by the Federal Reserve Bank of New York found that 11.8% of student loan borrowers with outstanding student loan debt are age 50-59 and 5.3% are age 60+, representing 4.4 million and 6.3 million borrowers, respectively. This suggests that 6.4% of people age 50+ and 3.4% of people age 60+ still have student loans, owing an average of $21,300 and $18,600, respectively.
It is unclear whether these older Americans borrowed the student loans to pay for their own education or for their children’s education. More likely the latter. Using data from the National Postsecondary Student Aid Study (NPSAS), 2.3% of undergraduate students and 5.4% of graduate students who graduated in 2007-08 were age 50+ (0.3% and 0.4% were age 60+), representing a minuscule fraction of older Americans. The Federal Reserve Bank of New York statistics are more consistent with Parent PLUS loan debt, since 2.8% of mothers were age 40 or older at their child’s birth in 2009 according to data from the National Center for Health Statistics, similar to figures for previous years. (It is also unclear whether the parent is repaying the Parent PLUS loans or whether the parent has a side agreement with the student for the student to make the payments on the Parent PLUS loans.)
Another approach for evaluating the cost/benefit tradeoffs is to compare the income one could earn now with the income one could earn with the degree, after subtracting the debt and the opporunity cost (the time the student won’t be able to work) and accounting for interest on the debt. Assuming that all of the extra after-tax income after graduation is devoted to paying off the debt as quickly as possible, then the number of years to reach break-even is approximately 1.4 x (Education Debt + Lost Income) / (2 x (New Income – Old Income)). If this is less than 10 years, it is financially worthwhile to pursue the degree. Given current income of $45,000, two years of income lost during the in-school period, total education debt (including living expenses) of $90,000 and an annual nursing salary of $60,000 to $75,000, the payback period is up to about 8 years. That, plus 2 years in college, doesn’t leave much time after the debt is repaid to save for retirement and to pay for other expenses.
There are also a variety of other risks to consider. Some students take longer to graduate, increasing the costs. Some students drop out and are left with the debt but no degree. Some students are unable to find a better-paying job after graduation. (The income statistics are averages, so some nurses will have an annual income that is below average.) Some nurses are unable to continue working until the normal retirement age due to illness, injury or other reasons.
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