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Will Student Loans Debt Destroy Your Retirement?

By Maurie Backman – Mar 6, 2016 at 6:05AM

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It doesn't even matter if they're yours.

Source: Tulane Public Relations via Flickr.

We all hear a lot about the student debt crisis. The fact that college graduates have amassed a collective $1.2 trillion in loans is nothing short of ludicrous.

When you think of those affected by student debt, you probably picture recent grads in their early 20s, struggling to make their monthly loan payments on their skimpy entry-level salaries. But student debt isn't limited to those fresh out of college, or even those a decade or two into the workforce with loans still looming. Many of the people who owe big money on their loans are soon-to-be retirees.

In recent years, the amount of student debt carried by retirees and pre-retirees has skyrocketed. Back in 1989, pre-retirees with debt carried an average of just $600 in student loans apiece, but by 2013, that average grew to almost $8,000. Meanwhile, retirees with debt carried an average of just $400 in student loans in 1989, but in 2013, that figure reached a frightening $2,300.

As of 2013, the 65-and-older crowd is on the hook for approximately $18.2 billion in student loans, and about 706,000 senior citizen households are still carrying some amount of student debt. And while student loan balances have increased significantly among borrowers of all ages in the past 10 years, the fastest growth has been seen among borrowers aged 60 or older.

So where is all that added debt coming from, and what can aging Americans do to avoid it?

Who's that loan for, anyway?
Taking out loans to finance your own education is one thing, but taking on debt near retirement to help a child or grandchild is a totally different ballgame. While most seniors with student debt took out loans for their own educational purposes, according to the U.S. Government Accountability Office, approximately 18% of federal educational debt held by seniors stems from Parent PLUS loans taken out for children or grandchildren.

Of course, it's noble to help a child or grandchild avoid debt. However, while it might make sense to take on loans to further your own education, saddling yourself with debt on behalf of a much younger person is not such a wise move. For one thing, someone who's two to four decades your junior has a lot more time to pay off those loans before retirement than you do. Once you leave the workforce, you'll be limited to a fixed income, and a monthly loan payment won't work wonders for your budget. Additionally, your salary is more likely to remain stagnant in the years leading up to retirement, whereas a 20-something college graduate has many years to build a career with steadily increasing earnings.

Keep those loans to a minimum
If you're taking on student debt later in life to cover the costs of your own education, then it might pay off if the resulting salary boost more than makes up for the cost. But before you sign those loan documents, make sure the numbers really add up. If you're looking at a monthly loan payment of $500 but only expect your salary to go up by $5,000 a year, then you'll lose money by furthering your education. On the other hand, if a $500 monthly loan payment for three years results in a $25,000 salary boost upon obtaining your degree, and you have enough working years ahead of you to repay that loan and then some, then taking on debt makes more financial sense.

Of course, you can still do your part to keep your education costs to a minimum. If you're going back to school later in life, skip the fancy private college, which, for the 2015-2016 school year, will probably cost you about $30,000-plus in tuition. Instead consider a local community college, where you'll pay about a tenth of that. Even a public four-year in-state school is a bargain compared to a private college. In-state students pay an average of $9,400; cross state lines, however, and you're looking at an average of $24,000.

Save for retirement first
A recent study by the U.S. Government Accountability Office found that about half of households with members aged 55 and older have no retirement savings whatsoever. If you're one of them, then you're better off steering clear of student debt altogether and focusing on saving for retirement instead. Even if you've been contributing to your IRA or 401(k) for years, if you're within a decade of retirement and that balance isn't where it should be, it's more important to build your nest egg than to worry about making loan payments during the last 10 years of your career.

Besides, if you have any money to spare as you near the end of your working years, putting it into a retirement account will go a long way. Over a five-year period, adding $400 a month to your 401(k) or IRA will result in an extra $24,000 for retirement, assuming a modest annual return of 6%. Remember, too, that if you're 50 or older, you're entitled to make tax-free catch-up contributions to your retirement accounts. You can put an extra $6,000 into your 401(k) and an additional $1,000 into your IRA, which is a much better use of that money than earmarking it to cover loan payments.

As a retiree or soon-to-be retiree, the last thing you want is to become a gray-haired poster child for student debt. At a time in your life when you deserve to be looking forward to retirement, you don't need the added pressure of student loan payments dragging you down -- especially if they're for somebody else.

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