Think long and hard before taking on debt to pay for your child’s college education. Those loans could come back to haunt you in your retirement years.
A look at new data from two reports suggests that many aging baby boomer parents are having trouble paying back federal student loans taken out to send their children or even grandchildren to college.
As a result, many adults age 50 and older who had the best intentions of taking on the college tuition burden for family members have jeopardized their retirement nest eggs. Add credit card debt and mortgage payments to the credit list and the unintended consequences could be severe.
Instead of light work and leisure time, many older adults may be dealing with damaged credit ratings and lower monthly Social Security benefits checks as the government deducts an amount off the top to recoup some of the balance owed on federal PLUS loans to parents.
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In some cases, the road may lead to personal bankruptcy, although keep in mind student loan debt generally cannot be discharged in the courts.
What’s clear from the data, however, is that increasingly student loan debt is not just a young person’s problem.
According to data from the Federal Reserve Bank of New York’s latest report on household debt covering the second quarter of 2014, the number of Americans age 50 and older with outstanding student loans had almost tripled to 2 million since 2005.
The report also said the debt among older people is up substantially to $43 billion through the second quarter from $8 billion in 2005.
The debt, which is a small percentage of the more than $1 trillion in student loan debt outstanding, was either from long-ago loans taken out by people to finance their own educations or more recently to pay for college degrees for their children or grandchildren.
The Government Accountability Office also released a report in September that looked at the impact of student loan debt on older Americans. It relied on slightly different data than the New York Fed.
The GAO report said that 27 percent of the outstanding balances on federal loans were held by adults ages 50 to 64 who financed college for their children. The remaining 73 percent of the outstanding balances financed the borrower’s own education.
But taken together, the default rate among borrowers in this age group who had missed payments was 19 percent versus 12 percent for those ages 25 to 49.
In addition, 27 percent of loans held by those ages 65 to 74 were in default, and more than half of the student loans held by borrowers 75 or older were in trouble, the GAO said. The data did not break out the purpose for the borrowing.
What’s the message for parents?
It’s natural to want to shoulder some of the college debt load for your student. But don’t put your retirement savings at risk either, experts say.
Compared to college grads in their 20s and 30s, older borrowers have less time to pay back loans if they get behind.
It’s like the flight attendant telling you to put your own oxygen mask on first before tending to the kids.
Before taking out a college loan, consider the “what if” scenarios and have a plan in mind for how long you’ll take to repay the debt. Mark Kantrowitz, the publisher of the Edvisors.com higher education webiste, offered this formula: “Parents should borrow no more for all their children than they can afford to repay in 10 years, or by the time they retire, whichever comes first.”