Student loans are a trillion-dollar problem in the US. Millions of Americans have amassed $1.766 trillion in student loan debt—a massive result of decades-long borrowing and rising education costs. While getting a quality college education sets you up for better salaries or income afterward, it can also shackle you to an enduring burden. For financial support strategies, explore tips for managing money during difficult times.
Mounting unpaid student loan debts have become a multi-generational issue. Almost 25% of the total student loan debt is held by the 50-and-above age bracket—hardly the millennial and Gen Z stereotype.
This problem has been brewing for decades and is coming to a head amid rising interest rates, inflation, and the cost of living. This situation implies that student loans could severely impact retirement funds, and unchecked debt could also affect the next generation’s prospects for wealth-building.
College degrees remain relevant, and those from expensive schools are valued in the workplace, but are they worth the cost, especially for ordinary Americans trying to build better lives and save enough for retirement? Discover available free money resources and strategies for rebuilding when finances are tight.
Average Student Loan Debt Statistics
Student loan debt is now the second-largest category of household debt, after mortgages. According to the August 2023 update from the Education Data Initiative, approximately 43.9 million federal student loan borrowers exist. Of the US’s $1.82 trillion total student loan debt, $1.70 trillion is from the outstanding federal loan balance, accounting for 93 percent of total student loan debt.
The number of student loan borrowers has almost doubled since 2004, while the outstanding debt has quadrupled. The average federal student loan balance is $37,718. The average total balance, which includes private loan debt, is $40,499. Recently, however, the rate of debt accumulation has been slowing.
To earn a bachelor’s degree, the average US student attending a public university borrows $32,637. The average borrower takes up to 20 years to repay their student debt.
A typical 20-year term would accrue up to $27,000 in interest alone at the rounded average interest rate of 6 percent. Borrowers pay up to 42 percent of the total repayment cost in interest. The average monthly payment is $503.
These are the baseline statistics, and costs can drastically go up when you pursue higher education, such as a master’s degree. Moreover, for professional and doctoral students, costs can go to the hundreds of thousands. Medical school debt, for example, averages $202,453. This amount excludes what you paid for in your undergraduate or premedical course.
Why do many older Americans still owe student loans?
Student loan debt is far from a problem confined to recent or younger borrowers. It has grown into a multi-generational quandary. The growth in older borrowers in the US is striking, but the reasons for this increase are varied. One reason is the growing number of parents taking on loans to support their children’s education.
The principle behind these “parent loans” is that parents tend to have more wealth or collateral. As a result, lenders offer them loans and allow borrowers to pay off their college tuition over time.
Unlike the conventional approach of students taking out federal loans to pay for their education and paying them off after they become employed, Parent PLUS loans are intended for parents with assets they could not access while their kids were in school.
A Parent PLUS loan, also called a Direct PLUS loan, lets parents borrow to help pay for their kids’ education. To obtain this type of loan, you must prove you have a good credit history.
You also need to meet the general requirements for federal student aid. The government will lend an amount equivalent to the cost of attendance at a university, minus any financial aid the child has already received.
Many older Americans have co-signed loans for their children or even grandchildren. Unforeseen events for these individuals in their 40s, 50s, and even 60s, like job losses and emergencies, could defer repayment and cause interest to accrue over time.
Parent PLUS loans are jeopardizing retirement.
According to federal data, in 2021, 3.6 million parents took out S103.6 billion in loans. The average initial balance standing for such loans is $29,000.
These parents have been paying off loans to support or supplement their children’s education for decades. Unfortunately, balances ballooned as interest rates surged, resulting in a new wave of aging Americans who may carry these loans well into retirement.
As a result, the debt cycle crosses generations. Both parents and children could be burdened with their own loans and thus be unable to contribute to each other’s lives financially and in different meaningful ways.
More than 8 million Americans over 50 hold 22% of total federal debt—about $336.1 billion—according to the American Association of Retired Persons (AARP). Some of this debt could carry as much as 10% interest annually. As a result, many on the brink of retirement face unique challenges as they try to balance retirement planning with debt repayment.
Understanding why student loan debt piles up and lingers for older Americans to come up with solutions is crucial. Some of these reasons are sociological. An increasingly competitive professional environment requires even more rigorous candidate screening.
Additional education in high-quality institutions becomes an advantage. As the job market continues to tighten and evolve, individuals are pressured to pursue more advanced education at unaffordable prices.
The lack of financial literacy is also a factor. Many individuals take on student loans without fully realizing their impact on their lifestyle or economic well-being. Older Americans co-sign loans without fully grasping how they affect their savings, investments, and financial future in retirement.
Many are unaware that parent PLUS loans have the highest interest rates and are therefore the most expensive type of student loan. Loan payments could keep them from making otherwise lucrative investments that could grow their nest egg—a heavy opportunity cost that will take its toll later.
Debt repayment siphons extra savings you could use to develop a robust financial cushion in retirement. Another option is to refinance Parent PLUS loans to secure a lower interest rate or more manageable repayment terms, which may reduce the overall cost of the debt. Lower monthly payments can also free up more room in a parent’s budget for retirement contributions, investments, and other long-term financial goals.
How Borrowers Can Rid Themselves of Student Loan Debt: Top Strategies
The sooner you realize the damage student loans can do to your finances, the sooner you will want to find strategies to pay them off. Here are some ways to start shedding student debt and focus on building your nest egg.
Explore employer assistance programs
Apart from paying for student equipment, books, tuition, fees, and other expenses, you can now use employer educational assistance programs to pay for student loans—both principal and interest.
Employer-sponsored student loan assistance is tax-free. The IRS does not consider employer-provided assistance taxable income to the employee. However, this assistance has a cap. The maximum annual exclusion for educational assistance an employer can provide to each employee is $5,250.
Such programs offer numerous benefits for both employees and employers. For companies, it could help retain top talent. Payments made directly to the lender and those given to the employee qualify under this program, according to the IRS.
Delay retirement to earn more
Delaying retirement to pay off student loans may not be ideal for many. Still, it may be worth it to be financially free in retirement. Finding ways to earn additional income could help you catch up on debt repayment.
Because most student loans among older adults were taken out with a parent or grandparent co-signer, would-be retirees may have to take on additional financial responsibility. They may need to work longer than planned, as Social Security, savings, and future retirement income may be compromised if they don’t.
Check for loan forgiveness programs
Explore student loan forgiveness programs and see if you qualify for any of them. There are a few federal programs where you may be eligible, namely:
Teacher loan forgiveness
If you’ve taught full-time for five years at a low-income school, you could be eligible for the discharge of some or all of your federal Direct and Stafford loans.
Under the Teacher Loan Forgiveness program, the loan discharge could total up to $17,500. However, to be eligible for this program, you must be a highly qualified teacher, as defined by the FSA.
Closed school discharge
If your former school closed while you were enrolled or soon after you left, you may be eligible for a closed school discharge. Through your research and application process to the U.S. Department of Education, you’ll learn whether you meet the criteria suitable for this type of student loan discharge.
If you qualify, you may not need to repay your debt. Sometimes, they automatically discharge the debt upon school closure, and you’ll get a notification from the loan servicer even without applying.
Borrower defense to repayment
If your school engaged in misconduct while you were enrolled, you may be qualified to have your student loan debt forgiven in part or in whole. You can qualify for this debt forgiveness through the borrower defense program.
In some cases, you could even receive a refund of your past payments, but you need to ascertain this by going through the FSA website.
Public service loan forgiveness (PSLF)
You could be eligible for federal student loan forgiveness if you are a public servant, such as a government or nonprofit worker. The PSLF program could forgive your remaining balance after a 10-year repayment period. Be sure to research whether your employer qualifies you for PSLF.
Check for income-driven repayment plans
Borrowers with federal student loan debt have access to four repayment plans. These are the Pay-as-you-earn Repayment Plan, the Income-Based Repayment Plan, the Income-Contingent Repayment Plan, and the Saving on a Valuable Education Repayment Plan (formerly the Revised Pay-as-you-earn plan).
These programs limit your repayment to 10 to 20 percent of your discretionary income. They also depend on your family size and the details of your chosen IDR plan.
Consolidate your multiple student loans into a single payment
You can consolidate student loans. First, you need to know what types of loans you have, then streamline your payments.
Private student loans
You can’t use a federal Direct Consolidation Loan if you have private student loans. However, you can combine your multiple private loans into one. Doing so would streamline your debt repayments. Consolidation would also make it easier to budget your monthly debt payments.
Like federal student loans, you could lower your monthly payments by choosing a longer repayment period. As an alternative strategy, you could also increase your monthly payments, apply to shorten your loan term, and pay off your debt faster.
If you consolidate your private student loans, you could qualify for a lower interest rate. Private student loan rates depend on the lender’s policies and can vary depending on the borrower’s creditworthiness.
Federal student loans
You are most likely eligible for consolidation if you have federal student loans. Even if they come from different loan servicers, borrowers with multiple federal student loans can combine their debt into a single loan with one monthly payment. This consolidation is called a Direct Consolidation Loan.
Most federal loan types are eligible for this type of debt consolidation, including subsidized and unsubsidized Direct loans, Parent PLUS loans, Graduate PLUS loans, PLUS loans from the Federal Family Education Loan Program, and Stafford loans.
When you consolidate your federal student loans, you may extend your repayment term to lower your monthly payment. Other benefits include access to the Public Service Loan Forgiveness Program and income-driven repayment.
You will not be charged a fee when you consolidate federal student debt into a Direct Consolidation Loan.
People with both private and federal student loans can consolidate their loans. However, all debt needs to be moved into a private student loan. This strategy has a downside because it results in losing the benefits of federal student loans, including federal deferment and forbearance, income-driven repayment plans, and most available student loan forgiveness programs.
Given these disadvantages, it may be wiser to consolidate the two loan types separately. Combine your multiple private loans into a single loan, and combine all your federal student loans into a Direct Consolidation Loan. As a result, you will have two separate loans with two separate monthly payments. This number is the fewest you can go in terms of payments while allowing you to retain access to your federal benefits, which are crucial to your financial well-being.
Lower your principal balance
With student loans, paying extra toward your principal makes sense. The minimum required monthly payment indicates the lowest possible amount you can pay toward your student debt without incurring penalties.
Direct any spare cash toward lowering your principal balance to relieve yourself of the obligation sooner. Paying down your principal reduces the debt owed and saves you considerable money on interest over time.
Whether you have a federal or private student loan, you can make additional payments without penalties or new fees. However, you need to inform your loan servicer about this plan to ensure that any extra payment goes toward paying down your principal instead of toward future student loan payments.
Try refinancing student loans at a lower rate
When you refinance your student loan, you take a new loan from a private lender to repay the balance of one or multiple loans. The goal is to refinance into a new loan with a lower interest rate. The lower interest could help you pay off your student loan faster or reduce your required monthly payments.
When you succeed in locking in a lower interest rate on your student loan refinance, you reap the benefit of saving hundreds or thousands in future charges.
Lenders who offer private student loan refinancing evaluate criteria such as your loan amount, credit history, debt-to-income (DTI) ratio, and repayment term to determine your interest rate. As a result, those with good or excellent credit and a low DTI will get better rates than those with higher outstanding debt and poor credit.
Before applying for your student loan refinance, you must prepare to get the best possible outcome. It pays to do your homework. Comparing rates across lenders and checking each one’s eligibility requirements will help you secure the best terms.
Review the lender’s interest-rate formula. After you prequalify for refinancing, compute your estimated interest rate among at least three lenders to get an accurate picture of your possible repayment terms based on your financial situation.
Know your credit score beforehand. You can do this by requesting a copy of your credit report from Experian, TransUnion, and Equifax—the three credit bureaus in the US. Be meticulous and check for mistakes. Dispute any errors whenever required. After thoroughly reviewing your credit report, work on improving your credit. Reduce your credit utilization rate, ensure timely payments, or open a secured credit card.
It can also help to work with a creditworthy co-signer, especially if you don’t have a strong or established credit history. Having someone with good credit to co-sign your loan—a relative, perhaps—goes a long way in attaining a competitive loan rate.
However, the co-signer is equally responsible for the student loan, and you must clearly agree on responsibilities before making this decision.
Refinancing student loans isn’t for everyone. It comes with its disadvantages. You lose benefits like administrative forbearance periods, income-driven repayment plans, other federal protections, and some student loan forgiveness programs.
Filing for bankruptcy: a last resort
Filing for bankruptcy on student loan debt is a last-resort option after exhausting all other avenues. However, it may apply in situations where the borrower is experiencing uncommon economic hardship.
Bankruptcy can discharge student loan debt. Consider it only after you’ve exhausted all options, including income-driven repayment, forbearance, and deferment. In this case, debt forgiveness is more straightforward for private student loans than federal loans.
One major caveat for bankruptcy is that it leaves enduring consequences on your credit history. It can make it harder to qualify for a rental due to credit checks or to qualify for a mortgage. Only proceed with a bankruptcy declaration after thoroughly consulting a professional, such as an attorney or a nonprofit credit counselor. Please see: AI and ML in Debt Recovery Processes.
Pay Off Student Loans: Get Off the Hamster Wheel Before It’s Too Late
While student loan debt can offer many benefits for career and professional advancement and future income, it can quickly get out of hand and become unmanageable unless you tackle it early.
Many older Americans nearing retirement age take on student debt to help out a family member or loved one rather than use the money to pay for their higher education. This phenomenon contributes to a multi-generational problem with a growing impact on households, compromising the future retirement of generations.
You must manage student debt strategically, using every available avenue to secure favorable repayment terms. By exploring refinancing opportunities, leveraging employment benefits and privileges, being savvy about timing and how to apply payments, and seeking professional guidance, borrowers can gain control of their student loan debt rather than waiting for retirement.
In retirement, income will likely be lower, and savings may not sufficiently cover the cost of daily living and debt repayment.
Student loans, which range from the tens to the hundreds of thousands on average depending on the level, institution, and course undertaken, can compound and keep borrowers from making sound investments and taking advantage of other financial opportunities at the prime of their lives.
Thus, knowing your options for reducing student loan debt and tackling it can go a long way toward a rewarding, burden-free future.
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