Two groups of people are being put between a rock and a hard place when it comes to managing student loans and their retirement. Recent graduates and parent-cosigners. The types of challenges these two groups face are different, but they are both facing some very difficult choices in the years ahead of them. In my past post about “Eliminate Debt Before Retirement” I discussed effective and proven ways on how to eliminate debt and enjoy a debt free life after retiring.
The difficult decision that recent grads face is a choice between where to place their priorities, on their student loan debt or on their long term future. These recent grads have to pick between spending their spare income towards paying down their student loans to get out of debt, or putting money away towards their retirement. It can seem like there is no right answer between these two priorities, as both are incredibly important, but there are some factors to consider when making this decision.
Paying down student loans
Many recent graduates feel that they should do everything they can to pay off their student loans as fast as possible. In some situations this is a great plan, but in certain circumstances it can be a flawed plan.
Paying student loans off as fast as possible saves the borrower a huge amount of money. There are thousands of dollars to be saved simply in servicing fees by paying back student loans ahead of schedule, not to mention the huge savings in interest to be had by paying loans off sooner rather than later.
The drawback comes when recent grads choose to pay down their student loans rather than investing towards their retirement. This causes them to miss out on the biggest advantage they have when it comes to saving for retirement: time. The time value of money dictates that $1 invested in your 20’s is worth $10 invested in your 50’s. This is a very powerful tool that recent grads should not miss out on. By investing early, their money has more time to work for them and more time to grow.
If recent grads choose to pay down their student loans heavily, they shouldn’t do so at the expense of saving for retirement. At the very least they should be investing whatever portion of their income their employer is willing to match. This helps put their money to work for them while not leaving any free money (employer contributions to a 401k) on the table.
Investing for retirement
The flip-side to heavily paying down student loans is to shift that focus towards heavily investing for retirement. This option has the major bonus of taking advantage of the time that recent grads will have to save for their retirement. This time exponentially increases the amount that they will end up saving for retirement.
The major downside to this approach is that they will end up paying more on their student loans over time due to the interest and fees that will continue to accrue for the life of their student loans. So while they may have saved adequate money for retirement, by the time they get there they will still be carrying student loan debt.
The exception here is for recent grads with federal loans on an income based repayment program. For these borrowers they can delay the repayment of their student loans and count on the fact that they will qualify for loan forgiveness after a set period of time. Here again there are drawbacks, mainly that there is a tax consequence for the forgiven portion of the loans for which they will ultimately be responsible.
Parent-Cosigners of Recent Grads
Similarly to recent graduates, their parent-cosigners face a difficult choice when it comes to student loans and retirement as well. Their choice is to delay retirement or to carry student loan debt into retirement. Both of these options have significant drawbacks, but for many people there is no alternative.
Many parents are choosing to delay their own retirement in favor of helping their children pay down their student loan burden. They are choosing to devote extra income to paying down the debt on which they cosigned for their children rather than investing that money towards their own retirement.
This has the major drawback of delaying the date they will be able to retire by years at a time. Parents choosing this option will be forced to work for a number of years past the date they may have thought they would be able to retire. Some parents are forced into working well into their 70’s in order to help their children pay down student loans and save for retirement at the same time.
The benefit to choosing this option is that their children will be debt free. This is helpful considering that those children may now be forced to help these parents financially through retirement since they devoted money from their retirement accounts to pay their children’s student loans. Another bonus to going this route is that parents can reduce the amount of risk and debt they carry into retirement by paying off the loans they have cosigned on before they retire.
Carrying debt into retirement
The alternative for parents who are unable or unwilling to help their children pay of their student loans prior to their own retirement is to carry this cosigned debt into retirement. This has the benefit of not delaying their retirement the way helping their children pay on student loans would. It also is the choice that seems the most fair. After all, these parents cosigned on the loans but the loans are ultimately the responsibility of their children.
This path can have some downsides though. The biggest downside is that these parents will be carrying debt, and the risk of becoming liable for that debt, into retirement. They carry the risk that their child will default on these student loans and the parents, as cosigners, will be financially liable to make good on the borrowed money. During their retirement years while on a fixed income is not the best time to find out that they will be liable for tens of thousands of dollars in student loan debt.
While nobody plans to default on a loan, there are a number of factors that can lead to parent-cosigners being liable for the student loans on which they cosigned. Illness, disability, and loss of employment are just a few of the reasons we see for student loan borrowers going into default. Once in default it is common for the parent-cosigners to be sued since they are the party more likely to have assets from which the creditors can recover. This is the risk of carrying debt into retirement.
Difficult choices, No right answers
As you can see, student loans have a major impact on the ability to retire for both borrowers and their cosigners. In either situation there are difficult choices to make, and there seems to be no right answers. The choice for you will very much depend on what you are comfortable with and where you place your priorities.
If you would like to speak to an attorney about these issues and an alternative that can reduce the amount you owe on your student loans and cut years off the time it will take you to repay those loans, give us a call at McCarthy Law PLC (855)-976-5777 for a FREE consultation to see how we can help you.
Kevin Fallon McCarthy
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