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Federal Student Loans in Retirement: Monthly Payment Calculations, Forgiveness, and Estate Planning

Federal student loan perks provide borrowers with valuable protections during retirement.

Written By: Michael P. Lux, Esq.

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Repaying federal student loans in retirement may not be an ideal scenario, but for many borrowers, managing payments is feasible. With the added prospect of forgiveness opportunities, retirees have several options at their disposal for handling their federal student loans.

However, it’s not all smooth sailing.

Retirees will need to engage in careful planning to minimize spending on student loans and maximize the potential for debt forgiveness.

Calculating Federal Student Loan Payments in Retirement

One of the reasons that federal student loans are preferable to private loans is the existence of Income-Driven Repayment (IDR) plans. The concept behind an IDR plan is straightforward: borrowers make payments based on their affordability, irrespective of their debt levels.

For retirees relying on Social Security, IDR plans often translate to monthly payments as low as $0. Those with a modest pension or living off savings may also qualify for very low or $0 monthly payments.

The crucial factor in determining IDR payments is the Adjusted Gross Income (AGI) from your most recent tax return. The lower your AGI, the more affordable your monthly student loan payment becomes.

To estimate your monthly payment using the latest and most cost-effective IDR plan, SAVE, you can use this calculator.

Automate $0 Payments: IDR plans are good for one year. After that year is up, borrowers must recertify their income.

New legislation now allows borrowers to authorize automatic recertification. For a borrower living on social security, this means they can qualify for $0 payments indefinitely if they select automatic recertification.

Keeping Student Loan Bills Low

The significant challenge for many retirees lies in keeping their Adjusted Gross Income (AGI) low, especially if 401(k) withdrawals play a crucial role in their retirement plan.

Withdrawing funds from a 401(k) or traditional IRA incurs taxation, leading to an increase in AGI and subsequently higher monthly payments.

Conversely, pulling money out of a Roth account, which has already been taxed, will not impact your AGI. Borrowers with both Roth and traditional IRAs may opt to rely on Roth withdrawals until their student debt is forgiven.

In certain scenarios, it might be advantageous to pack 401(k) withdrawals into a single tax year. Borrowers can use this approach to bury a single high AGI year from IDR calculations.

Sherpa Tip: Have a conversation with your financial planner regarding your student loans. Many financial planners may not be well-versed in the SAVE repayment plan and IDR calculations.

If you have significant federal student debt, this proactive planning is crucial.

Student Loan Forgiveness for Retired Borrowers

Another major perk of IDR plans is that the debt can usually be forgiven after 20 to 25 years of monthly payments.

There is no cap on the amount of debt eligible for forgiveness. However, it is possible that there may be a tax on this forgiveness. For now, this type of forgiveness isn’t taxed by the federal government, but it is scheduled to return in 2026. That said, there is hope that this tax eventually gets abolished.

Nonetheless, borrowers banking on IDR forgiveness should plan on a potential tax bill.

Estate Planning: Death and Disability Discharge

Another perk of federal student loans is that the debt does not survive your death. The federal government won’t come after your estate to collect student loan bills, and your kids will not inherit the debt.

When a student loan borrower dies, their federal loans are discharged. Likewise, if the borrower becomes disabled, the debt can also be discharged.

For this reason, borrowers shouldn’t feel obligated to pay off their debts for fear of leaving them behind for their children.

Student Loan Mistakes for Retirees to Avoid

Because student loan rules can be complicated, it is easy for some retirees to make a mistake.

Take care to avoid the following errors:

Don’t Make a Large Payment You Can’t Afford – Monitoring IDR payments and dealing with loan servicers can be a headache. However, with the available tools to keep repayment affordable, retirees shouldn’t feel obligated to pay off this debt quickly. This is especially true for those trying to get by on limited resources.

Watch 401(k) Withdrawals – If you are on an IDR plan, be careful about large 401(k) withdrawals. It could mean an entire year of higher student loan bills.

Don’t Miss IDR Certification Deadlines – If you choose not to automate certification, be certain not to miss a certification deadline. Borrowers who miss this critical deadline get placed on the standard repayment plan, which can mean massive monthly bills.

Don’t Be Afraid to Ask Questions – If your bill seems large or unaffordable, or if things appear confusing, don’t hesitate to ask for help. Servicers get paid to help borrowers navigate student debt. Feel free to leave a question in the comments if you get confused or frustrated.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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