Student Loan Plan: Managing Federal Student Loans in Retirement

Michael Lux Blog, Student Loan Plan, Student Loans 0 Comments

In this edition of the student loan plan, we take a look at Brenda’s student loan situation.  She is getting ready for retirement and worried that she might not be able to get her loans forgiven before she retires.  If you want tips for dealing with your student loans, contact us.

Brenda writes:

Hello,

I am very happy that I came upon your site while searching for help with my loans.  I have been on the loan forgiveness program for three years, paying off my parent plus loans that I consolidated. (app. $80,000) As wonderful as this program is, for medical reasons, I don’t know if I can remain employed on a full time basis long enough to complete the 10 years for forgiveness. (I have looked into permanent disability, which is almost impossible to try for).  

I have been reading over the other loan programs and my questions are whether it may be possible to be able to retire and switch my loans to another program, basing my payments on discretionary income.  I realize this means I will be paying the loans for 20-25 years, but if the payments are much lower then perhaps I can manage.  I pay $711.00 a month now. (Some my son helps pay) I currently file a joint return with my husband.  We have a mortgage, (app. $1700.00/month), a car loan, and household expenses.  My husband’s gross salary is $20,600.00, (he works in a restaurant as a manager)  I would have social security income of maybe 1200.00 a month.  I don’t know how social security is figured in as income?  

Since we live in an area with very high taxes, and can sell our house for a decent profit, we are looking into moving to an area with low taxes and finding an affordable, smaller home.  My husband will continue work, and perhaps I would too, if I can find a part time job suitable for my medical needs.

Thank you very much for your assistance.  I look forward to hearing from you.

Brenda

Figuring out where we start

A big question that Brenda first must answer is to figure out where she is in her quest for public service forgiveness.  Based upon her email, she seems to think she is three years towards forgiveness, but not currently enrolled in a repayment plan based upon her income.  Given that the income-driven repayment plans are the only plans eligible for public service forgiveness, Brenda first needs to call her lender to find out where she stands.  The best way to know for certain how close she is to getting her loans forgiven is to submit an employer certification form.  Sending in this paperwork is the best way to verify that that she has eligible loans, is on the right repayment plan, and is working for a eligible employer.

The next question to answer is to determine what her expected monthly payments would be on the various repayment plans.  The Department of Education’s Repayment Estimator Tool is very useful for this purpose.  Not only can Benda see what she what her monthly bills might be now, but she can also adjust the AGI to see what they would be during her retirement.

Does Social Security affect IBR and other income-driven repayment plans?

One major question that many retirees with student loans face is the impact of social security income on their repayment plan.

Whether or not social security will affect your student loan payment depends upon whether or not it is taxable.  For many retirees, social security income is not taxable.  However, if you have additional income past certain limits, your social security income becomes taxable.  The Social Security Administration has a nice page explaining when Social Security Income gets taxed.

Ultimately, if you pay taxes on your social security income, that means it is included in your AGI.  As your AGI goes up, your monthly payment on the income-driven repayment plans will also go up.

Brenda’s Options

One of the big limitations for Brenda will be the fact that a consolidated Parent Plus loan is not eligible for income-driven repayment plans such as IBR, PAYE, and REPAYE.  Fortunately, the Income-Contingent Repayment plan is an option for consolidated Parent PLUS loans.  Your loan servicer should be able to walk you through the enrollment process.

Putting a plan in action

This question really comes down to the math.  Brenda should put together a list of all her expenses that she expects to have in retirement.  Next, she should list the possible sources of income.  Once she knows her expected budget range, she can evaluate the various student loan repayment plan options.  This is where the Student Loan Estimator is especially helpful.

The good news is that with federal loans, Brenda has the safety of knowing he will never have to pay more than a small portion of her discretionary income.