The repayment of student loans can be a huge challenge. Living on Social Security can be a huge challenge. Living on Social Security AND repaying student loans might appear to be impossible.
Fortunately, borrowers can do both.
The key to success is to utilize programs like income-driven repayment plans and student loan forgiveness. These programs can provide excellent assistance to borrowers on Social Security. Many Social Security beneficiaries can eliminate all future student loan payments.
Income-Driven Repayment Plans for Federal Student Loan Borrowers on Social Security
At first glance, Income-Driven Repayment (IDR) might appear confusing.
The list of IDR plans is long. Borrowers can sign up for Income-Contingent Repayment (ICR), Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Saving for A Valuable Education (SAVE).
While there are some subtle but important differences between the various IDR plans, the basic premise is the same. Borrowers on income-driven repayment only have to pay a small percentage of their monthly income towards federal student loans. These plans are all designed so that federal student loan borrowers do not have to decide between paying the electric bill or defaulting on a student loan.
The government accomplishes this goal of student loan affordability by determining a borrower’s discretionary income. Monthly payments are between 10% to 20% of a borrower’s monthly discretionary income, depending upon the IDR plan selected. (More details on IDR plan selection and strategy can be found here.)
For Social Security recipients, this often means that monthly payments could be $0.
As a general rule, individuals and couples whose only source of income is Social Security probably will qualify for $0 per month payments. Those who have a pension, 401(k), or outside income may have larger payments.
A Special Note for Borrowers with Parent PLUS Loans: Parent PLUS loans are not eligible for any of the income-driven repayment plans. However, borrowers can consolidate them to gain eligibility. This article on Parent PLUS Loan Repayment for Borrowers on Social Security explains the process.
Does Social Security Income Affect IDR Student Loan Payments?
The short answer is maybe. Some borrowers will qualify for $0 payments, but others will have larger student loan bills because of their Social Security income.
The slightly more complicated answer: If your Social Security is considered to be taxable income by the IRS, it will impact monthly payments on an IDR plan. If your Social Security isn’t taxed, it won’t affect monthly payments on IDR plans.
Getting more exact will require doing some calculations.
Calculating IDR Payments for Borrowers on Social Security
The important number for calculating Income-Driven payments is Adjusted Gross Income or AGI. Using your AGI from your most recent tax return, any borrower can use the Department of Education’s Loan Simulator to preview monthly payments. The loan simulator shows monthly payments on all of the available federal repayment plans.
Those who are planning their retirement may have to do a little more math.
Generally speaking, when doing taxes, taxpayers add up their gross income, subtract certain deductions, and then arrive at their AGI.
Social Security works differently. Anywhere between 0% and 85% of a beneficiary’s Social Security could be included in their AGI. The exact percentage depends upon income and filing status. The Social Security Administration has a nice summary of how Social Security benefits are taxed. Those who want to generate exact numbers will need to use the IRS Publication 915 to calculate the Social Security that is considered taxable income.
If 0% of your Social Security is taxed, your IDR payments will likely be $0 per month. As the tax on your Social Security goes up, your IDR payments will also go up.
Once you have a better idea of your taxable Social Security income, you can use the Loan Simulator to get a more accurate estimation of IDR payments.
Federal Loan Forgiveness and Debt Elimination
Monthly payments only tell part of the student loan repayment story.
Many borrowers have monthly payments smaller than the amount of interest that the loan generates each month. If the loan balance is growing, how will the debt ever be eliminated?
Seniors living on Social Security and making small federal student loan payments will see likely see their debt eliminated in one of two ways.
- Student Loan Forgiveness – Borrowers on income-driven repayment plans qualify for student loan forgiveness after 20 to 25 years, depending upon their repayment plan.
- Death – If a federal student loan borrower dies, their student debt is forgiven in full. The estate will not receive a bill, and the federal government will not try to collect from an inheritance left behind or life insurance proceeds.
Thus, many Social Security beneficiaries may never have to make another student loan payment. They will have to stay enrolled in income-driven repayment, which requires yearly income certification. These borrowers will eventually qualify for forgiveness.
Digging Deeper: Learn how to manage student debt during your retirement.
Private Student Loan Options for Borrowers on Social Security
Private student loans are far less flexible.
The rules for private loans can vary from one lender to the next. The loan contract specifies the terms between the lender and the borrower.
Generally speaking, private lenders have no special programs for borrowers on Social Security.
In most cases, repayment in full will be the only option. Occasionally, refinancing the debt with lenders like Splash or SoFi can help. However, these opportunities are limited to borrowers who can pass a credit check.
Details and tips on refinancing are available here.