By Kathryn Flynn
Despite what you read in the headlines, student loan debt isn’t just a Millennial problem. According to a study from Fidelity, Baby Boomers saw the biggest increase in student loan debt balances from 2019-2020 (33%), outpacing all other generations.
Student loan debt is a financial burden at any age, but it can be particularly harmful later in life. Excessive debt can hinder plans for a comfortable retirement and could force Boomers to stay in the workforce longer. Older borrowers also risk losing their social security benefits if they default on a student loan.
Fortunately, there are ways to tackle student loan debt so that you don’t tarnish your golden years. Here are some tips on how to pay off your balance faster.
Depending on which type student loans you have, it might make sense to refinance. When you refinance, you borrow a new loan with a lower interest rate to pay for your existing loans. This will reduce the amount of interest you pay over the life of your loan, which can help you pay off the balance faster.
If you took out a student loan to pay for your child’s education, you may be able to refinance the loan in their name. That way you are relieved of the debt and your child can start paying for their own degree.
Keep in mind, however, that federal loans can only be refinanced into new private loans. This means you’ll no longer be eligible for repayment plans and forgiveness options that are only available for federal student loans.
Make Extra Payments
A large loan balance can be intimidating, so sometimes it’s best to start small. Consider making a few extra payments throughout the year that can be applied to the principal balance. This will lower the amount of interest you’ll pay and can shorten the length of your loan. Making just one extra payment a year can make a big difference over time.
In March 2020 the Department of Education started a COVID emergency relief program where all federal student loans were temporarily placed into administrative forbearance with a temporary interest rate of 0%. You can take advantage of this by making principal-only payments, which reduce the amount of interest you pay. The payment pause and interest waiver is in effect until at least September 30, 2021.
Automate Your Payments
Automating payments is a proven way to pay off debt. Some student lenders even offer a discounted interest rate for borrowers who set up auto payments (typically 0.25%). This strategy is often referred to as “set it and forget it”, because that’s exactly what you do. Simply link your bank account to your student loan account, and your payments are automatically sent each month.
Stop Being a Cosigner
Being a cosigner is one of the ways parents help their children pay for college. Private student loans typically require a cosigner when borrowers don’t have steady income and good credit. But what parents might not realize is that if the borrower stops paying the loan the cosigner becomes responsible for the balance. Parents should consider applying for a cosigner release once their child enters the workforce.
Claim a Tax Deduction
Eligible student loan borrowers may claim a federal tax deduction for up to $2,500 of student loan interest paid during a given tax year. The deduction applies to interest paid on federal and private student loans, with a maximum tax savings of $550 per borrower. For tax year 2020, the student loan interest deduction is available to borrowers with modified adjusted gross incomes below $85,000 ($170,000 if filing jointly).
Get Help from Your Employer
Employer student loan repayment assistance programs (LRAPs) are growing in popularity. A 2019 survey from the Society for Human Resource Management found that 8% of companies offer this type of employee benefit, up from 4% in 2018 and 3% in 2015.
Typically, employers who offer an LRAP make monthly student loan payments directly to the lenders, up to a cumulative limit or until the entire balance is paid off. Payments from LRAPs used to be treated as taxable income to the employee, but in 2020 the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) made the benefit tax-free.
Use Your Home Equity
Older borrowers may be able to borrow a Home Equity Line of Credit (HELOC) to pay off student loans. A HELOC is a second mortgage that works like a line of credit. And since your home is used as collateral, you typically pay lower interest rates compared to other types of loans.
To qualify for a HELOC, borrowers must have at least 15% to 20% equity in their home, a good credit score, a debt-to-income ratio of 43% or lower and stable income.
Use Leftover 529 Plan Money
Parents and grandparents with leftover 529 plan funds may take a tax-free distribution to pay student loans. This benefit is available to 529 plan beneficiaries and their siblings, so you may have to make yourself the beneficiary before you withdraw. Tax-free withdrawals for student loan repayments have a lifetime limit of $10,000 per borrower.