How Student Loans Affect Your Retirement

Retirement may be years away, but it’s never too soon to start planning for it. If you borrowed money to pay for college for yourself or your child, you might wonder what happens to student loans when you retire. 

Student debt doesn’t disappear because you reach retirement age. However, you could have some federal student loan debt forgiven if you’re enrolled in an income-driven repayment plan or meet other requirements. If you have student loans, it’s helpful to consider where that debt fits into your retirement planning picture. 

What happens to student loans when you retire? 

Student loans aren’t erased automatically when someone retires. Whether you have federal or private student loans, your obligation to repay the debt remains. A change in your employment status or income won’t change that unless you are part of an income-driven repayment plan. 

Taking out student loans can affect your ability to save for retirement. It can also determine how far your income goes once you stop working. 

How student loans affect your retirement savings

Paying down student loans could make it harder to save consistently for retirement. You may be eligible for loan forgiveness, discharge, or cancellation if you owe federal student loans. Each program would allow you to eliminate remaining loan balances on qualifying federal loans. 

For example, you might be able to get relief from your loans in retirement if you:

• Are enrolled in an income-driven repayment plan and have reached the end of your 20- or 25-year repayment term
• Become totally and permanently disabled
• Took out a Parent PLUS Loan on behalf of a child who passed away

Public Service Loan Forgiveness (PSLF) is another option you can pursue before retirement. You’ll need to make 120 qualifying payments while working for an eligible employer to apply for PSLF. Eligible employers include government agencies and nonprofit organizations. 

Retiring with student loans in default could put your Social Security benefits at risk. The federal government can garnish up to 15% of your benefits to recoup outstanding loan balances unless you’re disabled. Talking to your loan servicer can help you determine your options for addressing defaulted loans well before retirement. 

What if you don’t qualify for loan forgiveness, cancellation, or discharge? Enrolling in one of these income-driven repayment plans could reduce your payments and save you more money toward retirement. 

• Saving on a Valuable Education (SAVE)—formerly REPAYE
• Pay As You Earn (PAYE)
• Income-Based Repayment (IBR)
• Income Contingent Repayment (ICR)

These federal student loan repayment plans can also help ease budgetary strain if you’re in retirement with student debt. You can apply for income-driven repayment through the StudentAid.gov website. If approved, you must recertify your income and household size annually. 

Ask the expert

Kyle Ryan

CFP®

If your employer offers a match on their 401(k), and the employee must contribute to earn that much, we tend to recommend at least contributing the match so as not to lose out on free money. If your employer is willing to contribute to your 401(k) while the borrower pays down their loans, this can lead to a best-of-both-worlds scenario.

Laws and policies around student loans and retirement

Laws surrounding student loans are always evolving. Some regulations work in favor of borrowers; others put them at a disadvantage. 

Here are some of the most notable things to know about student loan debt and retirement from a legal perspective. 

• The federal government can legally garnish tax refunds and Social Security benefits of borrowers who default on student loans, but private student loan lenders cannot. 
• Private lenders can still sue you for unpaid student loan debt, even in retirement. 
• Should a private lender sue you and win, they may be able to garnish your bank account or put a lien on your home if you own one. 
• Federal lawmakers are increasingly calling for an end to Social Security offsets because it creates financial hardships for retirees. 
• The Secure 2.0 Act of 2022 allows employers to treat qualified student loan payments as retirement plan contributions and match some or all of those payments with deposits to a 401(k) or similar plan. 

The Student Loan Relief for Medicare and Social Security Recipients Act of 2023 proposes loan forgiveness for borrowers who receive benefits under part A of title XVIII of the Social Security Act. The bill is still in committee but would allow eligible Medicare and Social Security recipients to seek forgiveness for federal student loans if passed into law. 

Ask the expert

Kyle Ryan

CFP®

When it comes to balancing paying student loans and saving for retirement, it’s highly personalized. It really comes down to the interest rate on the loan vs. the anticipated market growth. Being that the market averages ~12% annually, it may behoove borrowers to invest aggressively in the market rather than aggressively overpaying their loans. Paying off a loan at a 5% interest rate is effectively guaranteeing yourself a 5% return on your money because you are lowering the principal balance further. Depending on your risk tolerance, one may take that guarantee or take the risk in the market to do better. It comes down to free cash flow and the amount of income one earns. IDR plans may allow for higher contributions to retirement accounts while your payments to student loans are low.

How to balance loan repayment and retirement savings 

It’s possible to save for retirement and repay student loan debt but it does take some planning. What your plan looks like will depend on:

• How much you owe, and the type of loans you have
• Your interest rates and where you are in your repayment term
• Your household size and income
• Employment status and whether your employer offers a retirement plan
• Other living expenses

Reviewing your budget can tell you how much money you have after expenses for savings and student loan repayment. You then have to decide how to allocate it.

For example, say that you have $500 left each month after paying the bills. You’re 30 years old with $30,000 in student loan debt and $0 saved for retirement. Here are three ways you might put that money to work.

• Option A: Save $500 per month in a retirement plan, like an IRA, while making regular payments to your loans.
• Option B: Use the $500 to make an extra payment to your loans and save nothing in the IRA.
• Option C: Split the $500 equally between loan repayment and savings.

Now, let’s assume you earn a 7% return in your IRA and pay 5% on your student loans. Your loans have a 10-year repayment term and a $320 monthly payment. Here’s how each scenario plays out. 

• Option A: After 10 years, you’d have $82,898 in your IRA and $0 owed to your loans.
• Option B: You’d pay your loans off in just under 3.5 years and save $5,500 in interest but have $0 saved for retirement.
• Option C: You’d pay your loans off in five years, save $4,200 in interest, and put away $41,449 for retirement.  

The last option could make the most sense if you want to work toward both goals simultaneously. Remember that when it comes to retirement, time is on your side. The sooner you start saving, the longer you have to benefit from compounding interest, even if you only initially save smaller amounts. 

Once you pay off your student loans, you can reallocate that money to retirement savings. You can also benefit from contributing to your employer’s 401(k) if you have one. Even if you’re only saving enough to get the company match, that’s free money you can put toward retirement. 

Increasing financial literacy around retirement and student loans can help you make the most informed decisions possible. Learn more about how student loans work.