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For most Americans, living well in retirement depends on how much they can save in their working years.
But for millions of older individuals, unpaid student loan debts may put that goal out of reach, according to new research from the Schwartz Center for Economic Policy Analysis at the New School for Social Research.
The research evaluated more than 2.2 million people over age 55 with outstanding student loans, according to the Federal Reserve Board’s 2022 Survey of Consumer Finance.
That includes more than 1.4 million workers and more than 820,000 unemployed people aged 55 and over who had taken student loan balances for themselves or their spouses. The data does not include older Americans who have taken on student loan debt on behalf of their children.
Half of the borrowers over 55 and still working were earning less than $54,600 — a “major financial vulnerability,” the research finds.
Those who had not completed their degrees were more likely to be at financial risk since their incomplete education likely did not increase their earning power. That includes about 14.9% of workers aged 55 to 64 and 17.3% of workers aged 65 and over, according to the research.
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The bottom 50% of older earners — with incomes less than $54,600 — owe the highest average debt of $58,823.
The middle 40% of earners — with incomes between $54,600 and $192,000 — owe an average debt of $48,174.
The top 10% — earning more than $192,000 — owe an average of $33,000.
“Lower-income and middle-income or older workers have the largest amount of debt and are then faced with difficult decisions about whether to reduce their retirement savings, or to work longer and delay retirement to repay their student loans,” said Karthik Manickam, a research associate at the Retirement Equity Lab at the Schwartz Center for Economic Policy Analysis.
For older workers aged 55 to 64, it may take an average of 11 years to pay off their student loans, according to the research. Workers 65 and up may need 3.5 years.
“Older workers do not have decades of future potential work that younger workers have to repay their loans,” Manickam said.
How policy changes can help older borrowers
Older Americans with student loans may not be able to save as much toward retirement if they have a high level of debt relative to their income. Moreover, Social Security benefits might be garnished if a debtor defaults on their student loan.
The research suggests certain policies, such as forgiving student debt; making debt repayment easier; and preventing the garnishment of Social Security benefits to repay student loans, can help reduce the negative consequences of older Americans’ student loan burden.
One plan — the Saving on a Valuable Education, or SAVE, plan, which President Joe Biden introduced last year — may help address the first two goals.
Under that new income-driven repayment plan, federal student loan borrowers may be eligible to forgo making payments or pay reduced monthly sums, depending on their incomes. After a certain period, loans may be forgiven.
Student loan forgiveness has critics who argue that students choose to take on those balances while forgiving debts would shift the burden to the federal government.
Additionally, the Schwartz Center research suggests ending the garnishment of Social Security benefits to repay federal student loans to help protect older Americans’ income.
Social Security beneficiaries who fall behind on their federal student loan payments may see about $2,500 taken from their benefits annually on average, according to the Center for Retirement Research at Boston College.
In March, more than 30 Congressional lawmakers called for ending that practice. It remains to be seen whether that proposal will gain traction.
Workers who are tempted to take on student loan debt they may carry into their later years should carefully consider whether that investment will pay off.
“Pursuing any education, whether it’s later in life or going to college for the first time after high school, has to be about whether or not you can get a return on your investment,” said Douglas Boneparth, a certified financial planner and president of Bone Fide Wealth in New York City.
Prospective students should weigh not only whether they will be able to make their monthly student loan payments, but also whether the education will enable them to increase their earning power.
“If you can’t figure out how that’s going to happen, maybe it’s not a great idea,” said Boneparth, who is a member of the CNBC FA Council.