The other day I received a call from a client who was concerned about her sister. Her sister is in her mid-70s and is experiencing some financial difficulties. Basically, as my client explained, a number of years ago her sister took out a student loan in order to help her granddaughter. The granddaughter is now out of school and my client’s sister must begin making payments on the loan. It is these payments that are causing her financial distress. My client wanted to know what options her sister had. She explained that the two options they are considering are either not making payments and hoping that the lender will not come after the sister, or to declare bankruptcy.
The first thing I explained to my client is that this problem is not uncommon. When most people think of student loans they’re generally thinking younger people; however, the amount of student debt by seniors has skyrocketed over the last number of years. In fact, in just the last decade outstanding student debt has increased by more than 600 percent for seniors. Although, the great bulk of that outstanding debt is for seniors’ own education, about 20 percent of outstanding student debts held by seniors are loans they took out to either help a child or a grandchild.
I also explained to my client that student loans are not dischargeable in bankruptcy. Therefore, the bankruptcy option would not resolve her issue. I also explained that it was a mistake to do nothing and wait for the lender to take action. I’ve always been a believer that it is better to be proactive in these issues than reactive. When you’re always on the defense, resolving the issue is much more difficult.
What most people don’t know about student loans is that all federal student loans are eligible for an income-based repayment program. These programs allow borrowers to pay off their loans based upon their income. There are a few different programs available each with a little different term. In many situations seniors find that because of the formula used to determine repayment terms along with how Social Security benefits are subject to income tax; these income based repayment programs can substantially reduce the payments on the loan.
The long and short of the story is the income-based repayment program is going to work for my client’s sister and thus, the crisis has been averted. However, it was only averted because we were proactive in trying to resolve the issue. Unfortunately, when people get themselves into financial difficulties, they tend to bury their heads and hope the problem goes away; unfortunately, it doesn’t work that way. When you have a financial problem, the sooner you address it the easier it will be to resolve. In addition, there’s another benefit and that is to your health. When you’re constantly worried about your finances it can’t be good for your health.
I would love to say that there are simple solutions to everyone’s financial issues but that would not be true. However, in many situations there are ways to work through the problem to a favorable outcome, but you must be proactive. The sooner you recognize there is an issue and act upon it, the sooner it will be resolved.
If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.