How to Align Strategies for Student Loans and Retirement

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Editor’s note: This is part one of a two-part series on managing parent PLUS loans. Part two, about rebalancing your student loan plan as you approach retirement and avoiding mistakes, is How to Manage Parent PLUS Student Loans as You Near Retirement.

Planning to pay for your child’s college education? I’m often asked about student loan strategies like, “Which lender will save me the most interest?” Or, “What’s the most I can set aside for retirement while paying these off?”

But did you know that you can align all your financial strategies for massive student loan savings?

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In this series, I’ll break down the benefits of holistic student loan planning, especially if you have parent PLUS loans. You’ll learn:

Why holistic student loan planning wins
Key parts of a holistic student loan plan
Rebalancing your plan as you approach retirement
Parent PLUS mistakes to avoid

Why holistic student loan planning wins

At first, it’s normal to focus only on a repayment strategy. Aggressive repayment can be an appropriate strategy for lower loan balances. But if you’re racking up federal loans (including parent PLUS), it’s easy to get stuck.

A holistic plan that includes your whole financial situation will help you make decisions that don’t jeopardize your retirement.

This is because federal loans offer flexible repayment and forgiveness options that can provide huge cuts to student loan payments while increasing retirement savings.

That being said, federal loan options do bring some complexity. Your employer, retirement savings and tax strategies can all influence your student loan bill on an income-driven repayment (IDR) plan.

Below, I discuss effective strategies in each area, ordered sequentially to reflect your decision-making process or by their potential impact on your student loan bill.

Loan strategies

These strategies affect the length of your loan, your monthly payments, forgiveness options and retirement savings potential.

Choose your loans carefully. Private loans don’t qualify for income-driven repayment or forgiveness. So, fill out your FAFSA and explore federal options first.

Decide who will carry the loan. If you’re married, carefully consider who will carry the loan. This could be the one with the lowest income or who works for a government organization or non-profit. This is because Public Service Loan Forgiveness could be a big help. PSLF offers a 10-year plan and tax-free forgiveness on the remaining balance!

Consider double loan consolidation for parent PLUS loans. If you’ve acquired a few parent PLUS loans, think about structuring them for an income-driven repayment plan using the double consolidation strategy. Even if you've already made payments, this strategy can cut your loan payments by more than half and qualify your loans for forgiveness. (In July, the Biden administration announced this strategy will expire in July 2025. This will massively affect your parent PLUS loan strategy. So, if you can benefit from double loan consolidation today, do it!) The double consolidation process uses at least two loans to perform three total Direct Consolidations. This is done over two separate rounds, which is why it’s called “double consolidation.”

Explore IDR plans and forgiveness before refinancing. Typically, I reserve refinancing strategies for private or low-balance loans. This is because refinancing federal loans disqualifies them from forgiveness and IDRs. For those who plan to pay off their loans, refinancing could save a lot on interest.

Employment strategies

These strategies affect your forgiveness options and retirement savings potential. If you’re married, have the spouse with the most strategic employment situation carry the loan.

Public Service Loan Forgiveness (PSLF). This forgiveness option is the most common and impactful solution based on your employment situation. It’s available to those who have jobs in the government or a public or non-profit organization.

Other loan repayment assistance programs (LRAPs). These repayment assistance programs are based on your occupation or by state. Though less common, their potential impact is huge (up to five figures!).

Employer-provided loan assistance. Finally, explore your employer’s benefits. Many are starting to offer repayment programs. These are more common than other LRAPs but less impactful.

Retirement strategies

These strategies affect your monthly payments and financial health during retirement.

Choose aggressive repayment or forgiveness. If you expect a low loan balance, aggressively pay down your loans and then save as much as you can toward retirement.

If you expect a large loan balance when you take out your final parent PLUS loan, forgiveness may be your best choice. Under this strategy, you’ll pay as little as possible toward your student loans and prioritize saving for retirement.

Prioritize pre-tax savings if you’re on an IDR plan. Under forgiveness, prioritizing pre-tax retirement savings before Roth will lower your AGI — and your monthly payment — even more.

For instance, your employer-sponsored retirement plan may allow you to contribute via pre-tax contributions and/or Roth contributions. Other times, many workers are deciding whether to contribute extra to their pre-tax retirement plans or contribute to their own Roth IRA. Pre-tax contributions, regardless of whether an IRA or 401(k), lower your current income, whereas Roth contributions do not. Therefore, the pre-tax contributions serve to lower your student loan payment as well!

Consider forbearance. When you’re one to two years from retirement, you’re likely in your highest-earning years. If PSLF isn’t an option, but you’ll be on an income-driven repayment plan, consider using forbearance. Forbearance can delay payments for up to three years. If you use it to push back payments into retirement, your income and student loan payments are usually lower. Be aware that interest still accrues during forbearance, so proceed with caution.

Consider retiring with an IDR plan. Retiring with an IDR plan could be to your benefit. Income typically drops during retirement, and at most, only 85% of Social Security ends up on your tax return. Under IDR, this means your student loan payments will be the lowest you’ll ever see.

With well-coordinated tax and withdrawal strategies, you could ride out much lower payments until you reach forgiveness.

Tax strategies

These strategies affect your monthly payments and retirement savings potential.

File separately if you’re married. If you’re married, your filing strategy can help you keep a low AGI throughout forgiveness. So, consider filing your taxes separately rather than jointly. If you live in a community property state, you can file separately and split the higher earner’s income between you.

Consider moving to a community property state. Location can play a huge role. Community property states offer additional tax benefits that can significantly lower your IDR payments. If you’re considering a move, it couldn’t hurt to explore opportunities in these states. Note that you must file separately when using this strategy.

Minimize tax consequences and plan retirement withdrawals. As mentioned above, prioritize pre-tax retirement savings (as opposed to Roth) if you’re the borrower. From there, you’ll want to manage all tax consequences in your investment portfolio and coordinate a plan for your retirement income and withdrawals.

Considering all of these pieces can have a profound impact on your student loan payments and your retirement plan, too! In part two of this series, How to Manage Parent PLUS Student Loans as You Near Retirement, I show you how to bring these pieces together, go into how to rebalance your plan as you approach retirement and share some of the parent PLUS loan mistakes to avoid.

For questions and to discuss your options personally, feel free to schedule an appointment with me.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Erik Kroll is a fee-only financial planner helping those over 50 years old conquer their student loan debt and retire sooner than they thought possible. He has advised on over $10 million in student loan debt. After getting into the industry in 2011, Erik learned how to navigate the complex student loan universe from running his other financial planning company, Hilltop Financial Advisors. In 2021, Erik started Student Loans Over 50 with the sole focus of helping borrowers over the age of 50 overcome their large student loan balances. Using specific loan repayment, forgiveness, tax and investment strategies, Erik Kroll helps clients manage their student debt and plan for retirement.