Editor’s note: This is part two of a two-part series on managing parent PLUS loans. Part one is How to Align Strategies for Student Loans and Retirement.
Part one of this series covered the importance of considering your whole financial situation when you’re planning to help your college student with student loans. I also discussed the key parts of a holistic student loan plan and the various strategies for repayment and forgiveness. This article brings those pieces together, addressing how to coordinate repayment of your parent PLUS student loans as your retirement approaches and mistakes to avoid.
Rebalancing your plan as you approach retirement
Similar to your investment portfolio, you can rebalance the strategies within your student loan plan as you get closer to retirement. Here, I outline the key strategies to consider in each phase, whether you’re pursuing an income-driven repayment (IDR) plan or standard repayment strategy.
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10 to 15 years away from retirement
In this stage, you’re somewhere between planning to take out loans for your kids’ education and your first child graduating from college.
Loan strategies:
- Complete FAFSA and prioritize federal over private student loans.
- Carefully consider who should carry loans, you or your spouse.
- For parent PLUS loans, plan for double loan consolidation.
Employment strategies:
- Explore employer benefits and what you’ll need to qualify.
- Considering a new job or career? Explore the public sector and repayment programs.
Retirement strategies:
- On IDR? Maximize retirement benefits and contributions to lower your AGI.
- Standard repayment? Pay at least the accrued interest and then prioritize retirement.
Tax strategies:
- Manage your AGI and tax consequences in your investment portfolio to minimize tax payments and maximize retirement savings.
- On IDR? Reduce AGI the calendar year before entering repayment.
Five to 10 years away from retirement
In this stage, you may have started paying down your parent PLUS loans, or you’re in the final stretch of taking out loans for your kids.
Loan strategies:
- New parent PLUS loans? Plan for double loan consolidation after your last loan and consider forgiveness if you expect a large balance.
- Standard repayment? Plan to pay off before retirement. Refinance to lower rates.
Employment strategies:
- Manage pay bumps by increasing pre-tax contributions and maxing out benefits.
- Considering a new job or career? Explore the public sector and repayment programs.
- Planning a move? If you’re married, consider a community property state.
Retirement strategies:
- On IDR? Prioritize retirement and pre-tax savings to keep your AGI low.
- Standard repayment? Prioritize payments and put everything left over toward retirement.
Tax strategies:
- Continue managing your AGI and tax consequences to keep tax payments low.
- On IDR? Continue filing separately and prioritize pre-tax savings over after-tax and Roth.
Fewer than five years away from retirement
When you’re this close to retirement (or currently retiring), you’re either on track for repayment, or you’re considering retiring with student loans.
Loan strategies:
- Large balance? You can still benefit from double loan consolidation and forgiveness.
- On IDR? Consider forbearance to delay payments to retirement when income is low.
- Standard repayment? Pay off ASAP to leverage “catch-up” retirement saving benefits.
Employment strategies:
- On IDR? Manage pay bumps by increasing pre-tax retirement contributions.
- Public employee? Explore Public Service Loan Forgiveness (PSLF) before it’s too late.
Retirement strategies:
- Prioritize retirement savings to leverage “catch-up” savings benefits.
- Coordinate a plan for retirement income and withdrawals.
- Planning to downsize? If you’re married, consider a community property state.
Tax strategies:
- Retiring with IDR? Manage taxes and withdrawals for lowest payments possible.
- Standard repayment? Manage tax consequences to max out saving options.
Parent PLUS loan mistakes to avoid
If you have parent PLUS loans, be sure to avoid these common mistakes:
- Don’t skip exploring IDR and forgiveness because you assume they’re not for you.
- If you’re pursuing forgiveness, avoid putting parent PLUS loans in the higher earner’s name. This can limit your savings.
- Do NOT refinance or consolidate all your loans into one loan. This limits you to the worst income-driven repayment plan: income-contingent repayment, or ICR. ICR forces results in a higher payment than the other IDR plans in two ways. First, it uses a smaller deduction against your overall income. Second, it uses 20% of your income (after the deduction) to calculate your payment, while other plans can be 10%, or even 5% with the new SAVE plan for undergraduate loans.
The road to a happy retirement
The road to a happy retirement starts well before your retirement date. If you have student loans (especially parent PLUS), planning ahead lets you make smaller adjustments along the way.
If you have a large balance, income-driven repayment and forgiveness could be your best options. But even if you choose repayment, following a holistic plan that balances your loan, employment, retirement and tax strategies will provide the biggest savings.
For questions and to discuss your options personally, feel free to schedule an appointment with me.
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