How to Align Strategies for Student Loans and Retirement
Parents who want to help their kids pay for college also need to keep their own retirement planning in mind.
![A mother and daughter look at the daughter's phone together while the daughter sits in front of a laptop on the dining room table.](https://cdn.mos.cms.futurecdn.net/EZ9kxr5QxFsE4LEbqVaCh5-415-80.jpg)
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?
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
related content
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
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.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
Estate Planning Strategies to Consider as Election Nears
Are big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
By David Handler, J.D. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Think of Prenups and Postnups as Financial Planning Tools
These contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Congratulations on Your Raise: Three Things to Do With It
We're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
By Andrew Rosen, CFP®, CEP Published
-
Check Off These Four Financial Tasks to Finish 2024 Strong
The new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
By Daniel Razvi, Esquire Published