Middle-class Gen Xers are facing a new retirement challenge: their student loans

A new report from the New School’s Schwartz Center for Economic Policy Analysis looks at how student-loan debt is weighing down workers who are gearing up for retirement and how that debt has diminishing returns for any would-be retirees.

Using data from the Federal Reserve Board’s 2022 Survey of Consumer Finance, the analysis found that more than a million Americans ages 55 to 64 held student loans or had spouses with loans. Gen Xers and boomers are also set to be saddled with that debt for years to come.

And the burden of that debt appears to fall disproportionately on the lowest earners. Looking at debtors over 55, the Schwartz Center calculated that just 3.7% were in the top 10% of earners, or those making more than $192,000. Conversely, it found that 50.3% were in the bottom half of earners, making below $54,600, and 46% were in between, making $54,600 to $192,000.

The analysis found that Gen Xers and younger boomers still expected their student debt to loom well into retirement age; on average, respondents to the Fed’s survey ages 55 to 64 said they expected it’d take 11 years to repay their loans, meaning many would be saddled with that debt well into retirement.

Many older Americans already find themselves living off of less than $30,000 a year, with many reliant on Social Security to stay afloat — or some just unable to retire altogether.

Older borrowers may struggle to pay off their student loans for a range of reasons. A key reason is interest capitalization: If borrowers cannot make their monthly payments at any point in their repayment period, they’re forced to enter deferment or forbearance. During those times, the borrower isn’t required to pay monthly. However, interest still accrues on their principal balance, meaning that oftentimes, the balance can surge beyond the original amount borrowed.

Should borrowers find they cannot pay their loans in retirement, the consequences could be severe. Retirees are at risk of having up to 15% of their Social Security benefits garnished to repay their loans—something that a group of Democratic lawmakers has called to end.

Of course, younger borrowers are also facing challenges paying off their student debt. Millennials are most likely to hold student debt, with an average balance of about $35,000. TransUnion found that while fewer Gen Xers had student debt, their average balance was higher at about $48,000.

President Joe Biden’s Education Department is rolling out provisions that could ease the burden of student debt on older borrowers. For example, the SAVE income-driven repayment plan shortens the timeline for debt relief—borrowers who originally took out $12,000 or less in student loans could receive debt cancellation after as few as 10 years of qualifying payments.

The department also extended the deadline for borrowers to benefit from one-time account adjustments, which allows borrowers on Public Service Loan Forgiveness and income-driven repayment plans an extra shot to get closer to relief.

In addition, the Education Department is working to implement a broader student-loan forgiveness plan after the Supreme Court struck down the first one. It would cancel up to $20,000 in unpaid interest for borrowers and provide debt relief to those who have made at least 20 years of payments without any forgiveness.