In the Red

At age 50, Sarah Smith found herself divorced, bankrupt and saddled with debts inherited from her ex-husband. When her two children chose to attend private colleges, she took out student loans. Now, at 66, Smith (not her real name) still owes about $60,000.

“Pretty much everyone told me to not take on college debt, but I wasn’t going to let my kids suffer because of their dad’s irresponsibility,” she said. 

In finding herself still in debt as she nears retirement age, Smith is far from alone. Financial debt among older Americans has skyrocketed in recent decades. And that trend was well underway before the COVID-19 pandemic—a source of financial calamity for many. 

From 1999 to 2019, total debt for Americans over 70 increased 543 percent. That’s the largest percentage increase for any age group, according to the Federal Reserve Bank of New York. Similarly, those in their 60s have seen their debts—including mortgages, auto loans, medical bills and other credit—balloon by 471 percent. Many who are nearing retirement age feel their debts are excessive and say they are financially distressed, according to a report by the TIAA Institute. 

Few statistics are available so far on the impact of COVID-19 on older people’s finances, but one study found that the nonmortgage debt burden of the average retiree doubled in 2020. Forced early retirement, job loss or reduced hours are likely contributors. 

Experts don’t expect the situation to improve any time soon.

“We’ve had two significant economic crises in barely over a decade,” said Mark Hamrick, senior economic analyst for Bankrate.com. “Many people were still trying to claw their way back to their previous position, having suffered setbacks from the Great Recession [of 2008]. Now they have the interruptions in income and employment due to the pandemic.” 

As a result, many people turned 65 during the last year after spending the past 12 years fighting just to stay afloat. They saved little or no money for retirement during their 50s, the decade when financial planners traditionally advise investors to focus on building a nest egg. Some were forced to start taking Social Security payments earlier, decreasing the monthly amount they’ll receive in their remaining years.

Once, paying off the mortgage was a big goal in life. Now, people refinance their mortgages to borrow cash. 

“For those lucky enough to become re-employed [after a job loss], many had to switch occupations and take a pay cut,” said Lori Trawinski, director of finance and employment for AARP’s Public Policy Institute. “And some gave up looking for a job.” 

Many Americans carry debt—most financial experts would say too much debt. Younger people have many years of earning power ahead to pay off debt; for an older adult, finding a full-time job that pays well becomes increasingly difficult. Those with health problems may not have the ability to work at all. 

Debbie Burkham, a financial coach with the Elder Financial Safety Center at the Senior Source in Dallas, sees a variety of reasons why older adults carry debt: job loss, medical bills, divorce, student loans and support they provide for adult children and grandchildren. Plus, she adds, it’s easy for Americans of any age to get credit. 

“In the 1970s and 1980s, you applied by mail for a credit card and waited several weeks, hoping for a credit line of maybe $500 to $1,000,” she said. Today, many find their mailboxes full of letters offering pre-approved credit cards. For those with bad credit, there are always payday loan businesses, which charge exorbitant interest rates and added fees for late repayment. 

Credit cards aren’t the only source of temptation. 

“Our financial system now allows for easy refinancing of a home, which gives the borrower cash for any purpose: to improve their home or to pay for college, to buy a new car or to pay off another debt,” Trawinski said. 

Contrast that to older adults of a generation or two ago, who had an aversion to debt after surviving the Great Depression of the 1930s. For that generation, “Paying off the mortgage was a big goal in life,” Trawinski said. “People would have mortgage burning parties, because it was a cause to celebrate.” 

How Debt Accrues

Why do so many people reach retirement age still owing money? 

Student loans are one surprising source of debt. A 2017 study by the Consumer Financial Protection Bureau found that the number of American consumers ages 60 and older with student loan debt quadrupled between 2005 and 2015, from 700,000 to 2.8 million. A few are paying off their own loans or those of a spouse, but the majority had funded the education of a child or grandchild, either by taking out a loan or acting as a cosigner.

Women and people of color are particularly burdened by college debt. The American Association of University Women found that Black women reported the highest levels of outstanding debt compared to white men and white women, with Black women racking up $37,558 in undergraduate loans, compared to $31,346 for white women. Nearly 60 percent of Black women report financial difficulties while repaying college loans. 

Then there are the adults in midlife (40-64) who provide financial support to their parents or their adult children—or both—according to an AARP telephone survey. Half of midlife adults continue paying for basic expenses like cell phone bills, groceries and rent for children over 25; nearly a third report providing similar financial support for their parents. This creates financial pressures that reduce retirement savings during a crucial period for building wealth.

Sometimes debt leads to deeper debt.

Another pitfall: medical costs that typically increase as people age, coupled with the skyrocketing price of health care and insurance. Even older adults with good insurance may end up owing thousands of dollars in deductibles and copayments after a single medical episode. 

On top of all of that, older adults are often targeted by scammers and unscrupulous salespeople. Burkham counseled an older man who was pushed to buy a new car every time he took his car into a dealership for repairs. The new purchases were rolled into his existing car loan. Now he’s driving a Ford Taurus with car payments of $900 a month. 

In some cases, debt just leads to deeper debt. Burkham worked with a client in her early 70s whose credit cards were maxed out.

“She lost her job, and health issues kept her from going back to work,” she said. “She used her credit cards to fill the gaps until her credit was maxed out.” Living on only about $1,500 a month in Social Security, the client can’t make even the minimum payments. Without the means to pay an attorney, bankruptcy isn’t an option. Right now, the woman is relying on the generosity of friends to survive. 

Who’s in Debt

Black people and lower-income earners are hardest hit, and much is based on socioeconomic inequalities. 

For example, before the pandemic, the unemployment rate among Black Americans was twice that of white Americans. Black workers earn less than white workers with similar education and experience. Other factors include historically low home ownership, lower rates of savings, less participation in the stock market and less generational wealth passed down from family members among people of color. 

According to a report by the Employee Benefit Research Institute, pre-COVID, families with Black or Hispanic heads of household had much higher debt-to-asset ratios compared to those households headed by non-Hispanic white people. Families with minority heads were more likely to be saddled with debt payments that represented more than 40 percent of their income. And that money owed was more often the result of consumer debt (such as credit cards or student loans) rather than housing debt (mortgages or home equity loans). That’s bad news, because families with mortgages build wealth through homeownership; consumer debt is a “sunk cost” with no future pay-off, and usually at higher rates of interest. 

Depression and Desperation

Debt represents more than a number on the wrong side of a financial ledger. Debt can negatively affect mental health at midlife and beyond. One survey of older adults in Miami-Dade County, FL, found more symptoms of depression, anxiety and anger among older adults who reported excessive levels of debt.

“Debtor status is more consistently associated with mental health than any other single traditional indicator of socioeconomic status,” the report said.

A National Council on Aging survey found that older adults often make tradeoffs to save money, such as foregoing needed home or auto repairs (23 percent), cutting pills to save money on medications (15 percent) or skipping meals or medical appointments (almost 14 percent). 

If that isn’t enough, an older person in debt may be harassed by debt collectors. Some may find their cars repossessed or end up evicted from an apartment because they can’t pay the rent.  

Tackling the Problem

Borrowing money is just one part of the problem. The other side of the coin is not saving enough and not having the financial literacy to know better. 

Most Americans no longer receive pensions from their employers and must rely on 401(k)s or other retirement savings plans. Hamrick of Bankrate.com says few Americans understand how much money they need to fund their retirement, especially in light of longer lifespans and growing costs of housing and health care. In some cases, debt becomes the only way to make ends meet. 

“As a society, we don’t do an adequate job of teaching financial literacy,” he said. “The onus to put money aside has been shifted to individuals, and it’s difficult to compel individuals to save.” 

Similarly, the TIAA study noted that many older adults nearing retirement age don’t understand basics about finance, such as how debt can quickly double on money borrowed at high rates of interest. Trawinski of AARP added that, as people age, they’re more likely to lose a spouse to death, but many don’t plan for living without the spouse’s earnings. 

A debt-consolidation loan can help, provided you don’t just revert to credit-card spending afterward.

For older adults in debt, experts suggest a traditional remedy: making a budget and sticking to it. They advise taking care of the basics first—rent, utilities, food, drugs and medical care—and then looking for ways to keep those costs as low as possible, and to save money for unexpected expenses. 

“I advise people to try to build up a savings of at least a few hundred dollars,” said Burkham of the Elder Financial Safety Center, “so they’ll be ready for those nonregular expenses that people end up putting on a credit card,” such as car repairs. To help keep monthly expenses down, she helps low-income adults apply for government assistance programs that help with expenses like food, transportation, Medicare premiums and prescription drugs. 

Credit counseling could help some people. Debt-management companies can assist in creating a manageable repayment plan. These services are not free, however, and Burkham advises choosing one that’s affiliated with the National Foundation for Credit Counseling, not a for-profit debt-settlement company that may charge higher fees. 

Debt-consolidation loans might be an option for older adults with a steady income and the discipline to not fall back into credit-card spending. Home refinancing or reverse mortgages may be good options in some cases, but older adults should seek advice from a trusted expert before proceeding. 

Working Longer

For most older Americans, debt means they will have to work longer and postpone retirement. That’s the fate facing Bonnie Jones (not her real name), 62. She planned to retire at age 60, but she’s still saddled with about $10,000 in credit-card debt, plus a mortgage. That’s whittled down from the six figures in debt she inherited from a divorce 10 years ago. She’ll need to work another three to five years before retiring. 

“I’ve been very focused on paying down the debt, and I just feel lucky that I’ve been able to earn a good salary,” she said. 

Financial experts note that not all debt among older adults is necessarily problematic. Some debts, like mortgages at record-low interest rates, may make sense, according to the Center for Retirement Research at Boston College.

“Given longer life expectancies and extended labor force participation rates of older workers, and improving health status, households may optimally choose to maintain mortgage debt later in life,” one report notes.

Debt can also serve as a positive source of motivation that keeps older adults engaged in the workforce. Sarah Smith is still in debt but also feels she’s just hitting her stride professionally. She started a successful legal referral business just a few years ago and feels more confident than ever about her money situation. 

“I have more money in the bank now than ever, a large amount of equity in my home, a growing business and an extremely positive outlook,” she said. “Had I not hit rock bottom, I might not have created such a massive success.”