College has become something of a Catch-22 for students. It’s impossible to secure even a mediocre job without a college degree, but the constantly spiraling costs of education make it nearly impossible to pay for that necessary degree.
For parents of students, it can be tempting to try to help out — by cosigning a loan, taking out a Parent PLUS loan, or even paying off a child’s individual student loan. However, as reasonable as it may be to want to help your child fulfill their academic potential, taking on their student debt in any way can seriously affect your bottom line.
Here are three reasons why it’s okay to let your child navigate the student debt issue on her own:
1. Co-signing a loan could leave you saddled with debt.
While federal student loans don’t need a co-signer, private student loans will often require one. And that can be a huge burden for families. Federal loans offer many repayment options, but private loans are not required to do so.
This means that if your child has trouble finding steady or lucrative employment after college, you’ll be on the hook for any payments owed to the co-signed private loan.
What’s worse is that if your child were to pass away — with no one benefiting from his education — you’ll still be required to pay back the loan. Some parents who have co-signed student loans for their children have bought life insurance for them in order to protect themselves. These aren’t issues that parents who are looking forward to retirement should have to worry about. Have your child stick with the federal student loans, and leave the private loans be.
2. The Parent PLUS program is a great way to get in over your head.
One way families try to bridge the gap between the cost of university and the amount that student aid will pay is to use a Parent PLUS loan. These loans allow parents to borrow up to the entire cost of a child’s education, and eligibility isn’t need based — which means they’re an attractive option for parents whose students don’t qualify for federal student aid.
Unfortunately, these loans don’t check income or current level of debt for eligibility, which means that parents can easily get overwhelmed. And since PLUS loans don’t have the repayment flexibility available to student loans, but still have the government power to garnish wages and Social Security benefits and seize tax refunds, these can really be a nightmare for parents who are unable to pay.
3. Paying your child’s student loan outright could get you stung by the gift tax.
Let’s say your adult child has been paying their student loan since graduation, when you suddenly come into a windfall. While you might be tempted to pay off their student loan with your newfound money, recognize that it could have some financial consequences that you wouldn’t have faced if you’d paid that cash as tuition back when he was in school.
If you’re giving your child more than $14,000 (in 2013), or $28,000 for a married couple filing jointly who is splitting gifts, then your lifetime unified credit for giving gifts is reduced by the amount of the gift. That lifetime limit is $5 million, so this might not be an issue for many families, but it is something to consider. In addition, you and your spouse will both have to file Form 709 when you file your taxes.
The Bottom Line
Giving your child financial help in order to get an education is a wonderful gift. However, taking on or taking care of loans for that education is the kind of gift that could really hurt your finances. Set a good example for your child by taking good care of your own financial future, and they’ll be a better place to take care of theirs.
Have you helped your children with their student loan debt?