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. That can be a huge burden for families. Federal loans offer many repayment options, but private loans are not required to help in any way.
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 $15,000 (in 2021), or $30,000 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 more than $10 million currently 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.
What to Do Instead
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.
Instead, you can help them manage their student loans properly on their own. Here are a few tips on how to do it.
1. Don’t let them ignore the debt
Unfortunately, many recent grads discover they can’t afford their loan payments once they’re done with school. No one thinks about how those loans will be repaid while going through school, but reality sets in pretty quickly. The job market is tough and getting a full-time job that pays enough to let your child repay the loans can be difficult.
That being said, you can’t let your kids ignore their obligations. The loans can have drastic impacts on a new grad’s ability to rent an apartment, lease or buy a car, or secure a mortgage in the future.
If your kids can’t make the payments, don’t let them ignore the problem. They have a number of options. For one, the government offers a consolidation plan for government-backed loans that bases your payments on your income and ability to pay. Help them talk to the lender about what would work best for your kid.
2. Avoid deferment (if possible)
Deferment is one of the options available when graduates run into financial hardship. This option allows them to put off payments “officially” for a set period of time. However, interest continues to accrue on the loan and your child could end up paying much, much more over time. Deferment can be a very costly mistake. Help your kid understand that this should be used as the last resort.
3. Start with private loans
List out all the loans outstanding with your kid and have her tackle the private student loans first. Keep making the smallest payment possible on the federal debt, and put the rest of her focus on your private loans. (Federal loans often have lower rates and more forgiving terms.)
4. Consider consulting an expert
If either of you has questions about how to proceed, it might make sense to contact an expert. New grads or parents who feel overwhelmed should look for an attorney specializing in student loans and other types of debt to help them work out the best course of action. Be careful who you hire, though, because there are many businesses out there who are just trying to make a quick buck instead of really trying to help students get out of a bad situation.
Bottom Line
Set a good example for your child by taking good care of your own financial future, and they’ll be in a better position to take care of theirs. Then, help the new grads out by talking them through the best ways to dealing with those gigantic loans.
Have you helped your children with their student loan debt? What’s your best tip for managing student loans?
{ read the comments below or add one }
My husband and I both paid our way through college and incurred no debt.
Now with two kids in college, once again they are getting through with no debt. We are helping, but they are contributing. No debt is the way to go. It is possible.
I have 156,000 dollars of school debt and I expect my Dad and mom to pay for everything. I mean… in a simple way to put it is that they had me. Yes, it took me 12 years to graduate but I got to do whatever I want. I learned a lot, got to use my dads credit card and now I am supposed to get a job. My dad pays for my condo because he knows that I am looking for a really good job. Today was hard because I filled out 3 job applications and the pool at my condo is packed. I can’t even find a space to sit to look at jobs. Hopefully when the school loans come in he will understand that I dont have a job and that he will help pay. I hope to hear back from my applications and to see if I can get an interview in a few weeks.
Dear Evan, you have a lot to learn. I don’t believe that because a parent had a child, they are responsible for paying for their college education. I can’t believe your Dad pays for a condo and gives you a credit card! I think you have been spoiled. You should sit in your condo to look for jobs….not at the pool. It may take 50 – 75 or more applications and maybe even 10 – 20 interviews before you land a job. Things in life are tough …and it doesn’t sound like you’ve ever had to “work” for anything…so you may have a hard time finding one.
I also think a compromise is the best option. Parents should help their children get through college, but not in such a way that it will ruin their own finances. You bring up excellent points about federal financial aid and scholarships – both should be used before resorting to private student loans.
Another thing to think about is that by helping your children too much with their debt you are not teaching them any good financial habits. They need to learn that debt is their responsibility to pay off as quickly as possible.
I paid for all my kids with multiple degrees and triple majors, I have 5 and am supporting my niece (I am her guardian), sure it’s expensive but I’d rather have my kids volunteering involved in lots of extra-curricular (3+ clubs) and being happy along with playing sports or excelling musically or through dance (ballet, tap, modern, musical theatre and jazz).
If you can you can, and my kids picked AMAZING schools, tops in the country (Ivy League’s) and in the World (studying abroad at Oxford and Cambridge- 2nd top university in the World).
Since money is not a factor we could afford the best schools which we did by hard work (I studied abroad from the UK to US Harvard and Yale and Princeton doing multiple degrees and ended up moving here).
There is nothing wrong with paying if you can afford it and can afford to take care of them even when you die. The issue is that, what kind of people are they? Are they fit and able to handle if they lose everything? It’s easy to do things when things are just given to you but that may not always be the case.
Parents who have co-signed student loans for their children should buy life insurance for them as a protection.
Gifts given directly to the student loan institution aren’t taxable gifts regardless of their size.
I think both extremes are faulty.
On one end, I would want to pay some for my kids, if only because it’s easy to undervalue a good education that early in life. Think of it as an incentive for them to want to spend a bit of their future earnings on an education.
On the other end, I wouldn’t want to pay for all of it because then they will not factor the cost of school into their decisions for going and picking a school.
I think all students should think about financial issues of their education, you shouldn’t spoil your kids for sure! Everyone should take responsibility for their life to be successful! But parents should help their kids (not do everything for them, do not spoil your child, because you kid will not have any motivation to make an impact!)
My parents signed one PLUS Loan for me for a couple of thousand dollars my last year and it was fine for the most part. That said, you bring up some great points in regards to taking on loans as a parent. I would tend to say no as the student has their entire life to repay the debt and you’re likely getting closer to retirement. On a side note, I would have to respectfully disagree with the assertion that it’s impossible to get a mediocre job without a college degree. There are many trades out there where you can make a very decent wage and not need a degree. Half of the student loan debt problem is pushing students into college when they have no direction as to what they should study and possibly end up with degrees that provide very little in terms of securing a good paying job.
My husband and I took out PLUS loans for our children, and yes, it’s a huge debt, BUT one graduate is now taking on paying the PLUS loan. He received a superior education that came at a cost for sure, but now has a superior job and can pay back our portion and his federal loans too. The other son hasn’t graduated yet, but has made the commitment to repay our PLUS loans too. It may be a promise, but I think he will keep it just as his older brother has.
M