Should You Help Your Children Pay Student Loans?
You should not jeopardize your finances or drain your retirement savings, but there are alternatives that are also teaching opportunities
Federal student loan payments resumed at the beginning of October, and many cash-strapped borrowers may be wondering how they'll manage to pay their loan payments after a three-year hiatus.
Should parents help their son or daughter pay back student loans? Financial advisers recommend that parents dispassionately consider the question using the following steps.
1. Review your own financial situation first. How are you on meeting your own financial goals? Do you have extra money that could be applied to a son's or daughter's student loan or is money pretty tight?
"I always tell parents that they cannot take care of anyone unless they take care of themselves first."
"I always tell parents that they cannot take care of anyone unless they take care of themselves first," says Ryan Galiotto, founder and lead planner of Etch Financial in Pittsburgh. "This means that parents should ensure they are on track for their own financial and retirement goals before considering helping their children with their student loans.
"The children are still young and have time to create a better financial picture for themselves," he adds. "Parents most likely don't have this luxury."
2. Add up what you already pay for your son or daughter. There's a good chance you are already helping out a son or daughter financially. Take a close look at this amount before agreeing to pay for a student loan.
"Many parents are already helping their adult children more than they realize. Cell phone plans, streaming subscriptions and other forms of assistance are common," Ryan Johnson, an advisor at WaterRock Financial in Chanhassen, Minnesota, says.
3. Don't pay it all. Keep your children involved in the payment of their student loans.
"I believe that children should have some skin in the game regarding student loans, meaning they should pay at least half of their loans. This will help them build responsible money habits," says Galiotto.
4. Reward good behavior. Offer a bonus payment to your son's or daughter's student loan to commemorate good grades or good financial choices.
"Parents can also use this as a chance to encourage them to work toward specific milestones they'd like to see the child accomplish," Galiotto says. "For instance, if the child graduates with a high GPA, the parents will pay a higher percentage of the loans. Or, if they commit to saving a certain percentage of their income, the parents will pay more toward the loans. Parents can get very creative here."
5. Understand how gifting works. Any sum you give your son or daughter to pay a student loan is considered a gift by the Internal Revenue Service. Beneficiaries can receive some money, called the excluded amount, without being obligated to report it to the IRS or pay any tax on it.
"The annual gifting limit for 2023 is $17,000 from any one person to another, beyond that limit, additional paperwork is required that will count against your lifetime giving limit," explains Brian Duncanson, a financial planner in Vero Beach, Florida. "If you are married, you may both gift $17,000 for a total of $34,000 to any individual."
"Be aware, once you gift money to someone, it is now their money and they could spend it on whatever they wish," Duncanson adds. "You could ask the child to provide their loan information along with their loan servicer and make the payments directly to the loan servicer if you are concerned how the money will be allocated."
6. Consider free living at home. If you are not able to help a son or daughter with student loan payments, give them the option of living in your home free of charge.
"If you can't afford to pay off a student loan it could be nice to have the student or graduate live at home for a few years. If cheap rent is close to $2,000 a month, a few years at home can do wonders," says Marc Lescarret of Marc Alan Wealth Management in Rockaway, New Jersey.
And if you have teenagers considering college soon, it is not too early to look for ways to lower future college expenses.
"Best yet, everyone needs to take school seriously. If you aren't expecting a future job to pay big bucks, they may wish to attend a cheaper school or do school part time and get the employer to help," Lescarret says.
7. Make it a loan. For some families the money that a parent pays toward a student loan is a temporary fix and needs to be paid back to the parent by the son or daughter. Terms for this agreement are up to the parent.
"This can be uncomfortable for some parents depending on their relationship with their kids, but we like to say, if your children want you to 'be the bank,' then you have every right to act like one," Johnson says. "Set clear terms in writing, including a repayment schedule. Some clients really don't care if it ever gets paid back, but they need to understand it might not then."
Other Ways to Help a Child Financially
If you would rather not directly make all or part of a student's loan payment, consider other financial assistance that would help the student pay back the debt. Budgeting assistance, car-buying help and finding an affordable apartment are all ways to help a new college graduate get a leg up financially.
"Does your child need money suddenly because he or she doesn't know how to budget?"
"Does your child need money suddenly because he or she doesn't know how to budget?" asks Johnson. "Help find that balance between covering current expenses and contributing to savings and investment accounts."
Next, tackle the big expenses of housing and transportation.
"Housing and transportation expenses can be a shock to recent college grads," Johnson says. "You could help your child negotiate a car lease. You might help a child who's already chasing after the Joneses by counseling against a rash home purchase that will stretch his or her finances thin."
You may also want to consider introducing your underemployed child to some of your professional connections, which might lead to a significant career upgrade.