Author: Emily Guy Birken
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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?
The post 3 Reasons You Shouldn’t Pay Your Child’s Student Loans first appeared on MoneyNing.