Discover Student Loans recently conducted a survey, and found that that over three-fifths of parents believe they will assist their children in paying their student debt, but is this the right thing to do? It’s an ever-increasing problem for parents who want to see their children achieve their potential. Many parents are even said to be risking their own retirement funds to bail out their children, resulting in an insecure financial future for themselves. And what of preparing our children for the future, where finances cannot always be helped by the bank of Mom and Dad? Could helping out now prevent your child from learning those all-important financial lessons necessary to be a successful adult?
If you are in the position to help, an alternative may be to come to an arrangement where your child maintains some responsibility for their finances. Here are just some of the ideas we came up with:
Offering the support of monthly contributions to your child can be an effective way of helping them get back on track and maintaining their loan contributions. With a hands-on approach like this, it is important to set some ground rules to make sure that you are both aware when the payments will cease, for example, if your child is unemployed you could arrange to pay their student loans until they get a full-time job. As with all arrangements such as this, it is important to see that your child is making progress towards the goal of financial independence so checking up to make sure they are doing all they can to ease you of your support is essential for a healthy relationship.
Remember too that it is easy to contribute more than you can reasonably afford to give your child a hand – after all, we all want what is best for our children. But in the long-run hindering yourself financially and causing detriment to your own lifestyle is not providing a good example to your child.
Offering a Lump Sum
If your child is finding it difficult to pay their loans, offering a lump sum can be a great way of easing their burden and reducing the amount of interest they will pay overall. Do bear in mind, though, that any contributions you give your child that are larger than $14,000 will be subject to gift tax. This rises to $28,000 if you contribute with your spouse.
It makes sense for any payments given to focus on the loans with the highest rate of interest to bring the overall cost down. However, some people prefer to go for the smaller loans and remove more than one off the list of debtors to gain an emotional boost. It is important that with any decision to pay a lump sum you and your child contact the loan provider to ensure that they know exactly where the money is to be allocated to prevent slip-ups later on.
Offering a lump sum doesn’t have to be the end of your money either. You can always arrange a repayment plan with your child if you feel that they could benefit from a little lesson in standing on their own two feet.
Matching Your Child’s Contributions
Take inspiration from 401(K)’s and offer matching contributions to your child’s payments. This not only encourages them to overpay, but they are more likely to be motivated to get the payments off quicker, encouraging a work ethic and advanced budgeting skills.
Set an agreement which clearly outlines what would happen in extreme circumstances such as redundancy (on either of your parts) and what actions will be taken if your child misses a payment so that you are both clear what you are getting into from the outset to avoid messy situations further down the line.
Choosing Between Federal and Private Loans
You would think that as federal loans are income based, it would make more sense to pay off these first as lower incomes will stretch out repayments over a longer period, adding interest as they go. However, with loan forgiveness kicking in after 20 years (10 for public servants), it makes more sense to pay off private loans first. This is particularly true if you have countersigned the loan for you child, as your credit will also be impacted if your child defaults. Private student loans are also often subject to higher interest rates, making it in your best interest (no pun intended) to pay them off as a priority.