Because the costs of higher education are constantly rising, it is becoming increasingly difficult for students to pay off student loans. Before you know it, your recent high school graduate with idealistic dreams is in her twenties with a diploma and a high-profile student debt that is also confronted with the burden of stagnant wage growth and skyrocketing costs of living. So what is a parent to do? (For more information, see Student loans: loan repayments .)
It takes a family to pay off student loans
Rather than being sombre about the idea that college debt is a modern transitional rite that young adults should only be fond of, some parents embrace the idea that repayment of college loans should be a group effort. A May 2016 survey by Discover Student Loans, a division of Discover Bank, revealed a significant trend: more than 60% of the parents surveyed indicated that they were interested in reimbursing their children their tuition fees.
A reverse relationship
If you look like many parents, you might have encouraged your children to go to the university that best suited their interests and goals, regardless of the price tag. Unfortunately, the relationship between university ambitions and debts is all too often the reverse: a top-level college is probably much more expensive than a local university with in-state education. According to the National Center for Education Statistics, the average cost of undergraduate tuition, room, expenses and fees during the 2014-2015 school year (the most recent figures available) was $ 22,750 at four-year public institutions. In the same year, that number was more than double, or $ 45, 760, at four-year private non-profit institutions.
Create Winwin situation
When debt becomes a family affair, all the ceilings on families and money apply. Retrieve practically any classic novel to find a storyline where a loan went wrong or a legacy wasted. Avoid unnecessary money drama by putting some common sense strategies and basic rules in place.
The aircraft mask rule applies here: make sure your own finances are protected – including pension funds and real estate – when creating this new financial obligation. Draining your 401 (k) mortgage or taking out a second mortgage, especially as the Federal Reserve raises interest rates, is not only a risky proposition for you but also for your children, who could do anything to lose any inheritance could be compromised. Why postponing retirement for your child’s college is a bad idea describes the reasons.
Keep it simple
Making a one-off payment for your child’s loans is a good way to get a dent in the debt without the risk of being driven. If you can help again in the future, that’s just a bonus. If your finances dictate otherwise, you avoid the conflict and the disappointment that may arise because you cannot continue with a monthly payment plan.
If you prefer to make monthly payments, set a fixed payment end date, preferably in writing, to prevent misunderstandings. Encourage your children to use this deferment of monthly payments to create an action plan to increase their earning capacity (or reduce their spending) with the ultimate goal of taking over their loans.
Maximize your contribution
To assess how your contribution will be most effective, you need to understand the basic principles of your child’s debts. For example, graduates who have multiple loans will most benefit from a lump sum or a monthly payment for their loan with the highest interest. If the debt is a mix of public and private loans, it is beneficial for parents to focus on reducing the private debt; Federal loans tend to offer more flexible payment options and lower interest rates than private student loans.
Know the tax rules
Which strategy works best for your family, stay up to date with the tax rules that apply. Currently, parents can contribute up to $ 28,000 to their child’s student loans without being subject to a gift tax. (That figure drops to $ 14,000 for an individual parent.) If the loan is co-signed in your name, there is no limit to your tax-free contribution. But co-signing a loan, whether you are a parent or grandparent, expose you to risky risks if the child does not make payments (see Seniors: before you co-sign the student loan). Make sure you consider all the consequences.
The bottom line
Stifling student loan costs become a bridge too far for many graduates, so at least work up and help if possible. Make sure your help is realistic and practical. Avoid overburdening yourself, especially when it comes to promised monthly payments, and first focus on assistance with loans with a higher interest rate. If you are wise with it, your children will become debt free and with an inheritance that is yet to come. (See for more
Student loans: pay your debt faster .)