One-third of parents plan to help their child pay back some or all of their student loans, according to a recent survey . But can you do it, and should you?
While there are no rules restricting parents from paying back their children’s student loans, if you choose to pay off your child’s student loan, you will most likely need to file a gift tax return and pay any applicable gift tax . The person who makes the payment as a gift pays the tax, not the recipient, according to IRS guidelines.
However, before you offer to give your child such a generous gift, you may want to think about how it will affect your retirement plans. Because parents are closer to retirement age than their adult children, it is often difficult for parents to build back up their nest egg if they deplete some or all of it helping pay back their children’s student loans.
Some parents decide to avoid using their retirement funds by tapping their home equity line of credit instead. But before you sign on the dotted line, you might want to consider the repercussions. You will want to make sure you have the necessary time to pay back that line of credit.
Many borrowers opt for a 10- or 15- year home equity loan, but what if you are only 10 years from retirement? There’s a lot of nuances to be considered if you’re going to pay off your child’s college loans while nearing retirement. Here are several ways you can do to potentially help your child repay their loan.
1. Making Small Payments During College
Although most student loans don’t need to be repaid until after your child graduates, making small monthly payments—even as little as $25 a month—while they are still in college may lower their debt by a few thousand dollars.
2. Making an Occasional Loan Payment as a Gift
When holidays and birthdays come around, instead of buying your child tickets to a concert or those shoes they’ve been coveting, consider making an extra payment on their student loan.
You can ask grandparents and aunts and uncles to do the same, if they are so inclined or have no idea what to give your child for their birthday or the holidays.
You may want to talk to your child about the fact that any extra payment beyond their minimum monthly payment should probably applied to the principal, not to their next monthly payment. Otherwise they could end up paying more interest if their lender simply applies the extra payment to next month’s bill.
3. Paying Off Private Loans First
If your child has a mix of private and federal loans, you could offer to pay off the private loan while they continue to make monthly payments on their federal loan. Since private loans typically have higher interest rates, paying that loan off first might go a long way to helping your child pay back their loans quicker.
Not sure what your child’s monthly student loan payments will be? You can use our student loan calculator to estimate how much they could be paying each month. You can then decide if you want to give them money each month to go towards their payments, which in turn can help them pay off their student loans faster.
Furthermore, your child’s federal loans come with certain federal benefits such as income-driven repayment plans, deferment, forbearance, and access to certain loan forgiveness programs. Private loans don’t enjoy those same federal benefits, which could be another argument for paying off private loans first.
4. Helping with Other Expenses
If paying back their entire loan is too expensive, consider helping them with some of their other monthly expenses that aren’t as steep. Perhaps pay an unexpected medical bill for them, offer to buy a week’s worth of groceries, or maybe surprise them with a dinner and movie once a month.
5. Considering a Parent PLUS Loan
Parent PLUS loans are federal student loans that are available to the parents of a dependent undergraduate student. For the 2018 to 2019 school year, it offered a fixed 7.6% interest rate, according to the U.S. Department of Education .
While credit scores aren’t factored in when determining eligibility for federal student loans, parents cannot typically qualify for these loans with “adverse credit history.”
6. Applying for a Private Parent Loan
If you don’t qualify for a federal loan for parents, you could take out a private loan to help fund your child’s education. Keep in mind that you will be the only borrower. This is very different than having your child named as the borrower, and you named as the cosigner.
Parents who take out loans need to be careful they aren’t taking on more debt than they could ever pay back in their lifetime.
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7. Refinancing the Student Loans
If you have a Federal Parent PLUS loan, you might be able to save money and simplify your payments by refinancing your Parent PLUS loan.
Or, you can help your child refinance their student loans by cosigning and potentially save them money over the life of the loan by qualifying for a lower interest rate. (This is usually true provided you do not extend the loan term.)
SoFi offers a range of options to optimize monthly payments, lifetime cost, and to speed up the pay off date of your student loans. There are no origination fees in most states or prepayment penalties when you or your child refinance with SoFi.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.