With college costs continuing to climb, many families are learning the hard way that obtaining a degree often means taking on loads of debt in the process. But while plenty of students are taking out loans in their own names, a large number of parents are assuming the responsibility of paying them off.
In a recent survey by College Ave Student Loans, 55% of parents said their children took out loans to cover the cost of college; yet 72% plan to help tackle some or all of their kids' balances. Meanwhile, 10% of parents who have kids with student loans say they're going to pay off the entire balance on their children's behalf.
Of course, helping your kids tackle their student debt is a generous thing to do in theory. Unfortunately, it may prove to be a dangerous move in practice.
Can you afford to part with that money?
If you're on track for retirement and have plenty of disposable income to spare at the end of each month, then by all means, go ahead and help your children tackle their student debt. But if your long-term savings need a boost, then you really can't afford to be parting with any sum of money, especially if retirement isn't all that far off.
Imagine you make a $300 monthly payment toward your child's student loans over a 10-year period. If you were to save that money in an IRA or 401(k) instead and invest it at an average annual 7% return (which is doable with a stock-heavy portfolio), then you'd add about $50,000 to your nest egg. That's a lot of money to give up in retirement, especially if you don't have any income other than savings and Social Security coming your way.
Your children, on the other hand, have their entire lives ahead of them to pay off their college education, so while you might think you're doing them a favor by taking that burden off their shoulders, in reality, you could be putting everyone in a tough spot. The reason? If you fall short on retirement income because you paid down your kids' student debt instead of saving, you may have no choice but to rely on your grown children for financial support during your senior years. Talk about an unwanted turn of events.
Set your kids on a successful path
While you definitely shouldn't plan on paying off all, or even some, of your kids' student loans, that doesn't mean you can't help them better manage that debt both during and immediately after college. In the aforementioned survey, 74% of parents helped their children set up a budget before heading off to school, and 68% expect their kids to get a job during their studies. Teaching your children to budget is a great way to help them keep their spending in check, while working part time while pursuing a degree is an excellent means of saving up cash to pay down student debt before interest really starts accruing.
Similarly, it pays to check in on your children once they graduate college and head into the working world on their own. This means making sure they stick to a budget and reviewing the repayment terms of their student debt so that they don't fall behind on their obligations.
It's noble to want to spare your kids the hassle of dealing with student debt, but you shouldn't do so at the expense of your retirement. Teach your kids to handle their money wisely during and after college, and encourage them to make smart choices that work to minimize their debt, like opting for a state school over a private one. With any luck, they'll graduate with a manageable amount of debt, and once they pay it off, you'll all have something to celebrate.