With college costs climbing, many students have no choice but to take on debt to finance a degree. The problem, however, is that many inevitably struggle to pay back those student loans once they graduate.
If you have a grown child who's having a hard time managing his or her student debt, you may be tempted to help ease that burden by taking over those loan payments. And if you can afford to do so, great. But before you rush to bail your child out, think about how that move might impact your finances for the worse.
Don't compromise your own finances
Helping a child pay off student loans is a noble act, and in your mind, doing so might make sense. After all, if you're a seasoned employee with, say, a $120,000 salary, and your recently graduated son or daughter is making a mere $35,000 a year in an entry-level role, it might seem like you're in a better position to make those loan payments.
But before you do, remember a few things. First, chances are, your child with that entry-level job probably doesn't have the same expenses as you. He or she may not have a mortgage, but rather, a cheap rental. And if your child lives in a city, he or she may not have the expense of a car, whereas if you do, that's thousands of dollars a year in insurance and maintenance alone. Therefore, don't assume that you're in a stronger position to pay that debt just because you earn more money.
Additionally, the money you'd spend to pay off your child's student loans is cash you can probably use for other important purposes, like building a nest egg for your golden years or paying off your mortgage so that it's not hanging over your head by the time you retire.
In fact, imagine you're willing to take over your child's $300 monthly student loan payment for the next 10 years. Doing so might make life easier on your child, but imagine what that money could do for your IRA or 401(k) instead. If you were to save that $300 a month and invest it at an average annual 7% return (which is a reasonable assumption for a 10-year window, as it's several percentage points below the stock market's average), you'd add about $50,000 to your nest egg. That's not a small amount of money.
Helping your child manage student loans
If you have a child who's having difficulty paying off his or her student debt, taking over that burden isn't necessarily the answer. What you should do first is encourage your child to explore his or her options for getting on an income-driven repayment plan, which is a protection available to borrowers who took out federal loans for college. That could lower your child’s monthly loan payments and make them easier to keep up with. In some cases, your child might also have the option to defer his or her federal loan payments for a period of time, though keep in mind that hitting pause on those payments automatically prolongs them.
If your child took out private loans for college, they have the option to reach out to the lender and ask for a lower monthly payment. Lenders want to get their money, so many will compromise rather than risk having borrowers default on their obligations. And in some cases, it's possible to defer private student loan payments, too.
Of course, if you're doing well financially and can afford to help your child out with student loan payments, then there's no reason not to. But make sure that's really the case before parting with money you may need for other purposes. For example, if you're carrying debt of your own, the last thing you should do is continue to pay interest on your loans or credit cards in an effort to save your child some money. This especially holds true if the interest on your debt exceeds the interest your child is on the hook for.
It's a generous thing to want to pay off a child's student loans, but doing so could hurt your finances and put you in a position where you're retiring with less money or stability than you'd like. And frankly, that's hardly fair to you.