Should You Pay Off Your Child's College Student Loans?

The Squeeze

• Organize your paperwork and talk to experts within your reach: student loan counselors, financial planners, and tax specialists can help you navigate your decision.
• Empower your child to know their repayment and loan forgiveness options and share findings as a family. If they hold federal (rather than private) student loans, they may be in decent shape to help your family by helping themselves.
• COVID-19-related benefits, among other flexibilities, may buy your family time and energy to tackle more pressing and mutually beneficial financial concerns.

Congratulations! Your kid has made it through college and this is no small feat. But now, as you plan for the future, you might be wondering, should you help pay off your child's student loans? 

If you're considering this question, you're facing a choice that can impact your entire family. Your child's financial security is not a stand-alone issue, especially if you're also managing your parents' needs and planning for your retirement simultaneously. 

Like most real-life situations, the best solutions fall into the grey area between "yes" and "no." So a realistic, hybrid approach to relieving student loan debt may be the key to you and your child's mutual success.

Here is what you need to consider in making your decision and customizing a plan that fits your family and financial situation.

Student Loan Repayment as a Family Issue

Chances are you've weighed the pros and cons of this dilemma and have run into brick walls. That's because the pain points of intervening in your child's college debt touch almost every level of family budgeting. Paying down your child's student loan impacts your capacity to:

• Care for and support your child or other children
• Enhance or maintain your ability to take care of yourself, your partner and build for your future
• Provide for others that may depend on you — including your parents

And that's just the standard scope of the issue — large enough on its own to make anyone's head spin before they've even begun planning. COVID-19-related impacts on your savings, employment, and health can intensify some of these concerns.

You're not alone. Some of the changes brought on by the pandemic are actually benefits amid all the chaos. COVID-19 relief policies, like the extended automatic forbearance on federal loan repayment, have already generated more opportunities to ease the financial burdens of student loans than ever before. 

Consider the issue from multiple angles

Whether or not you're leaning toward contributing directly to your child's student loan payments, it's essential to anticipate the personal and financial consequences of getting involved. These concerns break down into four basic categories: 

• Financial planning
• Taxes
• Legal provisions
• Family relationships

Identify where, realistically, you stand in each of these areas so that you target the right questions to ask yourself and the specialists you consult to come up with a plan that makes sense for your family.

Financial Planning 

Even entertaining the idea of paying off your child's student loans requires that you gauge your financial preparedness since the decision impacts not only your day-to-day budgeting but also the future security of everyone in its path. Take inventory, organize important documents, and know your options. Start by asking the obvious questions:

• Do I have a budget?
• Have I taken the guesswork out of retirement by using a retirement calculator or consulting a financial planner? 
• Do I have student loan payments or high-interest debt of my own to consider?
• What do I know about my child's student debt?

Having a firmer footing in your own financial planning will help you determine how urgent your child's student loan repayment situation is on a family scale. If you decide to proceed, you and your child will need to collaborate to gather information about their college loans. 

Contact the student loan servicer to find out what they can tell you first. Some key questions to include:

• What's the loan’s status? Is it up today or at risk of defaulting?  
• What types of loans does my child hold: federal or private? 
• What repayment options does my child have?

The answers will reflect your child's repayment and forbearance options and give you a better sense of how useful (or not) your help may be. For instance, current student loan relief policies — including the COVID-19 automatic forbearance — apply only to federally held loans. The same goes for Income-Driven Repayment (IDR) plans, which can result in a monthly bill as little as $0, depending on your child's income. 

On the other hand, private loans put your child — and you — in a tighter spot. These loans may offer some repayment flexibility but generally carry few options and protections. And if your child's loans are privately held, the chances are that you had to co-sign on them, which increases your personal credit risk if loan payments are not met.

Whatever the type of loan, the unavoidable, overarching consideration is the loan's standing. If your child is on track to default on their loans, your intervention may be more urgent. Typically, there are hefty penalties on defaulted loans entering collection and these can quickly bloat the loan balance beyond feasible limits — and unlike other debt, student loans cannot be discharged in bankruptcy. 

Taxes 

Generating more cash flow to help your child may be a reasonable (and noble) strategy, but it can also bring tax burdens your way. 

The obvious culprit in this scenario is that earning extra income could place you in a new tax bracket and ultimately be counterproductive to your goals. A less obvious consideration is the Capital Gains Tax you will incur if you sell off investments or other assets to free up cash.

Already having the money to give directly to your child for their loan payments is, of course, a rosier picture — but it's not without its thorns, as you could become liable for gift tax penalties. In 2021, avoiding these penalties means limiting your contribution to $15,000 per donor. 

Legal Provisions

If your child has federal student loan debt and any extenuating circumstance, they may be in a stronger position to help themselves than your financial involvement can offer. In this case, your best intervention could be a mild one: invest in student loan counseling for your child. 

Many nonprofit local and remote counseling agencies — like those indexed by The National Federation for Credit Counseling (NFCC) — offer affordable help on student loans. Counselors can help you quickly determine whether your child qualifies for any existing federal student loan forgiveness programs, like the Total and Permanent Disability Discharge or Public Service Loan Forgiveness for government and nonprofit jobs.

COVID-related protections for federal student loan holders also mean that families have an opportunity to plan around college loan debt more cautiously and wisely. All federal loan holders currently enjoy an automatic forbearance on repayment through September 30, 2021, with interest accrual and collection activities suspended until that date. 

Effectively a 0% interest rate on federal student loans, this forbearance brings not only relief but also a chance to divert funds to other financial plans (like emergency savings or higher interest debt) that may be holding your family back.  

With even more aggressive benefits — like a $10,000 student loan forgiveness policy and more flexible bankruptcy provisions—potentially on the horizon, the landscape of college student loan debt is changing fast. 

As federal pandemic response policies continue to take shape, your family would do best to keep up with the news, stay on top of your mail and follow updates on potential legal changes, like Biden's American Families Plan, in the wings.

Family Relationships 

Understanding that money is not the only way to help your child in their post-grad predicament (and not the only thing that can hurt your family situation) is a huge part of the battle.   

Consider opening up the decision-making process by talking to your child and other family members (your parents, siblings, partners) about what's worrying you. A collaborative family discussion may lead to new insights, for instance, about:

• What other family members can contribute
• What support that you currently provide to others can take a back seat
• Living arrangements within the family that can lessen the impact of your child's debt

If the pandemic has taught us anything, it is that personal choices have ripple effects beyond ourselves. Whatever your financial situation, what matters most is that you are transparent and chart a course of action together — as a family.