For U.S. parents in their later working years, or who are already in retirement, keeping debt at bay is an important part of protecting their investment portfolios and maximizing retirement income.
After all, a fixed income beckons. In that context, every dollar steered toward a debt payment is one dollar less for retirement. Yet increasingly, the high level of student debt has college graduate sons and daughters turning to mom and dad for financial help on their loans.
Should you give it? Not until you review a few pros and cons from financial experts on the topic.
[See: 11 Tips for the Sandwich Generation: Paying for College and Retirement.]
First, some relevant data. According to Student Loan Hero, a site dedicated to college loans and financing, Americans owe over $1.4 trillion in student loan debt, spread out among about 44 million borrowers. For perspective, consider that the total student loan debt is roughly $620 billion more than the current U.S. credit card debt. On an individual basis, the average class of 2016 graduate owes $37,172 in student loan debt, a figure that has risen 6 percent from 2016.
There are millions of beleaguered college grads who need help in paying off their loans. Should parents step in and save the day?
The pro side to the arguement. If you’ve saved money in a college fund in advance, you’ll be able to contribute to your child’s education expenses so they will have to borrow less, says Mike Sullivan, a personal financial consultant at Take Charge America, a national nonprofit credit counseling, debt management and student loan counseling agency. “Not every family is financially able to save for college, but setting aside a sum, whether small or large, specifically for college expenses will reduce your financial burden when it comes time to pay up.”
Plus, you can help your child pay down debt while they’re in college. “Parents can contribute cash to their child’s loans while they are still in school to lessen the financial burden after graduation,” Sullivan says. “Additionally, parents can let students live at home to decrease costs and provide food and other support.”
Additionally, if you do help with the loan payments, you’re setting your child up for success. “As a parent, you’ll feel good knowing you’re contributing to your child’s education,” he says. “Your child will be grateful that he or she does not have to pay and may be able to afford a better school thanks to your money if the commitment comes before loans are issued. However, any parent who has not saved enough to be able to help with college expenses certainly isn’t in a position to start covering expenses with borrowed money or credit.”
On the other hand … “As a financial coach and someone who had over $60,000 in student loan debt upon graduation from college, my answer may surprise you — but the answer is “no”, says Alexis Busetti, a financial specialist, and owner at Cistern & Grove Financial Coaching, in Houston.
Busetti says that “many” people who agree with her stance will make the argument that the student needs to learn responsibility, pay their own way, and pick themselves up by their bootstraps. “I certainly agree with those sentiments and think they are valid,” she says. “But, here, I think we need to take a look at the parents and their financial future and well-being.
“If parents have children graduating from college, that tells us that retirement for them is just around the corner,” Busetti says. “My guess is that if the parents did not have enough saved up to be the primary funder for their children’s college, another safe assumption might be that they got started late to the retirement funding game as well.”
[See: 7 Tips for Finding the Best Target-Date Retirement Funds to Buy.]
What happens when parents in their mid-50s end up paying $600 per month in student loan payments, instead of fully funding their 401(k) or IRA? “The student has more time to pay back their loans than the parents have to do that last bit of saving before retirement, and this is especially important if their current level of saving leaves much to be desired,” Busetti says.
Time is another big issue for parents and, make no mistake, their kids have many more pages on the calendar to flip than mom and dad.
“Too often parents end up compromising their own financial goals in order to reduce their child’s student loan burden,” says Kurt Rossi, chief executive officer at Independent Wealth Management, in Wall, New Jersey. “The reality is, children have many more years of earning potential ahead of them as compared to their parents and as a result, parents must ensure they are on track for their own goals before assisting children.”
The “balanced” side of the equation. Before you decide on a pro versus con response to paying a child’s college loans, do some research first, and ask yourself a few critical questions, says Lauren Zangardi Haynes, a financial planner with Evolution Advisers in Midlothian, Virginia.
“Is your financial situation buttoned-up? Are you saving enough to retire and live with dignity? Do you have a lot debt yourself that you need to pay off? Do you have at least three to six months saved up in cash for an emergency fund? If you aren’t in a good place to help out, get your situation on track before you help your child,” Haynes says. “Think of the airline pre-flight coaching place your oxygen mask first before helping others. This sets a good example for your kids.”
Haynes believes parents can set a better example for their kids by taking care of their own finances and talking about that process with their children. “If you aren’t in a place to provide that advice, or don’t want to, there are lots of fee-only financial planners that work with younger clients on an ongoing or project basis,” she says. “You could pay for your child’s engagement with the financial planner.”
In the end, the question of helping a child pay for his or her college loans is a deeply personal, and unique decision.
“I really believe this decision is up to each family based on their perceptions of the value of the degree, the career path the student is pursuing, and the family’s financial standing at a minimum,” says Ross Riskin, owner of Riskin Advisory in Orange, Connecticut. “Really, no one is in a position to make that call except for the family and their advisor.”
While that statement surely is valid, there are some broad points that every parent and college graduate child has in common when it comes to paying back college loans. Of the main points — income, the child’s need, credit scores, and retirement income — the most prominent one may be time.
Like it or not, the college graduate has more time than his or her parents to pay back the loan, and still get on the road to a good long-term financial path. Mom and dad likely don’t have the kind of time to both pay down college debt and save for retirement.
[See: 6 Strategies to Avoid Working in Retirement.]
Keep that in mind when the question comes up in your family — and then decide accordingly.
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Pros and Cons in Paying a Child’s Student Loans originally appeared on usnews.com
