Laurence Hale, AAMS®, CRPS®
Principal/Managing Partner, Investment Advisor & Chief Investment Officer
College tuition is at an all-time high. As of 2022, the average student loan debt is about $39,000 per student, and the average monthly student loan payment is nearly $400.1
It's no wonder parents want to help their children pay off their student loans – it could help set them up for success as they take important financial steps like applying for a mortgage. But is paying off your child's student loans for them always the best option? Here are five things to consider.
1. It's important to consider any high-interest debt before paying off student loans.
Before helping your child pay off their student loans, you should consider if you have any high-interest debt yourself. Generally, student loans feature a moderately-low interest rate (around 4% to 7% depending on the loan).
If you have debt at a higher interest rate, such as credit card debt or a personal loan, you may want to consider paying off that debt first. Prioritizing debt repayment by interest rate can save you money and in addition to that, revolving debt balances could hurt your credit score more than student loans would hurt your child’s.
2. If you do decide to pay off your child’s student loan, consider ways to avoid the gift tax.
Some parents may want to pay off their child's student loans but are afraid of triggering a gift tax. Luckily, there are a few ways around this tax. According to the IRS, the tuition you pay for someone may qualify as a non-taxable gift.2 However, this is applicable only when the payment is made directly to the school or university. With that in mind, if your child has any student loans that were issued by the university, payments towards these expenses may be tax-free from gift taxes. Talk to your CPA or a tax professional to be sure.
Another way to avoid this gift tax is to stay within the gift tax exclusion for the year. In 2023, the gift tax exclusion is $17,000.3 This means that each parent can give up to $17,000 a year ($34,000 total for a married couple). As long as your gift stays within these parameters, you shouldn't have to pay a gift tax.
3. Explore Repayment Plan Options
If you’re considering paying off your child’s student loans because you’re worried about their ability to make their payments on time, it might be worth having a conversation with them, as well as their lenders, to see if there are any adjusted repayment plans available.
Most loans, especially federal student loans, offer repayment plans that can be stepped up or down depending on your child's income.4 This may allow them to comfortably meet their student loan obligations on their own. To be sure that you’re selecting the right repayment plan for you and your child, it may be wise to consult a financial advisor.
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4. Research Loan Forgiveness Options
In addition to student loan repayment plans, there are also some loan forgiveness plans available that your child might qualify for.5 For example, there are student loan forgiveness options for students who pursue certain careers in the public sector. See if your child qualifies for any of these programs.
Also bear in mind that the Supreme Court is scheduled to come to a decision regarding President Biden’s Student Loan Forgiveness Plan by June 7. If the program is allowed to move forward, your child may be eligible for up to $20,000 in student debt forgiveness. If you took out a PLUS loan in your own name to pay for their education, you may be eligible for that debt relief as well. Borrowers are eligible for this relief if their individual income is less than $125,000 or $250,000 for households. You can learn more and get the latest updates on the program here.
5. Don’t Forget Retirement
As important as it is to take care of your children, it's also important to take care of yourself. As you get closer to retirement age, it might make more sense to contribute the money you would have used for your child's student loans to your retirement savings. Your children have long careers ahead of them to make payments on their loans, but no one is going to give you a loan for retirement. As your earning years come to a close, it's important to prioritize retirement savings.
It can be very difficult to balance these competing priorities. That’s why it can be extremely beneficial to work with a financial advisor. Feel free to get in touch with us at Weiss, Hale & Zahansky Strategic Wealth Advisors. We take a comprehensive and personalized approach to helping our clients meet their various goals through our strategic Plan Well. Invest Well. Live Well.™ process. Give us a call at (860) 928-2341 or schedule a complimentary consultation on our website.
Presented by Principal/Managing Partner Laurence Hale AAMS®, CRPS®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. www.whzwealth.com.