How to help your parent decide whether (and how) to take on student loan debt
Many older adults enjoy retirement debt free. If they have college-age grandchildren, however, they may decide to help cover tuition by taking out a loan.
With tuition costs soaring, more seniors are pitching in. According to a 2017 report from Consumer Financial Protection Bureau (CFPB), the number of people age 60 and over with student loan debt quadrupled from 700,000 in 2005 to 2.8 million in 2015.
Although it's absolutely generous for retirees to help with college expenses, doing so may put their income at risk. If an older adult defaults on a federal student loan, the government may withhold a portion of his social security benefits.
To ensure your loved one doesn't take on too much debt later in life, encourage these alternatives.
Think Before Cosigning
Private student loan cosigners are responsible for the balance if the borrower doesn’t repay the loan.
Before your loved one assumes responsibility, consider the worst-case scenario. Can they repay the loan in full if they had to? If not, they shouldn’t cosign.
Consider 529 Savings Plan
Similar to a 401(K) or Roth IRA, a 529 savings plan lets a parent or grandparent set aside pre-tax income to cover education expenses. The IRS taxes the money when it's withdrawn for college expenses.
If a college-bound student plans to apply for financial aid, however, think twice. Funds distributed for education expenses are considered student-owned. That extra student income could reduce her financial aid the following year by up to 20 percent.
Help Find a Scholarship
It's a daunting task for any high school senior to search and apply for scholarships. Why not give them a hand?
If your parent really wants to be involved in helping to pay for education, he could help your child search the prospective college's website together for scholarship opportunities. Also check the U.S. Department of Labor's scholarship search tool or Fastweb.
Pay After Graduation
Rather than worry about assuming private student loan debt or impacting future financial aid, encourage your loved one to gift money to cover student loans.
Grandparents can gift up to $14,000 per grandchild annually without having to report the gifts to the IRS. Married couples can gift $28,000 per grandchild. Gifts don't count as taxable income for the grandchildren; only earnings on the gifts get taxed.
Before your parent takes out a student loan to help a grandchild, research the benefits and risks create a plan that meets everyone’s needs.