Personal finance

How smart parents manage their kids’ student debt – while paying back their own loans

Student debt isn't just a Millennial problem. Baby Boomers and Generation Xers are finding themselves taking on student debt to help their children pay for college or graduate school -- in many cases before they've paid off their own student loans.

In fact, more than one-third of all outstanding student debt in 2014 was held by people over the age of 40. Twenty-four percent of parents ages 46 to 55 said that they were still paying off student loans from their own education.

 

This debt is having a real impact on whether parents can meet other financial goals. For example, a PwC survey of 1,600 of the company's US employees found that almost 32% of respondents have spent retirement savings on student loans, and 57% predicted they'll do so in the future.

If you find yourself in this situation, make sure you have a strategy. To help, we’ve compiled some expert tips to help parents like you pay down both you and your children's student loans – so that you can address your other financial goals.

 

Start with the debt that has the highest interest rates

When you have multiple loans, and perhaps other debts such as auto or credit card debt, it is critical that you prioritize the debt with the highest interest rates, first. For example, if you have a student loan with a 7% interest rate and a credit card debt that accrues 22% interest per month, the smartest strategy is to pay off your credit card debt as soon as possible. Each day that goes by, the credit card debt will accrue more interest and ultimately cost you more money.

 

In order to address your highest rates first, you need to read the fine print on all of your debts. Then, make a list or Excel sheet ranking your interest rates from highest to lowest. From a mathematical perspective, that's the order in which you should pay off the loans.

"It comes down to interest rate and time," says Tony Liddle, a financial adviser and CEO of Prosper Wealth Management."I always like to go with paying off the highest rate first."

Importantly, this smart strategy may mean you pay your children's debt off before your own. Parent PLUS loans offered by the federal government tend to have a higher interest rate than many types of undergraduate loans that you may have yourself. Even though you have held your child’s loans for a shorter time period of time, paying these loans off first is the right strategy from a savings perspective.

 

See what’s possible by refinancing

If your credit score or income have strengthened since you originally took out your loans, you may be eligible for a lower rate by refinancing. Refinancing your loans allows you to swap out an outdated rate for a new rate that better reflects your current financial situation. Plus, depending on the macroeconomy, certain financial seasons might create a ripe environment for getting a lower rate.

 

In particular, if you hold a government-issued Parent PLUS loan for your child, it’s possible that you could potentially save thousands of dollars over the life of the loan by refinancing.

 

You can pick and choose which of your loans you’d like to refinance. If you have a few loans with already-favorable rates, you don’t have to refinance those loans. Most lenders offer a “soft credit pull” tool, which allows you to receive a quote without any ding to your credit score. You can use the soft credit pull to strategize which loans, if not all, you want to refinance, depending on the rates you get quoted.

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Keep in mind that refinancing can eliminate certain federal protections, such as income-contingent repayment (ICR) and Public Service Loan Forgiveness. You may be able to receive ICR if your monthly loan payment dramatically outweighs your income, but you must apply and be accepted into the program. Public Service Loan Forgiveness is only available to people who work for a government organization or 503(c)(3) and have made payments toward their federal loans for 10 years.

 

If you're currently in need of ICR or want to remain eligible for Public Service Loan Forgiveness, refinancing your federal loans with a private lender might not be for you, says Jan Miller, president of Miller Student Loan Consulting.

However, if these specific situations don’t apply to you, refinancing your loans is likely the best route to take.

Consider transferring Parent PLUS loans to your children

Just because you took out Parent PLUS loans to help your children pay for school doesn't necessarily mean you need to be on the hook for making these payments over the long term. Private lenders often offer parents the option to transfer PLUS loans to their children, if the children qualify to take over these loans. Note that transferring Parent PLUS loans to your child isn't an option offered by the federal government.

Amrinder Babbra, a CommonBond member currently completing his doctoral degree and working as a behavioral therapist in Chicago, recently transferred about $30,000 of his mother's Parent PLUS loans into his name through CommonBond.

"I didn't want my mom to be saddled with that kind of debt," Babbra said."I always saw it as my debt."

Babbra added that because of the Parent PLUS loans his mother took out for his and his sister's college educations, she was unable to refinance their mortgage. By transferring the Parent PLUS loans to his own name, Babbra helped to lift a burden for his family.

Ultimately, your finances are a family affair. Do your research and come up with a strategy. You’ll save money and maybe even teach the next generation financial literacy skills of their own.

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