The Student-Debt Dilemma
My daughter graduated from nursing school with $50,000 in student loans. I am extremely proud of her achievement and grateful she now has a rewarding and well-paying job. I’d like to help her pay down the debt. What do I need to consider?
This is a great question simply because there are so many parents—and families—in your situation. In fact, in 2015 some 71% of college seniors graduated with student loans, with debt averaging $35,000 per student.1 The loan balances are much higher for graduate students, more along the lines of what your daughter is facing.
I admire your instinct to support your child’s hard work and achievement, and to help her move confidently into the next phase of her life. Before you make a commitment to your daughter, however, it is important for you to take a step back and think carefully about your finances—now and in the future. Let’s walk through the steps.
Make sure that your retirement is secure
First on your list is crunching your retirement numbers. The standard recommendation is to withdraw roughly 4% of your retirement nest egg in the first year of retirement (with adjustments for inflation thereafter) if you want your money to last for 30 years or so (assuming a moderate asset allocation). For example, if you saved $1 million, you could withdraw up to $40,000 in your first year.
Next, mock up a retirement budget. Will the proceeds from your portfolio combined with other secure income cover your expenses? Only if you can answer with a resounding “yes” should you proceed.
Examine the pros and cons objectively
Personal finance can be a tricky business, because it often involves emotions as well as math. As you work your way through your decision, here are a few things to think about:
- The upside is that interest rates are generally low and interest on your daughter’s student loans may be tax-deductible (up to $2,500 of interest is deductible if your modified adjusted gross income is less than $80,000 for single filers or less than $160,000 for married couples filing jointly). Certainly, extreme student debt can be burdensome, but it’s not in the same camp as credit card or other consumer debt.
- Because student loans often have low interest rates compared to other forms of unsecured debt, it’s important to think through whether paying them off is the best use of your money. If you confidently believe you could earn a higher return by investing your money, then that is another possibility to consider. Or if you or your daughter have other, higher-interest loans, it would make more sense to pay those off first.
- This doesn’t have to be an all-or-nothing situation. Of course it would be ideal if you could wipe out all of your daughter’s debt in one fell swoop. However, if that doesn’t seem prudent, you might be able to eliminate a significant chunk of her debt (and her monthly payments) with a partial payoff.
- Likewise, you don’t have to pay off all of the debt at once. If you are comfortable making a partial payment now, you could include additional payments in your budget over the next year or series of years.
Walk through the mechanics
If you’ve taken the preceding steps and are confident that you want to move ahead, it’s time to take a closer look:
- First, make an inventory of all the debt. Many students have a combination of several federal and private loans, with different interest rates and terms. You’ll need this big-picture view before you make any decisions.
- When you’re selecting which loans to pay off, it’s almost always best to pay off the ones with the highest interest rates first. However, private loans may have a variable rate (federal loans are mostly fixed), and others may be eligible for consolidation into a lower-rate loan. Also be on the lookout for “gotchas.” For example, although it’s uncommon, some private loans carry a prepayment penalty.
- Find out if any of the loans are eligible for forgiveness. Many nurses, teachers and other public service employees are eligible for a variety of state and federal loan-forgiveness programs. Investigate this before you make any payments. Timetables and other requirements vary according to the program, so pay attention to the details. Given that your daughter is a nurse, this would be a great way to trim her debt from the get-go.
- If you gift your daughter more than $14,000 in one year, the balance over that amount will count against your lifetime gift and estate tax exclusion (with that exclusion now set at over $5 million, it’s a nonissue for most people). Realize, however, that even though no tax is due, gifting any individual more than $14,000 in one year requires you to file a gift tax return (IRS Form 709). Likewise, if you and your spouse combine your gift, you must file a gift tax return regardless of the amount.
A final thought: Share your know-how
Your daughter is one lucky woman to have such a generous and caring parent. If you ultimately decide that you can help pay off her student loans, you can top off that gift by helping her take charge of the rest of her finances. Does she have an emergency fund? Is she saving for retirement? Is she aspiring to other professional or personal goals? By eliminating or minimizing her monthly loan payments, and then encouraging her to save and plan for the future, you are also putting her in the enviable position of being able to help secure her goals and finances for years to come.
Carrie Schwab-Pomerantz, CFP®, is President of Charles Schwab Foundation and Senior Vice President of Schwab Community Services at Charles Schwab & Co., Inc.
1 Edvisors.com, 2015.