Three out of five parents with children heading to college say they expect to help their kids repay student loans, according to a Discover Student Loans survey.
In fact, many parents of adult children are already doing so. Some are making payments on student loans for parents, such as Parent PLUS loans, that they borrowed to help pay for a child’s education. Other parents are repaying student loans that they cosigned.
And how do these student loan payments impact parents’ financial situations? Student Loan Hero recently surveyed parents who took out or cosigned a loan for their child’s education to find out.
55 percent of parents have more than $40,000 in student debt
The survey collected responses from parents who are repaying student loans used to pay for a child’s education, and for which they are legally responsible. This includes cosigned or parent student loans to finance their child’s education.
Among the parents surveyed, the total balances of student debt are high. Looking at both their student loans and student loans they used to pay for a child’s education, here’s a breakdown of student loan balance levels:
- 23 percent have more than $50,000 in student loan debt
- 32 percent have more than $40,000 in student loan debt
- 43 percent have more than $30,000 in student loan debt
Over half (55 percent) of parents surveyed have a combined student loan balance of more than $40,000. This significant financial burden can hold parents back when working toward other financial goals, such as saving for retirement.
Overall, high student loan balances can be a significant drain on these parents’ financial health.
What’s more, these parents are likely part of the “sandwich generation” – stuck between an older and younger generation that both need financial support. A Pew Research Center survey found 15 percent of adults helped both aging parents and young adult children financially in the course of a year.
Almost 2 in 5 parents repay student debt on their own
The survey also asked parents how often their child or children contribute payments toward the student loans borrowed to fund their education. Here’s how they responded:
- 39 percent – almost two in five parents – say their child or children never contribute to student loan repayment
- 20 percent say their child or children sometimes contribute to student loan repayment
- 41 percent say their child or children always contribute to student loan repayment
Altogether, 59 percent of parents who borrowed or cosigned to finance a child’s college degree pay some or all of the student loan debt they incur.
While parents are legally responsible for student loans they took out or cosigned, many families have informal agreements about who is responsible for repaying the student loans.
It’s not uncommon for parents to take out Parent PLUS loans or cosign a student loan that a child agrees to repay. However, many parents end up stuck repaying student loans on their own.
Parents should plan for their child to take over student loans
When it comes to shared student debt, parents should keep an open dialogue with the child about who is responsible for repaying it.
Perhaps a child has difficulty repaying their student loans due to low income or high costs of living. Parents can help their child find strategies to create more room in their budget to help with repayment.
Once a child can afford to take over payments, even partially, parents can work with them to make a plan for a complete takeover in the future. Perhaps the adult child can cover 25 percent of monthly payments to start. Then, keep bumping up contributions until they are paying the full monthly payment amount.
Parents and their adult children should also discuss refinancing student loans. If a child is repaying student loans, refinancing can change who holds the loans to reflect that. Some lenders, like CommonBond, allow a child to refinance Parent PLUS student loans from their parent’s name to their own.
A child can also refinance cosigned private student loans to remove a parent as a cosigner on these student loans. The child can also apply for a cosigner release with the current lender they’re working with.
27 percent of parents used retirement savings to cover student loans
Among the parents surveyed, nearly three in 10 (27 percent) say that they have withdrawn from retirement savings to help cover student loan payments.
A similar percentage of parents – 24 percent – say they considered using retirement savings to pay student debt.
This shows that student debt does, in fact, harm retirement planning for parents. Plus, early withdrawals from retirement savings accounts are a financial setback that’s hard to recover from.
What’s more, early withdrawals often incur costly penalties that can waste some of a parent’s retirement savings. Even if a parent manages to replace those funds, that parent still loses out on the time those savings could have earned gains and compounding interest.
How to boost a retirement fund’s recovery from student loans
Parents who have withdrawn from retirement accounts to cover student loans need to play catch up to get back on track.
First and foremost, parents should get student loans under control to avoid any future need to tap into retirement funds. So if you’re struggling with Parent PLUS loans, consider applying for an income-driven repayment plan to lower monthly payments.
You might also try refinancing Parent PLUS loans. Private student loans often offer interest rates lower than those charged on Parent PLUS loans. Refinancing will also give you control over the length and monthly amount of your repayment.
Parents should also work to step up retirement contributions, especially in the last 10 years before retiring. Refinancing student loans can produce savings, which can then be contributed to retirement savings.
Student loans for parents can set back retirement – but they don’t regret it
Most experts advise that adults pay down debts as they transition to retirement. Parents with high student loans will have to work a lot harder to follow this advice. Plus, debt diverts money away from retirements savings.
Despite the potentially negative effects of this student debt, most parents (66 percent) don’t regret taking out or cosigning for these loans. In fact, just 18 percent say they do regret cosigning or taking out student loans for a child’s college costs.
Majority of parents don’t know their student loan repayment options
Many parents struggle with this student debt burden. This survey also reveals that a majority of parents are unaware of options that can help.
A full 56 percent of parents don’t know about options like a cosigner release or an income-driven repayment plan.
For instance, 19 percent of parents surveyed are unaware that they can put Parent PLUS loans on an income-driven repayment plan (called Income-Contingent Repayment). Twelve percent also don’t know how to refinance student loans into their child’s name.
What’s more, almost two out of five parents (19 percent) surveyed are unaware of Public Service Loan Forgiveness, which can help eliminate debts for parents and students who hold government jobs or work for certain nonprofits.
Even when parents did say they knew about options, they weren’t always valid. Seventeen percent of parents say they know about Obama student loan forgiveness – even though no such program exists.
Parents could be missing out on student loan refinancing
Refinancing student loans can be a good move since it can solve a few problems at once. For instance, borrowers can get a cheaper student loan rate and lower monthly payments. It can also be a way to move student loans from parent to child (or vice versa) or remove a cosigner.
That’s why 12 percent of parents surveyed have already refinanced student loans used for a child’s college to be solely in the parent’s name. A parent might want to do so to take over a student loan they cosigned and are repaying because a child can’t afford to, for example. Eleven percent didn’t even know this was an option.
Parents also have the option to refinance student debt into the child’s name. This can make the child the legal payee of Parent PLUS loans, or remove the parent as a cosigner. Here’s a breakdown of why parents haven’t refinanced student loans to their child’s name:
- 64 percent haven’t considered this option
- 16 percent didn’t know refinancing student loans to a child’s name was an option
- 20 percent have considered it
Parents who are interested in making such a move should do it soon. Interest rates are expected to increase in 2017 and into coming years. Borrowers are most likely to get the best deals by refinancing student loans now.
When putting refinancing into perspective with interest rates, a third (36 percent) say they are either somewhat or very likely to refinance student loans. Another third said this is unlikely to affect their decision (32 percent), while the remaining third (32 percent) are unsure.
Look for solutions together to repay parent student loans
Overall, parents who helped their children borrow for college are usually glad they did. But that doesn’t mitigate the potential negative impact these debts can have on parents. When the arrangement isn’t working, both parents and the child need to seek solutions proactively.
The good news is that parents likely have more student loan repayment options than they think. Parents should take the time to research these options and understand their impacts so they can create the best repayment strategies for themselves and their children.
Methodology: Survey was conducted via Google Consumer Surveys on behalf of Student Loan Hero on April 5-9, 2017, with a nationally representative sample of 1,001 adults living in the United States. “Are you currently making payments on student loans you cosigned for or took out for your child(ren)’s education?” was used as a screening question (with a target answer of “yes”). The survey margin of error ranged from 4.5 to 4.8 percent.
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