A new report out by the Consumer Financial Protection Bureau shines a spotlight on how many older adults are taking on student loan debt whether for their children, grandchildren, themselves or a spouse. The report states that this segment of student debtholders has quadrupled over the last decade, making those age 60 and older being the fastest growing age segment of student loan debt, and holds an estimated $66.7 billion in student loans.
Unfortunately for those who have already taken out a loan, there isn’t much you can do at this point. But for those who are coming up to the time when your children or grandchildren are heading to college, we spoke with Christopher Young, principal at Cassaday & Company, Inc., to get some tips on how to navigate the financial field.
First and foremost, Young says: “It is best for parents and grandparents to stay out of getting loans if possible. You can’t get a loan for retirement, but kids can get a loan for college, and over time, you can assist them in paying it back.”
With the ever-increasing costs for college, it’s hard for a student to look at incurring that large of a sum of debt. For the 2016-17 academic year, the average cost of tuition and fees, according to the College Board, was $33,480 at private colleges, $9,650 for in-state public colleges and $24,930 for out-of-state public universities. Multiply that by four, or however many years it will take a student to graduate, and a student is looking at a massive amount of debt, which takes an average of 21 years to pay off, according to Young, who reiterates that parents and grandparents should not get involved in the loans.
Student loans should only be taken out in the student’s name.
To get the best options and flexibility when it comes to student loans, the student is the one in the best position to incur the debt for a couple of reasons.
“[Student loan] programs are fluid and are changing all the time,” Young says. “Depending on what type of job [a student] has [after college], if they make 10 years of payments, their loans can be forgiven.” He cites examples such as government or nonprofit jobs.
When students take the loan, they are also set up with more flexible options such as Income-Driven Repayment plans—as your income fluctuates, so does your payment. “There is a lot more flexibility in leniency in terms of payback forgiveness,” Young says. “With federal student loans that students can get, they can access all the different flexibilities with the lender. Parents don’t get that option.”
There are ways, though, for parents to help students find grants and aid and to get them started on saving. There is a big difference in the types of loans students can get through the government and what a parent of a student can get through the government, says Young.
When parents apply for a Parent PLUS Loan or a private loan with new companies like SoFi, benefit options like payment flexibility that students get if they file on their own are reduced. “When [the parents or grandparents] retire, the payments won’t adjust to their new fixed income,” he explains.
What parents should do is have a conversation with their child and explain that “college is an investment, not an entitlement,” says Young. “It may not make sense [for them] to go to the college of their dreams if that college doesn’t make sense for what they want to pursue. You can pay a lot of money toward a degree, and if your earning potential is limited, you’ll have a problem making those payments.”
So what else can parents do? Young breaks down options:
Set up a college savings plan.
First, Young suggests setting up a 529 plan. “With a 529 plan, the child is the beneficiary not the owner of the account, so when the student is being looked at for potential aid, the 529 Plan counts less toward your family contribution as opposed to the kid owning it.”
Fill out a Free Application for Student Aid form.
This is something Young suggests everyone do prior to looking into college financing. “Every student who is looking to go to school needs to fill out a FAFSA form and submit it to the government,” he says. “That will allow you to take advantage of federal and state aid that is potentially available to you and your specific financial circumstances.”
Young says this should be filled out right after the New Year during the child’s senior year of high school.
Don’t want to wait that long? During the student’s sophomore or junior year of high school, to get an idea of potential costs for colleges your child is considering, Young suggests going to the College Board website and using the net price calculator to see what the potential costs are. You can input your personal financial information, and it will offer information about grants and aids your child might be eligible for.
If you can pay for your child’s education outright …
“Go for it, but make sure to first fill out the FASFA form,” Young says.
If a parent or grandparent wants to help a child out …
“What they don’t want to do is give them money outright prior to them filling out any of these forms because that will hurt [the student’s] chance of getting aid because that asset is now under their name,” Young says. “They can always make deposits into the child’s 529 plan or help pay college expenses or loans outright. Giving them [money] up front could impact their potential for financial aid because the asset will be in the student’s name as opposed to the parent or grandparent.”
If you pay your student’s loan payments …
“Structure it as a gift,” he says. “You can give $14,000 per spouse, per year, per child to your kids without having to file any extra tax forms. Everyone has a lifetime exclusion of what you can gift—right now about $5.49 million. Any time you gift over $14,000 a year, that amount gets deducted; you will have to fill out an additional form letting the IRS know to deduct that overage amount from your lifetime exclusion.”
If you’re thinking about going back to school as a senior student …
“You’d have to have a tough conversation” Young says. “There are many types of benefits from [going back to school], but is that going to impede their potential retirement savings, and is the degree they are going back to obtain going help them get a job with better earnings potential? You have to have a conversation about the purpose of going back.”
If you’ve already put your name on loan …
“If it is a plus loan, you can go back to your lender and see if there is any form of adjustment,” he says. “If you have multiple loans, consolidate them—SoFi can help with this.”