I often write about trends that I am seeing with clients or things I read online and this week is no different. The number of times that parents taking out student loans for their children has come up in the past week was pretty staggering. My standard advice is to never take a student loan out for anyone else, including your children, unless you have the assets already to pay that debt off. I am seeing people in dire financial straits who are trying to figure out how to take on MORE debt that they can’t possibly afford.
There are several reasons that taking on student loans for anyone other than yourself is a bad idea:
- Most people looking to take on student loans for their kids are over 40 years old. By the time you are 40, you should have about 3 times your annual salary in your 401(k) for retirement. So, if you make $100,000 a year, you should have at least $300,000 in retirement savings. If you are already behind on retirement, there is no way you should be taking on debt that does not improve your own ability to earn or retire.
- You owe the money, whether or not your child graduates or ever makes a good living. Most of the parent loans do not even have the student as a borrower or co-borrower, so they have no liability on the debt. I can’t tell you how many people I talk to who owe $75,000 or more and the adult child is now living at home because they can’t find a job or are under-employed. So, not only is the parent trying to pay off significant student loans, but also supporting the adult child.
- If a federal student loan goes into default, your Social Security can be garnished up to 15%. Social Security already is not a lot of money, depending on where you live, but taking 15% off the top really hurts.
- One of the main reasons that the cost of education is so high is because parents have been willing to sign their lives away for these loans. When the schools come up with the family’s expected financial contribution, they make parents feel like they have to do anything and everything to come up with that huge number that most families can’t afford. We are seeing the effects of that with people in their 50s, 60s, 70s, and 80s who are now defaulting on these loans and the financial stress is crushing at a time when life should be enjoyed.
Please think long and hard before taking on debt for others, even when those others are your children. I know that sounds really harsh, but there are so many options out there that do not involve this type of financial stress and I encourage you to talk to your kids about their goals and realistic options.
This is just a basic overview and is not legal advice specific to your situation. If you have questions about your rights when it comes to debt and credit, you should speak with an attorney in your area for legal advice. If you live in California or North Dakota and would like to speak with Jen Lee Law regarding your situation, please schedule an appointment.