Best Ways For Parents to Pay Off Student LoansNovember 18, 2022
$233,610. This is the total today’s average American family can expect to spend raising one child. If this seems like a lot, get ready for more sticker shock since this doesn’t include the cost of college. The average tuition at a public in-state school for 2022-2023 is $10,423. Multiply that by four years (plus student loan interest), and you’re adding another $50,000+ to the total cost of raising a child.
If you’re reading this blog, you’re likely well aware of the cost of college, and you might now be looking for ways to help your son or daughter pay their college debt. Your recent graduate likely has a student loan (and if they’re lucky, parents who offered to make payments toward that loan). Or you might have taken out a parent loan to fully cover the cost of college for your child. Either way, those loans are staring you in the face, begging to be paid.
Luckily, there are no rules against helping your son or daughter pay off student loan debt. Here are some tips for parents paying student loans.
Can Parents Pay Off Student Loans?
If you’re wondering, “Can parents pay off student loans for their children?” the answer is yes. There are no restrictions for parents interested in helping their child pay off student loans. Still, there are some important considerations parents should factor in before doing so—namely, the gift tax.
Per the IRS, repaying your child’s student loans would be considered a gift to them, and the giver pays taxes on the gift, not the recipient. As you plan for tax season, make sure to keep this top of mind if you’re offering help with your child’s student loans.
8 Ways for Parents to Pay Off a Child’s Student Loans
Given that college costs are so high, your son or daughter may be burdened with significant student loan debt. Helping them repay their loans if it’s financially feasible for you could offset some of this burden. That said, it won’t necessarily be an easy process for either of you. But there are some strategies that can help parents that are paying student loans.
1. Set Up Automatic Payments
The easiest way to help manage your child’s student loan debt is by setting up automatic payments from your checking or savings account. We all get busy and forget items on our to-do lists. And while one or two missed payments might not make a difference, several can result in late fee charges and dings on your credit, especially if the loan is in your name or if you were a co-signer for the loan.
2. Play By the Rules (Tax Rules)
If you help pay your child’s student loan debt, you might need to pay gift tax and file a gift tax return during tax season. A gift tax applies to the giver (that’s you) and to any contributions over $17,000 for 2023, though it doesn’t apply if you co-signed their loan initially and have been helping repay it.
Tuition is excluded from gift tax, but loan payments are not. Double-check current IRS regulations around gifting student loan payments before making the decision to help. Here is a current FAQ list around gift tax.
3. Focus on Loans with High Interest Rates
Look at all your loans—car loans, mortgage loans, credit card debt—and focus on those with the highest interest rate. If you have a credit card with an 18% interest rate, and the interest on your child’s student loan is just 8%, it would be wiser to focus on paying your card first. Note that private student loans typically have higher rates than federal student loans, so it’s a good idea to focus on private loans first as you’re prioritizing payments. Adding an extra $50 or $100 per paycheck to those higher-rate loans can help in the long run.
4. Prepay the Loan
You may want to consider prepaying your child’s student loans if they’re still in school. Since certain federal loans don’t accrue interest before your child graduates, this could be an excellent way to pay down the loan principal and potentially reduce future interest charges.
If you receive a bonus or a cushy tax return, allocate those extra funds toward the student loan debt. By paying down your child’s student loan faster, you can reduce the total amount of interest paid over the life of the loan by paying less monthly interest.
You can also allocate extra funds toward paying your child’s student loans by rearranging other existing finances. For example, consolidate the balances into one loan if you have multiple credit cards. A single loan with a fixed interest rate lower than your credit card’s APR will help you simplify and save.
5. Refinance Student Loans
Refinancing student loans is another way to simplify payments and readjust finances. Whether the loan is a parent loan or student loan, reducing the interest rate lowers monthly and total loan payments. You can also change the term of the loan to 5, 7, or 10 years to help lower monthly payments, allowing you to reallocate funds to other expenses or debts (refer back to our tip about paying off debts with high-interest rates first).
Remember that you’ll need to meet certain student loan refinancing requirements. Lenders may require a minimum loan amount, credit score, and more to be eligible for a refinance.
6. Set Up Biweekly vs. Monthly Payments
You might have noticed that some months, you get an extra paycheck. This is because the 52 weeks in a year don’t evenly divide into four weeks for every 12 months. You can take advantage of these extra four weeks by setting up biweekly loan payments.
If your monthly payment is $300, and you readjust to paying $150 every other week, you pay the same amount each paycheck but end up with an extra loan payment paid over the course of a year. This pays your student loan debt faster. Another bonus? This tip works for paying off any loans, not just student loans.
7. Match Your Child’s Student Loan Payments
One of the best ways for parents to pay off student loans is by matching their child’s payments. For instance, you might make a payment at the same time that they do, or you could even alternate payments, so you’re paying every two weeks. Scheduling payments every two weeks could help significantly reduce interest charges over the life of the loan.
8. Fully Understand Your Offer
Paying your child’s student loans, whether partially or in full, is a generous offer. It can help your new graduate get on his or her feet in the working world. It can also help free up money for dealing with other debts or life’s unexpected surprises. Since your offer also impacts your financial situation, be sure you fully understand the pros and cons. Consider how close you are to retirement and if your 401k or other funds will suffer. Be aware of the balances and interest rates in your other debts.
Whether or not you choose to help your child pay their loan, student loan refinancing (or even refinancing your parent loan) can help avoid the hassle of multiple payments and get a more affordable rate and flexible terms. See if you qualify for student loan refinancing*.
Refinance Student Loans with ELFI
ELFI offers student loan refinancing options for parents and students, with some of the lowest rates available and flexible terms.* We also have no application fees, no loan origination fees, and no penalty for paying off your student loan early. See how much you could save with ELFI student loan refinancing.