(Image credit: Getty Images, with Gemini edits)
Question: Our grandson just graduated from college with $45,000 in debt. I want to pay off his student loans, but my husband says we can’t afford it. We’re 73-year-old retirees with $2.1 million and $4,000 a month in Social Security that covers most of our bills. Who’s right?
Answer: You’ll often hear that college graduates are drowning in debt. That may not be true for everyone, but the average student loan debt, including private loans, may be as high as $42,673 today, reports the Education Data Initiative.
A balance that large could be difficult to shake for recent grads who aren’t diving into instantly lucrative careers. So if you’re a retired couple who’s financially comfortable and have a grandson who just walked away with a $45,000 pile of student loan debt after wrapping up his studies, you may be inclined to help.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
If you’re sitting on a $2.1 million nest and your $4,000 monthly Social Security check mostly covers your bills, it’s clear that you have some wiggle room in your budget. But your husband may not be as convinced.
Here’s how to figure out how to lend a hand in a manner that doesn’t compromise your financial security or convey the wrong message.
Paying off the loan probably won’t change your lifestyle
A $2.1 million nest egg is not the same thing as unlimited financial resources. But if you’re mostly able to live on Social Security and that $2.1 million is just your “extra” cash, a $45,000 withdrawal may have a minimal impact, says Deon Strickland, Ph.D. financial advisor at Scholar Advising.
“If you’re looking at the couple, 73 years old, about $2 million in retirement assets, and $4,000 a month in Social Security, you’re probably talking about somewhere around $100,000 a year, give or take, available to spend after tax,” he says. “So they’re in a position where this decision is not going to dramatically change their lifestyle.”
That doesn’t mean you should just write a check without thinking things through, though.
As Strickland says, “This really comes down more to the relationship with the grandson and what they’re trying to accomplish. If the grandson has been responsible, appreciates the opportunities he’s had, then maybe there’s a way to help. But it doesn’t necessarily have to be just writing a check.”
Strickland says you shouldn’t feel obligated to pay your grandson’s debt in its entirety.
“It could be structured,” he explains. “It could be something like if you pay the first $5,000, we’ll match it. Something that reinforces good behavior rather than replaces it.”
Consider your goals carefully
A $45,000 gift to repay student loans may be a small chunk of a $2.1 million pool of money. But for your grandson, it’s huge.
Strickland says that if you’re looking to make that gift, it’s important to tell the right story.
“It’s more about what they want to pass on, not just financially, but in terms of values,” he says. “While $45,000 is not going to be a huge shock to their overall financial picture, it is an opportunity to demonstrate how to make good financial decisions.”
In other words, if you’re going to give your grandson the money, set some expectations and help him realize what that gift represents. It could be the thing that allows him to build savings early on or get a head start on accumulating his own retirement nest egg so that he may one day be in a position to help a grandchild pay off their student debt.
“If you have RMDs … you could gift some or all of that amount to your grandson to pay off the student loan.” — Brandon Agamennone
Figure out the path that’s best for your cash flow
Even though you can probably afford to pay off your grandson’s $45,000 debt without blinking, that doesn’t mean you shouldn’t try to do so strategically. Brandon Agamennone, CRPC and wealth management advisor at Victory Private Wealth LLC, says you have several options for handling that bill.
“It depends on what you need for your income,” he says. But one option is to use dividends or interest from your portfolio to pay off the loan over a few years. Another option is for each of you to give your grandson a $19,000 gift this year, for a total of $38,000, to stay within the gift tax limit. You can then tackle the remaining loan balance the year after.
Another option? “If you have RMDs on a portion of your investment portfolio,” Agamennone says, “you could take those and then gift some or all of that amount to your grandson to pay off the student loan.”
Make sure your grandson knows what repayment options he has
A $45,000 student loan bill may seem overwhelming to a new college graduate. But before you rush to come to the rescue, you may want to walk your grandson through his options for repaying that debt, either on his own or with assistance.
“I would have the grandson understand college loan consolidation options,” says Brian Safdari, founder of College Planning Experts. “Maybe the [grandson] can get some student loan interest deductions while working.”
Safdari thinks it’s important that borrowers realize that there are different ways to tackle college loans. With federal loans, for example, there are income-based repayment plans that can be more affordable.
“Start with a strategy and a plan first,” he says. “Then execute the best plan that provides the family the best outcome.”
That plan could involve having you foot some or all of the bill, but it’s important to dole out that money in the context of a broad plan everyone involved is on board with.
Next Steps to Help Your Grandchild Afford College
- The basics
- Balance your retirement security with supporting grandchildren
