There’s nothing wrong with wanting the best for your children and your grandchildren. Specifically, the best tools for them to succeed. Therefore, you might not bat an eye when a child or grandchild asks you for help to pay for college.
However, it’s important to know when to draw the line.
People tend to think of student loan debt as a problem only for 20-somethings. But, it’s becoming a financial scourge that spans generations. Government data from the U.S. Department of Education released last year found the amount of federal student loan debt held by Americans aged 50 and older grew by about $18 billion from 2017.
According to the Consumer Financial Protection Bureau, the number of American consumers ages 60 and older with student loan debt quadrupled between 2005 and 2015, jumping from 700,000 to 2.8 million. A majority of these older student loan borrowers (73%) are taking out loans to help pay for their child or grandchild’s education.
The fact is, college costs keep rising and many students can’t keep up. Older adults have increasingly stepped in to help. The most recent data from the Department of Education’s National Center for Education Statistics shows about two-thirds of federal parental loan borrowers (PLUS Loans) were taking loans out for undergraduate students who had reached their loan limit in their senior year.
Why older adults should avoid student loan debt
There are two common ways older borrowers try to help students: They take out a private or federal student loan in their own name and then gift it to a child or grandchild. Or, they co-sign a child or grandchild’s loan.
Taking on student debt later in life can be a dangerous retirement risk.
For one, unlike the students they’re trying to support, older adults typically won’t be working for much longer. In other words, they won’t be making money to simply pay off the loans. Once these borrowers enter retirement and are living on a fixed income, it becomes a challenge to allocate money to pay off the loans. Particularly, if they already have debts, such as a mortgage or auto loan. Additional debt makes older adults more financially vulnerable should they face a medical or other major emergency.
Further, if you default on a federal student loan, the government could garnish your Social Security benefit.
How to help without taking out a loan or co-signing
There are several ways you can help without resorting to taking out a loan or acting as a co-signer.
The first place to look for student aid is scholarships. There are a wide variety of scholarships and grant programs out there. Use sites such as StudentScholarshipSearch.com and Fastweb.com to search for scholarships related to your student’s field of study, background and other attributes.
A 529 plan is a tax-advantaged investment account that can be used for college and other higher-education expenses. Think of it like a 401(k) or IRA for college. Your Advance Capital adviser can help set one up for you.
The savings in a 529 account can go toward tuition, books, and other education-related expenses at most accredited colleges and universities, U.S. vocational-technical schools, and eligible foreign institutions.
Keep in mind, funds distributed from a 529 plan can reduce a student’s eligibility for federal student aid.
Coverdell Education Savings Account (ESA)
A Coverdell ESA is a tax-deferred trust designed to help meet education expenses. Unlike 529 plans, contributions are tax-deferred. The beneficiary will pay taxes when they withdraw funds.
Like other trusts, funds will become available when beneficiaries reach a specified age. They can then use the money to meet any expense they want. However, similar to 529 plans, contributions may affect a student’s federal financial eligibility.
Above all, the best way to help fund a student’s education is to make it a goal in your financial plan. The sooner, the better. It can pay off to start planning at birth. Work with a financial adviser who can help determine what specific options may be best for you.