As children struggle with their first few years of post-college life, parents are often tempted to help them out by paying down their student loans. It's a generous impulse, but choosing to pay down your child's student debts does have a few possible ramifications that you should be aware of before you start writing checks to lenders.
If you gift your child more than $17K a year (as of 2023) to assist with student loans, you could become liable for a federal gift tax. If your child has a spouse, you are also allowed to gift that individual an additional $17K for student loan repayment, but you cannot gift a married couple more than $34K per annum without possibly paying a gift tax. You can find more information about gift taxes and gift tax exclusions on the IRS website.
If your child is still enrolled in college, consider a financial plan that would be more beneficial to both of you, such as simply paying the college's tuition bills directly instead of taking out more loans in your name or your child's name. You can make unlimited, tax-free gifts of educational expenses, as long as they are paid to the college, university, or postsecondary institution directly. You may also want to look into setting up a 529 College Savings Plan. These types of college savings plans can be a good option for navigating around any gift tax issues that you might bump into.
You may be relieved to know that student loan reforms have done a lot to make the burden of student loan debt more bearable for everyone, including parents. Rather than contributing large sums of your own money to help pay down his or her debt, help your child explore alternative options such as income-based repayment plans.
Income-based repayment plans (or IBRs, as they're commonly referred to) limit your child's student loan payment to 10% of their income above a basic living allowance. They also allow the remainder of your child's student loan debt to be forgiven after 20 years, or if they work in the public sector (i.e. if they are a teacher or nurse, serve in the AmeriCorps or Peace Corps, or they hold a job with a non-profit organization, or a local, state, federal, or tribal government), their loans can be forgiven in just ten years through the Public Service Loan Forgiveness program.
When it comes to your child's education, you will want to get an idea of how much you should be saving for college. If you need to find out how much you should be saving for your child's college education, or if you need more info about the myriad ways you can help your child pay for college, be sure to consult the College Planning area of the Protective Learning Center.
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