Most parents are interested in helping their children get on the right financial foot. One way to do that might be to help with college costs and other expenses.

One of the questions often asked is this: “Can parents pay off student loans?”

The short answer is yes. However, there might be ways to help your student without paying off all their student loans at once. In fact, it might be better if you don’t do that. Let’s look at what happens when parents pay off student loans and what it might mean for borrowers and their parents.

Can parents pay off student loans?

Even though parents can pay off student loans, it might not be the best choice to pay them all off at once. 

First of all, paying off student loans could be considered a gift to your child. You can provide a gift of up to $15,000 in 2021 without paying the gift tax. For amounts above that, though, you will have to pay a tax. The IRS levies the gift tax against the giver, so you’d be on the hook for any student loan payoff exceeding the exemption. Either way, though, you will need to fill out a tax form and disclose the gift.

So while paying off your child’s student loans can feel like a generous and good thing to do, it’s essential to think through the consequences.

5 ways to help pay off your child’s student loans

If you want to help your child by paying off student loans, there are some other strategies you can use. Some of these strategies don’t require you to pay off the total amount — just help your child reduce their student loan burden.

1. Make small payments while they’re in school

Making interest payments on your child’s student loans can help them avoid more debt in the future. When you don’t pay interest on loans, the accrued interest is added to the loan balance, increasing debt. You don’t have to pay off the entire loan amount, but you can help out by keeping the balance lower.

2. Pay under the gift limit each year

If you want to put more toward student loan reduction, have your child make regular payments (so they are still invested in their education), but you can make a hefty payment each year — keeping it under the gift tax exclusion amount. Maybe you set aside $10,000 or $12,000 a year to help with student loan debt until it’s paid off.

3. Make an occasional payment as a gift

Rather than paying a significant amount toward student loans each year, you could make a periodic payment as a gift. Perhaps for a birthday or holiday gift, you could put $1,000 toward student loans, reducing the principal and making it easier for your child to pay off the debt.

4. Co-sign on a student loan refinance

You don’t have to pay off the loan directly to help your student. In some cases, students can benefit by refinancing their student loans. Refinancing can lead to a lower interest rate, saving your child money over the life of the loan. Plus, depending on the terms, it might help them get out of debt faster.

Many new grads can’t qualify for student loan refinancing without help, though. If you’re willing to co-sign on the refinance, your student might be able to get what they need. Just be aware that if your child can’t make payments, you’re on the hook. Organizations such as Juno offer access to various deals and opportunities, including lenders that allow co-signers for student loan refinancing.

5. Help with other costs

Even though parents can pay off student loans, sometimes it makes more sense to help with other costs. If you’re unsure about taking on debt as a borrower or co-signer, you can aid in different ways. If you cover some of your student’s expenses, they can concentrate on putting more money toward tackling their student debt.

You could let them live at home rent-free, as long as the savings go toward reducing debt. Or if that isn’t an option, you could help them pay their rent elsewhere. You could pay their utility bills or buy their groceries. There are many ways for you to help with expenses in a way that allows your child to put more money toward paying off student loans.

Don’t put your finances at risk

While it’s natural to want to help your child, it’s important not to put your finances at risk. Just because parents can pay off student loans, it doesn’t mean they should. 

As the saying goes, there are loans for college — there aren’t loans for retirement. Double-check to ensure you aren’t putting your finances at risk before you decide to pay off student loans or even co-sign on private student loans or refinancing. There are two main issues to consider:

• Retirement: Try to avoid dipping into retirement funds to pay off student loans. Also, if you’re helping in other ways, don’t pull back on retirement savings to help your child with other bills. Make sure you’re on your way to building your nest egg before you risk your finances.
• Debt and credit: When you take out a private loan or a Parent PLUS Loan to help your child pay for college, you reduce your ability to borrow in the future. Additionally, co-signing on a student loan refinance for your child can reduce your capacity to take on additional debt if needed. If you think you will need to have a good debt-to-income ratio for a car or home purchase in the next few years, it might not make sense to take responsibility for your child’s student loan debt.

Bottom line

Can parents pay off student loans? Yes. However, before you decide to take that step with your child’s debt, review your financial situation and goals. Consider the consequences and figure out if other ways might be just as helpful to your child.