When I graduated from college, I had a student loan for 3-4% simple interest, payable quarterly @$90. It was $3000 or so total. I wanted to pay it off, as I had that money in my checking acct, earning 6% interest but was told to just pay it off on schedule, for my credit rating.
I did as recommended but it felt dumb and irked me to have debt.
For our kids, I have a joint account with each of them and their credit histories are older than they are and excellent.
I’d say, if you can pay it off and still have a decent emergency fund, it feels great! If your folks have excellent credit and willing to have a joint account with you, that’s a great way to boost your credit score quickly. Just make charges and pay them in full regularly. (For our joint accounts, my kids are the only ones using and paying those cards.)
Building a good credit rating isn’t worth throwing money away, and throwing money away is what you are doing when you don’t pay off debt fully and incur the interest on the payments. For a young person who has the opportunity to get rid of the debt, and who has parents as a back-up in case of emergency (health care expenses and the like) - I’d dump the debt. Start from a clean slate.
What you don’t know is how much the credit rating will go up. A few points a month? Per year? What are you going to do with the higher credit rating? Buy a house? Take out a loan for a car?
Really, it is not a smart idea to pay interest just to see your credit rating go up a few points.
I’d rather he keep the cash. He’s driving a 2000 Honda Accord. If he needs to buy a new (used) car - he has the cash to do so. Student loan pymts are lower than a car pymt would be and he can deduct the interest on the student loan.
It’s true that you can deduct the interest on school loans but interest rates on cars can be really low. My D just bought a new car. 1.9% interest for 60 months. It’s also a great way to build credit now with very low interest rates.
“I’d rather he keep the cash. He’s driving a 2000 Honda Accord. If he needs to buy a new (used) car - he has the cash to do so. Student loan pymts are lower than a car pymt would be and he can deduct the interest on the student loan.”
That’s where I think a parent should be back up if a new (used) car is needed. That’s a possibility but not a given at this time.
Some of us parents are not in a financial position to be a “backup” for our grown, out of college students. Sometimes it’s all we can do to manage thing on our own and pay back whatever we borrowed on our own to put our kids through college. The whole thing about “skin in the game?” – that means the student needs to manage their own finances post college – not figure on mommy and daddy being their financial backstop forever down the line.
I find some of the assumptions posted in this thread about parents being a “back up” (by more than one poster) to be naive at best. Sometimes the situation is reversed – the parents face issues like disability or living on a fixed retirement income, and need financial help from their college grad kids.
Part of financial management is making choices, and sometimes it’s better to pay off a loan over time and use cash reserves for something else. The concept that the parent should help adult offspring buy a car seems ridiculous to me (or a house, or any other discretionary purchase). If the college grad has a job and income, then they should have responsibility for all expenses.
If the student loans are federal, in most cases the student is better off with that debt than with taking on other debts. Obviously, no debt at all is ideal – but in today’s economy that’s pie in the sky for many.
As noted, the interest payments are deductible. Further, if the student loses their job, or is underpaid - they can arrange for income based repayment – no other type of debt allows the debtor the option of arranging a lower payment rate in hard times…
Yes, we are all at different places in our lives, as are our loved ones. None of us really knows the finances of anyone else here and it is good for young adults to be financially self-sufficient, as it is for us and everyone.
Making sound financial choices is important to having a comfortable future, imho.
@calmom - I agree with you. Son is 24. I would be there in case of dire emergency - but he is financially independent and I want to keep it that way. In my life experience - shit happens - and nothing is better to countersct it than a decent cash cushion/emergency fund sitting in the bank.
Agreed. Of course, if you can’t be a backup for your kid, then that’s how it goes. However, if you can – it just makes more sense to me that you pay down a debt, because the interest on that debt is essentially throwing money out the window.
It’s the same reason that I wouldn’t condone my kids racking up credit card debt, but if they did, I’d rather give them an interest-free loan to wipe it out fully and they can then pay me back.
I have lived through / am living through a family member going bankrupt from consumer debt (which isn’t even school-debt - which is at least an investment in self!). So I am extremely twitchy about debt of any sort.
Well, let’s move into the real world for a minute, assuming the person’s goal is to be financially self-sufficient.
In the real world, there is no such thing as an interest-free loan to fall back on, particularly not from lenders who are willing to allow repayment to be on the never-never plan.
Further, there are not unlimited funds to tap for whatever: rather, it’s a zero sum game. Money spent on X won’t be available for Y.
As I’ve noted, the student loan has a built in safety valve in the even of hard times.
If paying off the student loan means that the person is going to have to borrow money to finance a car – then the person has simply shifted the type of debt they will take on.
If paying off the student loan means that the person doesn’t have reserves to deal with an emergency – that’s a problem. The person may end up needing run up credit card debt to cover a financial shortfall.
If the question were: my kid just won the lottery, should he pay off all his loans? Then the answer is - sure, he’s rich, why carry debt.
But very few students are in that position.
If, as a parent, you want to be your child’s safety net forever – and have the financial wherewithal to be able to do that- fine. Good for you. But it is unrealistic to assume that others are in the same position.
Not everyone is financially comfortable in paying off the student loans, especially if the total student loan amount is not small and the emergency fund is not large enough yet.
No matter how we spin it, mom and dad WILL be their “kids’s” backup unless they are financially challenged themselves. I once read that if the “kids” choose to forgo the purchase of a good coverage of health insurance, they are financially irresponsible for both themselves and their parents. The similar can be said about not building up their own emergency fund as soon as they could. If they do not have their own emergency fund and all of a sudden needs money in an emergency situation, the bank of mom and dad will be their backup. If the parents are well-off, it will be fine. But not all parents are well-off in their retirement or near retirement age.
Recently we had a related discussion. DS’s student account still has quite a lot of money. The amount could be easily used to pay off another year worth of his Federal Direct loans. We had paid off two-years worth of such Federal Direct loans. So if the third year Federal Direct loan were also paid off, it would be a very satisfying thing to do. But we think it may not be a good idea to do this for the similar reason mentioned by calmom. What if he all of a sudden needs some money for whatever the reason it may be? (e.g., need to replace/fix his car?) He would need some savings as an emergency fund – of course we could provide him with this emergency fund if we have it, but this is a big if.
So far, he decides against using that money to pay off another year of Federal Direct loan. We could raid our other savings (before tax one or after tax one) to help pay off some of them too. But we decide against doing too much of these also.
My wife has a bigger heart than me apparently. She has been very motivated in doing this (paying off his loans) in the past several years. I would never, say, borrow money from the 401K to do this like some people may do. She even thought of withdrawing all money from her IRA account to pay off some of his student loans (and I finally convinced her not to do that – if we do want to touch IRA to do this, we should touch mine, not hers. Hers is much smaller than mine. She has no problem with this if I actually choose to use mine to do this so I really do not know whether she has fully bought into my argument of “taking care of our own retirement first”.) This is because our nest egg is really not that large to begin with. If we do want to “shift the money around”, we would rather pay off our mortgage than his loans – paying off our mortgage will help with our cash flow in our retirement. At least it is much easier for us to pay off our mortgage than his student loans because the former is much smaller in comparison.
But the suggestion on this thread has been more than that - suggesting that the parents can help finance purchases like a new car with parental interest free loans.
And I am puzzled as to when this parental bail out is supposed to end?
I don’t disagree that in a true crisis - if the parents are financially able, they are going to help out… in theory. (Sometimes parents get tired of moocher offspring and cut them off-- it’s one thing if a kid with a history of being hard working and responsible has a short-term emergency, quite another when there is a continuous pattern of irresponsible life choice and one crisis after another).
But it seem to me that financial independence includes formulating a plan that doesn’t include parental bailouts.
I guess my view is colored by seeing situations where parents aren’t there any more – like the examples I’ve given.
I’m not sure that it’s helpful long term for a parent to be an enabler of poor financial planning.
I mean – I could pay off my house tomorrow. But I don’t want to be in a situation where I would have to take out a new mortgage to cover expenses – seems to me better to live within my means while I have an income.