Dear Penny: I’m Getting $165K in Child Support. Do I Pay Down My Kids’ Loans?
I will be getting nearly $165,000 in child support arrears from my former husband. I have two kids in college. (Dad doesn’t contribute.)
We’ve taken out private student loans to pay for their college tuition. Should I pay toward the loans, or should I invest in something yielding a higher interest rate than their loan interest? I am currently paying all the interest, so as not to compound their loan amounts. I do intend to use part of a yearly bonus to pay off some of the loans as well.
Sure, it’s possible to get returns that are higher than the interest you’re paying. In an average year, an S&P 500 index fund produces returns of about 10%, which is probably a lot more than the interest rates on your loans. Of course, you could also lose money, as we’re all painfully aware of in the abysmal stock market year of 2022.
Meanwhile, paying down your kids’ student loans presents a guaranteed return in terms of the money you’ll save on interest. But the biggest rewards aren’t quantifiable.
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Think about the enormous burden you’ll be lifting off your kids’ shoulders if they can start their careers owing a combined $165,000 less. Think of how much less stressful living on an entry-level paycheck will be. Think of the dreams they won’t have to delay because you’ve made their debt more manageable.
But this isn’t just about your children. Since it sounds like your name is on these loans — which is typical, since most private student loans require a parent co-signer — you’re every bit as responsible for repaying them as your kids are.
By wiping out a substantial portion of this debt, you’ll be in a better position to pursue your own goals. When you’re on the hook for a substantial balance, student loans pose a real risk to your retirement. Reducing the balance will also help if you need financing for a major purchase. As long as your name is on these loans, it will increase your debt-to-income ratio, which makes it harder to get a loan.
The fact that these are private loans makes me even more adamant that paying them off is the right decision. With federal student loans, borrowers have options like forbearance and income-driven repayment programs if they encounter tough times. But with private student loans, borrowers are forever at the mercy of the lender.
My other big piece of advice is to be cautious about accruing additional student loan debt, since your children are still in school. Make sure you’ve exhausted all your options for federal loans, including Parent PLUS loans, before you take out more private loans. Because of the flexible repayment options federal borrowers get, borrowing from the government is typically a safer bet, even if a private lender offers a slightly lower interest rate. If your kids can work part time so they can borrow less, that should be on the table.
Reducing this debt is hands-down the best way to use this $165,000. Consider it a guaranteed investment not only in your children’s future, but your own.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].
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