US parents increasingly impacted by children's student loans

Parents in the US are putting their retirement funds at risk by dipping into their savings to help pay for their children’s student loans, according an annual survey by Discover Student Loans. More than 60% of parents said they would be “likely” to help repay their offspring’s student debts and regarded them as a “shared burden”, while a survey by Fidelity said 8 out of 10 parents believed their children’s loans would prevent them from being financially independent. This follows our note last week highlighting the increasing financial reliance on parents in the UK by their children, "the Bank of Mum and Dad", with Legal & General warning that relying on parents might soon be unsustainable.

While it’s tempting to help your kids pay off their student loans, most of you shouldn’t do it, experts say — that is, if you want to ensure your own secure retirement.

A record number of parents — more than six in 10 — whose children will take out student loans to pay for college say they will likely help their kids repay those loans, according to the fifth annual survey of 1,000 adults with children ages 16 to 18 released Monday by Discover Student Loans, which offers student loans to consumers.

More parents say they’ll help their kids repay student loans

Percentage of parents whose kids took out student loans who say they are likely/unlikely to help them pay back the loans. 2016 2012 Likely to help repay loans 61% 55% Unlikely to help repay loans 34% 41% Not sure 5% 4% Source: Discover Student Loans

Some parents do this because they worry about the impact student loans may have on a child’s future. Indeed, eight in 10 parents are worried that student-loan debt will hinder their child’s ability to be financially independent when they graduate, according to a Fidelity survey. (And they have a point: A number of surveys find that those with student loans say they have put major life events on hold while repaying their loans.)

Other parents view their children’s loan debt as a shared burden that they should help out with, says Jodi Okun, founder of College Financial Aid Advisors and a brand ambassador for Discover Student Loans DFS, +0.41% . “Parents feel obligated to pay,” says Brittany Butler, a blogger at personal finance blog MissBFab.com. “They feel guilty that they never saved anything.”

“‘By age 40, you should have three times your annual salary saved ... by age 50, you want six times your annual salary saved.’” — Mike Falco, Falco Wealth Management

Whatever the reasons they’re pledging to help out, one thing is clear: The financial implications that come with paying off kids’ student loans can make for a “grim reality” for parents because, by doing it, they are often underfunding their own retirement, or in some actually withdrawing retirement funds, says Kimberly Foss, the president and founder of Empyrion Wealth Management. “As a parent, I understand the desire to help our kids, but as a financial professional, I caution against dipping into your retirement savings for anything other than retirement,” says Mike Falco, the president of Falco Wealth Management near Philadelphia. Though your kids can get loans for college, he says, “you are not going to find a loan to fund your retirement.”

As it is, parents are already undersaved: People in their 40s have a median retirement balance, including IRAs and 401(k)s, of just $63,000, and for those in their 50s, it’s just $117,000, according to data released in 2015 by the TransAmerica Center for Retirement Studies.

Most financial advisers recommend significantly more. Falco says a good rule of thumb is this: “By age 40, you should have three times your annual salary saved ... by age 50, you want six times your annual salary saved. ... So, for example, a worker who is making $50,000 per year should have $150,000 saved by age 40 and $300,000 by age 50,” he says.

Of course, many parents will find it difficult to cut their kids off entirely. So experts say that you could do something like let them live with you (which would at least help them save on rent) rather than paying significant chunks of their student loans. Or, rather than paying back the majority of their loans, start a “matching program,” says Eric Pucciarelli, the vice president of oXYGen Financial in Alpharetta, Ga. So, he explains, for every $100 they repay, maybe you contribute $25, he explains.

Falco says parents should also offer them financial mentoring. “Parents should help kids find the best options for repaying,” says Andrew Josuweit, the CEO of Student Loan Hero, a website that helps borrowers repay their student loans. “If their kids can’t afford their monthly payments, parents can help them enroll in an income-driven repayment plan. ... Help like this poses no risks to parents and still helps the child get a handle on their loans.”