When my children were little, I was under the delusion that parenting stops when your child becomes an adult. But the truth for many parents is that the need is still great for their adult children who stumble and even fall flat.
Such was the case for a mother who emailed me about the desire she and her husband had to help their son recover financially.
The backstory: Their son went to law school. He paid some of his education loans back but fell behind. Now the debt has mushroomed to almost $200,000. The interest alone on his student debt is more than $1,000 a month. Their son defaulted on the loans because of a drinking problem. Eventually he went to rehab. He’s out and has been alcohol-free for two years.
Currently, their son is working part-time for a public affairs firm. He makes about $60 an hour, but he’s not guaranteed a fixed work schedule. He plans to get a legal job if he passes the bar exam. He’s unmarried with no children and lives near his parents.
To help, the parents considered tapping their considerable retirement funds to pay off the debt for their son. Of course, if they take money out of their tax-advantaged retirement accounts, they will be hit with a big tax bill.
“We worked hard and saved this money, but we really want to help our son if we can,” the mother wrote.
What’s on the table now: The parents are thinking about using a 3.5-percent home-equity line of credit they already have in place. They figure that’s a lot less than the almost 8 percent for the law school loans. The line of credit is for $100,000, plus they could come up with an additional $20,000 in cash.
If they are going to make a lump-sum payment, they wonder if the lender would compromise on the amount so that they can pay off the whole thing.
When it comes to the home-equity loan, they would become their son’s lender.
“He can pay us directly with automatic deposit each month,” the mother wrote.
This isn’t just about this family. Lots of parents have asked about how to best help adult children smothered by student loans.
“When you hear stories about student-loan debt doubling, tripling or quadrupling, it usually involves an extended period of nonpayment,” said Mark Kantrowitz, publisher of PrivateStudentLoans.guru. “Interest continues to accrue during a default and can be capitalized.”
About negotiating the loans, here’s what Kantrowitz says.
— If this involves federal loans, there are three standard settlement offers on defaulted debt that collection agencies are allowed to accept without prior approval from the U.S. Department of Education. They include: (1) waiving the collection charges that are normally added to the payoff amount; (2) cutting the outstanding interest and principal balance by 10 percent; or (3) waiving half the interest that has accrued since the loan went into default. Note that a settlement like this requires a lump-sum payment, not a new payment plan.
Before bailing out their son, the parents should have him look into an income-driven repayment plan, which will base the monthly payment on his income. However, he can’t be in default to use this option.
— If these are private loans, he needs to call and talk with the lender about his options. “If he is seeking a settlement, he must make sure that he gets a paid-in-full statement and that the statement lists all of his loans,” Kantrowitz said.
He might be able to qualify for public-service loan forgiveness if he works full time in a qualifying public-service job while repaying the loans in an income-driven repayment plan for 10 years. But again, this option might not be available to him if he is in default.
Once his financial situation improves, he might be able to refinance the debt, says Scott Snider, a certified financial planner based in Florida.
“If he has good credit and gets a job, he may be able to do this on his own,” Snider said.
Here’s the thing: For now, I think their son needs to take ownership of figuring out how to handle the student loans. Since he lives near his parents, he could move back home and just use the majority of what he earns to aggressively pay back his loans.
The parents should not take out the home-equity line of credit. If they want to give — not lend — him a lump sum to bring the loans current, fine. But the last thing they should do is step into the role of banker.