Should You Let Your Parents Pay Off Your Debt And Then Repay Them?

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piglet staring at cat outside window

Sometimes, it pays to embrace the unknown—especially if it leads to a new friend for Piglet (or, in our reader’s case, a better loan situation).

Helping people understand student loans is our job at SALT™, and few are better at it than Betsy Mayotte—the director of regulatory compliance for American Student Assistance® (our parent company). We told borrowers to “Just Ask” her questions, so check out her answers below (as well as her cat—because if Piglet can’t make student loans better, what can?). 

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Parents Offer To Pay Debt

I have $70,000 in debt from going to school and a 6.8 percent interest rate. My parents would like to buy this debt from me and then have me pay them back at a 4 percent interest rate. I have a good job, and I am on track to finish paying my loans by 2015 with my current interest rate. But with my parents help, I can pay back the faster and they would get a better return than they are currently getting from their retirement plan. Are there any legal reasons not to do this?

First, let me make sure you understand that I am not a certified financial planner and you and your folks may want to consult one regarding this decision.

With that said, from a financial perspective, it sounds like this might be a good idea for all parties for the reasons you described. There is risk, however. While you seem to be in a great financial position now, sometimes the unexpected can happen—job loss, injury, illness, etc., and if the loans remain where they are, you may have options to lower or postpone your payments. Also, if the worst were to happen (total disability or worse), the loans would be forgiven. If your parents had paid them off, they’d just be out the money. You should all think all of these things through before making this decision.

You also need to think of the potential emotional strain this might have on you and your parents’ relationship. Do you ever watch Judge Judy? If she has said it once, she’s said it a million times: Don’t ever lend money to or borrow from family!! Joking aside, it really is something you will need to think about. If you decide to do this, make sure you both sign a promissory note outlining the terms and conditions of this loan.

Dealing With Default From 20 Years Ago

My daughter has a friend who left school during his first semester because his father had a heart attack and his mother needed his help. This was about 20 years ago. He did not talk to anyone at school about his loan, as he did not know he was supposed to. He has been in default all these years, which ruins his credit and his chance to go back to school and receive further financial aid. Is there anything to be done?

Oh yes, there are several options for your friend—I’m glad you reached out. Assuming this is a federal loan, he can either consolidate or rehabilitate the loan out of default. Doing so will improve his credit and allow him to be eligible for future financial aid if he needs it. There are pros and cons to both options so here’s a good summary of each. Once the loan is out of default, he will again be eligible for lower payment options and deferments if he should need them.

Student loans generally have no statute of limitations so even though it’s been a long time since he addressed this loan, it’s important he resolves it. If he happens to be able to pay the loan in full now, he may be able to get the loan holder to agree to reduce the interest or some of the collection costs in a settlement agreement.

If he’s not sure who is holding his loan he can log into the National Student Loan Data System at www.nslds.ed.gov He should contact that loan holder to get started on either of these plans.

Have a student loan question you need an answer to? Just Ask.

(Note: The questions and answers above are real; however, they have been edited for grammar and clarity, but not by Piglet.)

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  1. Dave Parker September 24, 2013 / 7:43 pm

    Re Parents Offer To Pay Debt.

    Assuming that the parents step in to end the original creditor relationship; i.e. the student loan-lender is paid off entirely, then this is akin to consumer debt consolidation, where the parents become the new creditor ‘organization’. Despite family, the arrangement should be documented and regarded as formal. The responsible debtor should expect, if not insist on this. As noted, there is genuine potential for strain upon the family as a result of this type of arrangement.

    With the debt consolidated, the smart graduate debtor needs to concentrate on how they can put more money towards repayments. This means paying back more money than was being routinely repaid to the original creditor (at 6.8%). In order to do this, earn more money, but crucially, release money that can be used to increase repayment by overhauling your personal budget with a fine-tooth comb. Reduce costs and cut down and out on expenditures. Redirect this ‘saving’ to those awesome parents in the form of increased repayment and never forget what they did for you.

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