How to Help Your Adult Child Deal with Student Loan Repayments

Your not-so-recent college or university graduate may be feeling the financial pinch of repaying their student loan. The U.S. Dept of Education announced April 21 that it would resume collections from individuals who had defaulted on their repayments.

Then President Biden suspended loan collections in March 2020, when a national emergency was declared due to COVID-19. When Congress instructed the administration in October 2023 to resume collections, no action was taken.

The department now says more than 5 million borrowers have defaulted on a combined $1.6 trillion debt. The announcement says it is sending a message that “student and parent borrowers—not taxpayers—must repay their student loans.”

Restarting payments may be difficult and costly, and penalties for falling behind can harm a borrower’s credit rating. Who’s most affected? Borrowers between the ages of 35 and 49; they collectively owe $650 billion, according to Scripps News. However, everyone who graduated six months ago, with some exceptions, must start paying back their education debts.

Many debtors have not planned or today lack the financial resources to resume repayment and escape default status. One solution: tapping a home equity line of credit.

Older loan holders who have owned a home for a while probably have equity created more through appreciation than through loan payments. The median price of a home sold in the first quarter this year was $416,900 nationwide, a 26% increase from $329,900 in the same period of 2020 when the pandemic began, according to the Federal Reserve Bank of St. Louis.

What if the borrower doesn’t own a residence? A parent, who may be a loan co-signer, can tap into their home equity to help the adult child.

Financial institutions like Tropical Financial Credit Union offer home equity lines of credit and home equity loans. If the amount you can repay could fluctuate each month, an equity line, or HELOC, could initially be a better choice because a loan will have larger, fixed payments.

Either form of borrowing equates to a second mortgage. Here’s what to know before applying for a HELOC:

• The amount you can borrow is a percentage of your home’s appraised value after subtracting the first-mortgage balance. Tropical Financial lends up to 75% of the loan-to-value ratio.

• The lender will consider your total debts–mortgage, car, credit card payments, and so on–when considering how much you can borrow. That figure is usually capped at 43% of your gross monthly income.

• Your credit history factors into the approval process and loan rate.

• During the draw period, when you can tap your home’s equity, you may get by with only interest payments or a minimum of 1% or 1.5% of the amount borrowed. After that time, usually 6-10 years, you will make uniform principal and interest payments as you would with a mortgage or car loan. Tropical Financial has no pre-payment penalties.

• The interest rate depends on the lender. Some adjust it with an index such as the prime rate, while others lock it in for a set number of years.

• You should expect to pay fees, including an appraisal, for applying and possibly an annual fee for having the account. Tropical Financial has no closing costs for loans up to $250,000.

Why go to all the trouble of trading one debt for another?

• Income-driven repayment plans are in flux due to court injunctions that make them unavailable.

• Consolidating defaulted loans into a Direct Consolidation Loan to pay off existing debts creates complications for borrowers with income-driven payment plans because the credit they earned toward loan forgiveness is wiped out.

• A U.S. House bill would repeal three income-related plans known by their acronyms, SAVE, PAYE and ICR. The proposed law would affect current borrowers. Meanwhile, the education department has proposed changing the ICR and PAYE regulations.

You can learn more about student loans at the credit union’s Knowledge of Financial Education website.