Using inheritance to pay off student loan debt

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question Dear Sally,
My husband and I are 62 and 59, respectively. I owe $181,000 in consolidated government student loans under my name (mixture of Parent Plus and Stafford loans for me and my kids). None of this is under my husband’s name, so I understand that if I die, the loans disappear even though I live in a community property state.

My problem is that my loans are at 5.5 percent interest and my payments are $1,040 a month and it really inhibits our lifestyle. I have an inheritance in the bank that will just about pay off the balance, but I am unsure if this is the wisest thing to do.

Where can I get guidance on what my best course of action is? Should I pay them off and free up the cash flow? Or should I scrimp by and pay the minimum, knowing that I'll probably never pay them off before I am unable to work anymore? – Shirley


Dear Shirley,
Wow, $181,000 is a lot of money to owe in student loans! In retrospect, taking out that much in student loans, unless people are entering very lucrative lines of work, may not have been the best decision. Many people get a college education without taking on that much debt.

Of course, you didn’t spend that money all by yourself. My question is, where are your kids? Why are they not paying their student loans? They’re the ones who should be earning more thanks to a college education. They’re still young and have many prime working years ahead. You can’t afford to be stuck with their bills.

The first thing you should do is talk to your children and tell them that they must pay their share of the student loans. Even if it would be a good idea for you to use your entire inheritance to pay off their student loans, you shouldn’t have to. Perhaps your kids have never known any details of your finances. Some of us have a little too much pride, and hate to admit that we can’t afford everything our kids want. It’s time to be honest, and to get your kids on board with helping you pay this off.

It’s OK to appeal to your kids’ self-interest in asking them to pay their own student loan bills. If they don’t take responsibility for the loans, their inheritance from you will be reduced. They may have to help you financially as you get older. You may even show up with suitcases in hand at their house to stay if you’re unable to save for your old age.

If your kids do start paying their share, you may want to pay off your portion of the loans with your inheritance money. Unless you have substantial retirement accounts and other plans for retirement, however, I do not recommend you drain the entire fund. You need an emergency fund, and you need retirement options.

A better idea would be to get a decent return on your inheritance fund. If it’s in the bank, it’s probably paying you less than 1 percent annual interest at the moment. If you have $180,000 in a bank savings account and earn 1 percent interest, that’s $1,800 a year, and then you have to pay tax on that. You’re not even keeping up with inflation.

You can do a lot better by diversifying your investments. Perhaps you can take part of the money and make a down payment on investment real estate, or in a real estate investment trust (REIT). You could buy mutual fund shares, or a solid stock that pays dividends. You can choose from many moderate- to low-risk investments that pay better than the bank (and at our age, we need to stay away from anything high-risk). If you don’t know where to start, seek professional investment advice.

Your inheritance is a huge asset in your favor. If you start getting a good return from it, you can increase your cash flow significantly. If your kids also pay their share of the student loans, you should be able to live a comfortable lifestyle and still save for a more secure and enjoyable retirement.

As far as your husband’s liability for your student loan debts goes, you probably have nothing to worry about. If you and your children incurred the loans before you were married, he is not liable for them. Debts that belong to you before the marriage do not become community debt.

Most debts acquired after marriage in a community property state are community debt, but student loans are sometimes an exception. If you should die, your husband could be held responsible for private student loans you took out while you were married. However, he is unlikely to have to pay back any federal student loans in your name.

See related: Student loan debt regret, 8 ways seniors can ease student loan debt pain

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Updated: 11-22-2017