Q: Our youngest son just graduated from film school, and while he looks for full-time work, he's doing some project work in the industry. He has federal student loans but also $94,000 in private loans with a $850 monthly tab. It has a 14-year payback term with no option to extend. He could put it in forbearance for a year with the interest still accumulating. I'm pulling from retirement funds to help now, but we don't know what to do. Help! — Debt-worried dad
A: That's a lot of debt to carry straight out of college.
It's very generous of you to help, but you're risking your retirement to do so. Of course we all want to take care of our kids, but as you get older, you may really miss the money you're taking out of your retirement accounts today. The funds you're taking out of the account are not only gone forever, but you now have a smaller balance accumulating gains over time.
If you are prematurely withdrawing funds from retirement accounts to help pay your son's student debt, forbearance for a year sounds like a reasonable road to take, said Brian Power, a certified financial planner with Gateway Advisory in Westfield, N.J.
A year can make a big difference, he said.
Power said depending on your age, if you're under age 59 ½, you may have to pay a penalty in addition to taxes on any withdrawals from a retirement account.
He said you might be better off borrowing from the 401(k) — assuming that's allowed by your plan — rather than take outright withdrawals because the tax and possible penalties are very severe.
Another benefit with the 401(k) loan is that you'd be paying yourself back the interest.
But a lot can change in a year, so the forbearance may be a reasonable option.
"The forbearance can buy you some time to look into other borrowing alternatives," Power said. "You may want to consider taking out a home equity loan to pay off the student loans. Home equity loans could reduce your payments significantly and provide a tax deduction on the interest payments."
[Editor's Note: Keep in mind that you'll need a good credit score to get the best rates on a home equity loan or line of credit. You can check your credit scores for free on Credit.com to see where you stand.]
Another possibility is to consider whether a family member would give your son a loan — a personal note.
"A family member could lend the graduate the loan amount or partial loan amount to pay off the student debt," Power said. "This will give the graduate a lot more flexibility on the terms of the loans such as interest rate and time frame to pay off the personal note."