Should You Help Your Partner Pay Off Student Loans?
With so many people graduating college with immense student debt, there’s a good chance that the person you’re in a relationship will have some student loans of their own. It’s natural to wonder whether you should help your partner pay off their loans.
Find out whether you help provide financial assistance to a significant other and learn about other ways that he or she can make their student loan debt more manageable.
Reasons to Help
If your partner has a large amount of student loan balances, there are a few reasons you might want to help them pay it off.
One of the biggest questions in any long-term relationship is how you want to handle your finances together. If you move in together, it might make sense to combine your finances because of all the joint expenses: rent, utilities, food, and so on, that you have to pay.
Usually, people who move in together are in a long-term relationship and have an idea of where they expect their relationship going. If you are in a long-term relationship with someone and don’t foresee that changing, helping your partner with student loans can be a good idea. This is especially true if you plan to combine your finances since you can see both your incomes as your joint income and both your debts as your joint debt.
You don't expect the money back
Unfortunately, when you give someone money to pay off their student loans, or for nearly any reason, there are no guarantees that they will pay you back. That’s what makes helping a partner pay off their loans risky. You could give your partner thousands of dollars to help with loans, but never receive something in return.
Before helping your partner pay off their loans, make sure that you’re willing to give the money to them as a gift. Don’t expect anything in return.
A major, upcoming loan needed
If you and your partner plan to buy a house together, helping your partner pay off their loans might help you qualify for a loan (such as a mortgage). This is because lenders will look at the debt-to-income ratio of anyone involved in the loan application when making a lending decision.
Debt-to-income ratio is calculated by dividing the total amount of debt you have by your annual income. The lower the result, the better it looks to lenders.
Here's an example: Say you pay $1,500 a month towards rent, $200 a month towards your car payment, $350 a month to your student loans, and $200 for other monthly expenses. If you make $42,000 a year, then your gross monthly income is about $3,500 a month. To calculate your debt-to-income ratio you would add up your monthly expenses, $1,500 + $200 + $350 + $200, which equals $2,250, and divide that by your gross monthly income, so $2,250/$3,500 = .64 or 64%. A good rule of thumb is to keep your debt-to-income ratio below 43%, in order to up your chances of being approved for loans and mortgages.
The reason lenders care about debt-to-income ratios is that they show how much money you have available each month to use on payments on new loans. If you make $50,000 a year and have $40,000 in debt, you’ll have a harder time paying off a new loan than someone who has $80,000 in debt but who makes $125,000 per year.
Helping your partner pay their student loans can reduce your debt-to-income ratio and help you qualify for a loan.
Reasons to Not Help
There are also many reasons to not help your partner pay their loans because it may not be the best move for your finances.
The relationship is new
If your relationship is relatively new, you should probably avoid helping your partner pay their loans. You can’t be sure whether the relationship will last. If it doesn’t, you have no way of getting your money back. You’ll simply have gifted the money to the person you are no longer with. Had you kept the money, you would be in a better financial situation, and had you stayed together you could use it to pay their loans once the relationship had lasted a while longer.
Separate finances preferred
Some couples who have been together for a long time have joint finances. They share bank accounts, credit cards, and treat all of the money that each partner makes as joint money. Though that works for some couples, many couples find it easier to keep their finances separate. This is especially common for couples where there is a large income disparity between the two partners.
If you and your partner have been together for a while, but you plan to keep your finances separate for the long-term, you might not want to help your partner pay off their loans.
Possible student loan forgiveness
If your partner has a large loan balance, it might be better for your partner to seek loan forgiveness than to try to pay off the loans ahead of schedule.
Your partner may be eligible for loan forgiveness on federal student loans if they meet one of the requirements listed by the federal government. One of the most common ways to qualify for loan forgiveness is to work for a federal, state, or local government, or a non-profit, for a certain number of years.
Money can grow faster elsewhere
If your partner has student loans with a low interest rate, you might be able to earn more money than you would save by paying the loans off early. If you invest your extra money and the annual return on investment (ROI) is greater than the interest rate of the loan, you’re better off investing than paying off the loan.
Over the past century, the U.S. stock market has returned an average of 9-10% per year. Of course, some years saw returns far higher, and some years saw losses. Because of the huge variance in returns year-to-year, investing in stocks rather than paying off loans can be risky. It’s up to you what interest rate you’re comfortable keeping on a loan.
Alternatives to Consider
If you don’t want to help your partner pay off their student loans, there are still ways to help.
Be a cosigner
This option is mentioned for the sake of putting it out there. Generally, it is not a good idea to cosign for any loan.
Take note that cosigning on a loan means that you become equally legally responsible for the loan. In the event that your partner stops making payments, you will have to start making payments on their behalf. If you don’t, your credit score will drop and debt collectors might start contacting you.
Cosigning is the same as giving money away with no expectations of repayment.
Deferment or forbearance
If your partner's financial struggles are relatively temporary with reasonable financial hardship, deferment or forbearance are viable programs that can help to reduce the financial strain temporarily. This may be what your partner needs to get their finances back on track without defaulting on their student loans payments. Each program has its own benefits, rules, and eligibility requirements -- not all loans are eligible and you'll have to be prepared to prove financial hardship to qualify for the programs.
Compare Deferment vs. Forbearance
Refinance student loan debt
Another way to help your partner is to help them refinance their student loans.
Refinancing loans involves taking out a new loan, and using that money to pay off the existing balances. You can use refinancing to reduce the interest rate on existing loans or to consolidate multiple loans into one. That can help your partner save money over the course of the loan, or free up some money from monthly minimum payments.
You can help your partner refinance by helping them find lenders who offer good deals on refinancing loans. Personal loans, and in some cases, balance transfer credit cards are possible ways to refinance existing student loans -- ideally when the debt is close to being paid off.
If your partner has a lot of student debt, it’s understandable that you’d want to help them pay off their loans. Take the time to consider whether it is a good idea to do this, and understand the risks that can be involved. Discuss your plans and the whole process with your partner to make sure that you’re both on the same page.