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Parents: How to Keep Student Loans from Derailing Your Retirement Plans

Conquer your student debt. Refinance now.

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It seems like just yesterday you were bringing home a new baby, surviving those sleepless nights, and dreaming about who he or she would become in the future. You blinked, and somehow eighteen years have gone by. Now those dreams that you had about sending your child to college are becoming a reality—one that you might not be completely financially prepared for.

As you explore financing options you might soon learn that your student isn’t the only one who can take out loans. The government offers parent PLUS loans which allow you to borrow up to the cost of attendance, minus any financial aid received. Parents can also turn to private student loans, where the borrowing limits vary by lender.

In 1990, parent borrowers took out $5,200 in student loan debt per year on average, but the amount parents are borrowing has risen rapidly. By 2014 it had more than tripled to $16,100—in 2018 3.4 million parent borrowers owed $87 billion in parent PLUS loans. 

But is taking out extra money to help your child manage the cost of school the right move for your financial goals? And how can you ease your own financial burden if you’ve already taken on debt? Here are some things to consider. 

Before You Take Out Loans

If you haven’t taken out loans for your child’s education, you’ll want to consider these things before you do:

Check-in on your retirement fund

Before you commit to student loan payments, think about how it will affect your savings goal and retirement account. According to a Bankrate study, at least 50% of parents say they’ve cut into their retirement savings to financially help adult children. 

Are you on track with your retirement savings? Do you already have an emergency fund in place? Do you need to have extra cash on hand for any expected major expenses (ex: a down payment). Do you already have high-interest debt, like credit card debt, that you need to tackle? Will taking out a loan for college mean that you’ll need to work for a longer period of time to retire debt-free? Talk to a financial expert to answer these questions. Or do your own retirement estimation with online retirement calculators (try NerdWallet or CalcXML). 

While you may struggle with the idea of seeing your student take on debt, keep in mind that if you’re unprepared for retirement because you’re trying to pay off debt from their education, that may be a burden on them.

Fill out the FAFSA every year

Navigating the paperwork that comes with college can be confusing. But filling out the Free Application for Federal Student Aid, or FAFSA should be at the top of your to-do list, even if you are not sure if you will qualify for aid.

The US Department of Education awards over $120 billion annually to students in the form of grants, loans, and work-study funds. But to qualify for free money and other aid, your child must file a FAFSA. You will also need to file the FAFSA to see what federal student loan options your family qualifies for. 

Students should file a FAFSA annually—the application opens on October 1st for the following year. Money is awarded on a rolling basis, meaning the earlier you submit the FAFSA, the better. 

Consider federal student loan interest rates

Most federal student loan rates are set at a fixed rate and don’t take an applicant’s credit profile into consideration. This means that undergrad students with a thin credit report are able to borrow at a low interest rate that they might not see elsewhere without a cosigner. It also means that many parents might be able to qualify for a lower interest rate with a private lender if they do have a strong credit score, than the federal Parent PLUS student loan rate. 

Weigh the additional federal student loan repayment plan options for parents before deciding if you want to apply for a private loan with your student 

If you are worried about your student taking on debt and their ability to make the minimum payments after graduation, you could work with them about how you can support them for a set amount of time after graduation until they have a job lined up. 

Understand your liability

Before you decide on any loan options, it’s important to understand who is responsible for repayment. If you take out a student loan for your child’s education, whether that be a Parent PLUS loan or a private student loan, you’ll be on the hook for repayment. Your child won’t be required to make those payments. 

If your child asks you to cosign on a private student loan, you’ll be legally responsible for paying the loan if your student is unable to. Understanding your loan responsibility and your own financial situation before borrowing money will hopefully mean there are fewer surprises during the repayment process. 

If You’ve Already Taken Out Loans

If you’ve already made the decision to take out loans for your child’s education and are now trying to figure out how to repay it without sacrificing your savings account as well, you’ll want to consider these options. 

Graduated or extended repayment plans

If you’re struggling to make payments and you have a parent PLUS loan, you have the option of choosing a different repayment plan. Two options exist to extend these loans: graduated and extended repayment plans

With a graduated repayment plan, your payments will start off lower and will gradually increase over a 10 year repayment period. With an extended repayment plan, you can take up to 25 years to repay the loan, which can decrease your monthly payments. But watch out: with both of these options you may find yourself paying more in interest over the financial life of the loan. 

Refinancing

Your interest rate on the loan can add significantly to the total cost that you have to pay. On a parent PLUS loan, the current interest rate is 5.30%

Refinancing your loans can save you money by decreasing your interest rate, which can reduce both the amount of your monthly payment and the total amount of interest you pay. As a parent, you may be a prime candidate to refinance your loans: lenders often look for a long and well-established credit history when making a refinancing decision. 

It is important to consider any federal loan repayment options you would be giving up by refinancing. 

Talk to your child

Another option you’ll want to consider is talking to your child about the student loans that you took on to support their goals. While you are the one legally responsible for repaying the loan, if your child is able to, they may want to help you repay the debt you incurred to finance their education. Talk to them honestly about your debt and whether it’s affecting your living expenses or ability to adequately save for retirement. 

College is expensive, but so is retirement. While you may want to help your child with the ballooning costs of college, you should avoid doing so at the detriment of your own financial priorities. 

Conquer your student debt. Refinance now.

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Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.