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

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 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 loans to help your child manage the cost of school the right move? 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 retirement

Before you sign up to take on debt, think about how it will affect your retirement. 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? Will taking out a loan for college mean that you’ll need to work for a longer period of time to retire? Talk to a financial professional, like a Certified Financial Planner, 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 annually

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 this aid, your child must file a FAFSA.

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. 

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 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 financial future 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 long run. 

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 7.08%. If you’ve taken out private loans, your interest rate will vary, but fixed rates currently range from 5.48% – 12.87%

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. 

Talk to your child

Another option you’ll want to consider is talking to your child about your student loans. 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 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 health. 

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