Like most parents, you probably want the best possible education for your child. Unfortunately, that education can be very costly. From tuition to room and board to books and more, higher education is expensive. There are few families who can cover the costs directly out-of-pocket.
Many families turn to student loans to cover the high cost of education. While student loans can be a useful tool, they can also become problematic if they are used in excess. The balances can accumulate quickly, and so to can the payments. Graduates who are entering soft job markets may struggle to make their payments.
Student loans aren’t just an issue for graduates, though. Many parents are also feeling the sting of student loan payments. According to estimates from the Government Accountability Office, as of 2015 there were 2 million holders of Direct Plus Loans from age 50 to 64. There were an additional 200,000 Direct Plus Loan holders over the age of 65. Those numbers have more than doubled since 2005.1
Direct Plus Loans are a certain type of loan that allows a parent to borrow money to pay for their child’s education. Many parents opt for this type of loan to protect their children from student loan debt, or because they have greater borrowing capacity than their child.
Even if you don’t take a Direct Plus Loan for your child’s education, you could still be on the hook for student loan payments. Many loan providers require parents to co-sign for their children’s loans. If your child can’t make the payments after graduation, the burden may fall to you.
As you near retirement, these student loan payments can be increasingly problematic. If you’re covering some or all of your child’s payments, that’s money you can’t contribute toward retirement. You may even be forced to work longer than you’d like to continue making the payments.
Fortunately, there are steps you can take to ease the burden. Below are a few tips to help you minimize the pain of your child’s student loan debt and to protect your retirement:
It can be tempting to pause your retirement savings so you can pay down student loans or pay for education costs. However, this strategy could be a mistake. Remember that you will likely need a significant amount of assets to fund a retirement that could last decades.
If you stop your retirement contributions to focus on loan repayment, you could miss your retirement savings target. Make sure you keep retirement as a top financial priority. Set a firm amount that you will contribute to retirement every month, and don’t deviate from that amount for the sake of student loan debt.
Many lenders know that families struggle with student loan debt. That’s why some companies offer refinancing options to those who have strong credit. You may be able to refinance your loan balance into a product with a lower interest rate, which would allow you to pay down the debt faster.
You also may have access to lending tools that have lower interest rates, like home equity lines of credit. If so, perhaps consider using that funding to pay down the loans so you can get a lower payment.
Don’t assume that your child understands your retirement challenges. Many young people don’t fully comprehend how difficult retirement planning can be or how much money is needed to retire successfully. They may be under the assumption that you can afford to pay their student loans.
Have a conversation with your child and show them how much money you need to save to be able to retire comfortably. You also might remind them that if you don’t save enough to retire, it could be you who needs their help in the future.
If they understand your needs and goals, they may be more willing to contribute their fair share to paying off the student loans. If you’re making payments on their loans, consider working out a plan in which you gradually transfer the responsibility of the loan back to them over time. That allows them to make the necessary changes to their budget, and it gives you some certainty on when your share of the payments will end.
Need advice on how to protect your retirement from student loan costs? Contact us at Sprouse Financial Group. We can help you analyze your needs and develop a strategy. Let’s connect today.
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