Student loan debt - college loans

3 Tips to Protect You and Your Child from Student Loan Debt

Student loans are a double-edged sword for many families. On one hand, they make college affordable for students who otherwise may not be able to afford the high costs. On the other hand, student loan debt can quickly accumulate, leaving graduates with payments they can’t make.

It’s not just students who take student loans, though. In fact, many parents take loans to fund their child’s education, through a program called Direct Plus. The number of parents taking Direct Plus Loans has risen in recent years, especially among those approaching retirement.

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 Many parents opt for Direct Plus Loans 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, you could still be on the hook for your child’s student loans after they graduate. Many loan programs require a parent to co-sign. If your child can’t afford to make the payments, you may be next in line.

As you approach retirement, student loan payments can be increasingly problematic. The loan payments may add up to hundreds or even thousands of dollars per month. Every dollar you spend on student loans is a dollar 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:

1.) Set a hard limit on retirement savings.

You may be tempted to reduce or even halt your retirement contributions so you can focus on paying for college or paying down student loans. This may be a mistake. Remember, you will likely need a substantial sum to fund your retirement, especially if it lasts several decades.

If you stop your retirement contributions to focus on loan repayment, you’ll lose not only those contributions but also their future growth. That could have a big impact on your savings balance when you reach retirement.

Set firm rules and limits on your retirement savings plan. Set a minimum contribution amount that you will make to your retirement every month, and treat that contribution like a mandatory expense. Also, resist the urge to tap into your 401(k) or IRA to fund college expenses.

2.) Be creative in your college funding strategy.

Perhaps the best way to minimize student loan debt is to reduce the cost of your child’s education. Granted, you probably want the best education possible for your child. However, that doesn’t mean you have to break the bank to pay for their schooling.

Be creative and think of ways to reduce the costs. Apply for every grant, scholarship and work-study program possible. Consider using a low-cost community college for the first couple of years of school. You may be able to avoid taking out student loans if you can keep the cost down.

If you need help with any of these aspects, don’t hesitate to seek out a qualified college financial planner. These specialists can help you to find financial aid sources you may not otherwise know about, share strategies to maximize your chances of receiving aid, and even coach your child on choosing the right major and career path so they don’t waste time in school by switching majors mid-way through and having to take additional classes.

3.) Include your student in the process – including the financial part.

Most importantly, be honest with your child. Help them understand the challenges that student loans can create, for both them and you. Show them how much you need to save for retirement, and explain how student loan debt may impact your retirement plans.

If your child has already graduated and you are paying for their loans, work out a plan to gradually shift responsibility for the loan to them over time. If they’re just starting the college process, ask them to contribute in any way they can, perhaps by maintaining good grades to qualify for a scholarship or working a part-time job. If they understand your challenges, they may be more willing to help.

Need advice on how to protect your retirement from student loan costs? Contact us today!  With a full suite of college planning services, plus unique and comprehensive retirement solutions, we can help you analyze your needs and develop the right strategy for you.



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