As you start to grow your family, you may be wondering whether you should continue to aggressively pay down your student loans or start saving for your little bundle of joy’s college fund. Do you immediately set up a 529 to start saving for their college expenses? Or should you focus on paying your student loans before saving for your kid’s college? Here is some information to consider before you decide.
For the 2018-2019 school year, families spent an average of $26,226 on college. With tuition rates and the cost of living increasing, higher education can be an expensive endeavor to undertake. In 2019, 64% of families planned to pay for college by saving, according to Sallie Mae’s “How America Pays for College 2019 Study”.
With all this in mind, you may think it’s a good idea to start saving for your child to attend college when they are a newborn. Perhaps the heavy burden of your student loans is something you want your child to avoid. However, it’s important to consider some factors:
Do you have a healthy retirement account?
Financial experts will argue you should not save for your child’s college expenses if it prevents you from saving for your retirement. The argument is based on the fact that you can’t borrow for your living expenses in retirement, but your child can borrow for school costs. If you wait to save for retirement after sending your child off to school with their tuition saved for, you will be missing out on vital years of compounding. Saving for retirement early can earn you thousands of dollars more than if you were to start saving later!
What do your other debt payments look like?
Is your financial situation stable enough to be able to pay tuition or save for future tuition costs? To determine this you should consider what debt (including your student loans) you have. Are you able to make all your debt payments? Do you have an emergency fund you are contributing to? If you have unpaid debts or don’t have an emergency fund, you may need to delay saving for future college expenses at this time.
Can you afford tuition payments or monthly college savings in your budget?
If saving for your child’s college expenses is a priority for you, plan for it in your budget. If you are able to continue making your own student loan payments, save for retirement, and continue to build an emergency fund while saving for your child’s college expenses, go for it! Ready to make a budget, but not sure how? Check out this budgeting method.
Options to Consider
If you want to help with your child’s college expenses but it’s not financially feasible at this time, here are some ways you may still be able to help:
- Refinance your student loans. If you are trying to save some money in your budget for your child’s college expenses consider refinancing your student loans. Refinancing allows you to obtain a new loan, presumably at a lower interest rate, to pay off your old loan. The new loan with a lower interest rate can result in significant savings for your monthly payment and in interest costs over the life of the loan. This monthly savings can go directly into your child’s college savings. To find out how much you may be able to save, check out our student loan refinance calculator.*
- Don’t feel bad if saving for your child’s higher education is not something you can afford. In 2019, 50% of families borrowed for college. This figure also includes families who had some savings. Student loans, both federal and private, are an important resource to pay for college expenses. Help your child determine how much they need to borrow and compare their options.
- If it’s not in the budget to save for future education expenses start saving any cash gifts your child receives. Take those gifts and open a 529 plan for your child. A 529 is a tax-advantaged investment account that allows you to save for qualified higher education expenses such as tuition and room and board.
Ways to Save on College Costs
When you are deciding how to pay for college expenses, be sure to include your child in the discussion. After all, they will be starting their adult life and should have a good understanding of finances. Here are some points of discussion to get you started:
- Can they take Advanced Placement classes or do dual enrollment in high school to earn college credits? Earning college credits while still in high school is significantly less expensive, or possibly free in some cases, and can cut down on the required number of classes when they actually attend college. This can help them graduate early or reduce the amount of tuition you need to pay.
- Is your child considering a private or public college? The type of school they are considering can have a significant impact on the cost. In 2019, the average cost of a private school was $48,510 per year compared to $21,370 for a public college. Though the sticker price for a private college is a lot higher, private schools often have the ability to give more generous financial aid. Before eliminating a potential college due to costs, be sure to look at their financial aid statistics.
- Will they be eligible for any scholarships? There are a number of general and niche scholarships that your child can apply to. College Board’s Scholarship Search is a good resource to find out about scholarship opportunities. Tip: Be sure to fill out the FASFA, which allows you to be eligible to receive aid such as grants, scholarships, work-study and federal student loans.
- Will your child have a job during school to help pay for expenses? A job on campus can be a great way for a college student to be more involved on campus and earn money for their living expenses.
The ability to help your child pay for future educational expenses can be a great feeling. But before you take on this endeavor, you’ll want to be sure that your financial situation is stable enough. Armed with this information, you can make an informed decision for how you can successfully pay off your student loans and save for your child’s college expenses.
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