Are you helping your adult child by making some or all of their student loan payments? Or did you even take out student loans yourself to pay for their education? You’re not alone.
According to estimates from the Government Accountability Office, as of 2015 there were 2 million holders of Direct Plus Loans from age of 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 type of loan that a parent can take out to pay for a child’s education. Parents often choose to take these types of loans because they think they’re in a better position than the child to make the payments, or because they don’t want to see their child start their adult life in a challenged debt position.
It’s natural to want to help your child succeed in life. Student loans are a serious challenge for many young graduates. The desire to help your child avoid the burden of student loan debt is understandable.
However, every dollar you pay toward student loans is a dollar you can’t use to fund other financial goals, like retirement. It’s possible that you may not be saving enough for retirement because a sizable chunk of your income is going toward student loan repayment.
Fortunately, there are steps you and your child can take to better manage the situation. Below are three tips to help you get your student loan situation under control. If you are shortchanging retirement in favor of student loan debt, now may be the time to take action.
Lenders are aware of the challenges many families face with regard to student loans. That’s why many lenders offer refinancing products to help reduce the burden of student loan interest.
If you or your child has strong credit, you may want to explore refinancing the student loans to get a better interest rate. That could reduce your monthly payment and allow you to allocate more money toward retirement, or the lower interest rate could help you pay down the balance faster.
Cut back on spending aggressively to pay down the balance.
If retirement is approaching quickly, you may want to consider aggressively cutting back on your spending so you can keep contributing to your retirement accounts, but also pay down the student loan balance. You probably don’t want to carry the student loan payments into retirement with you. You might find that your retirement budget is stretched to begin with and that the added burden of student loan payments makes retirement a financial challenge.
It may not be fun to cut back on things like vacations, shopping and expensive hobbies for a few years. However, your future self will thank you when you don’t have to make student loan payments in retirement.
Talk to your child.
If you are making payments on behalf of your child, it might be time to have an honest conversation with them. Talk about how the student loans are impacting your ability to save for retirement. You also may want to show them how if you don’t meet your savings goals, it could be you asking them for help in the future.
Your child may not be in a position to take over the loan payments all at once. However, you could come up with a graduated schedule in which you transfer the responsibility for the payments back to them over time. That gives them advanced warning so they can plan, and it gives you some certainty so you can better plan for retirement.
Ready to develop a strategy for your child’s student loan debt? Let’s talk about it. Contact us at Bam Advisory Group. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
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