Are You Paying For Your Child’s College? Think twice 3 times
TOne significant group is often neglected in the student loan debt debate: parents.
About 1 in 3 dollars the federal government borrowed for basic education last year was on a parent’s behalf. Overall, federal parental loan debt is over $ 103 billion with more than 3.6 million borrowers, according to the Federal Student Aid office.
But parents who want to help their children pay for college often fail. The Ministry of Education estimates that 9% of Parents PLUS loan borrowers default within two years of their child leaving school.
“They don’t think about the cost and the return on investment and whether they can handle the costs in retrospect,” says Jan Miller, president of Miller Student Loan Consulting. “You have to make the tough decisions now so that you don’t end up in an irretrievable situation later.”
Here’s a time you may not want to pay your child’s college and why is that okay.
Payments are getting too high
If you borrow $ 17,500 – roughly the average amount paid out to each parent borrower last year – at the current rate of 6.28%, expect monthly payments of about $ 197 and a total repayment amount of over $ 23,611 ten years.
If you borrow this amount annually for four years of college, the payments are approximately $ 788 with over $ 94,000 total repayments, assuming the interest rate stays the same and you pay on time.
Kristen Holt, CEO of Greenpath Financial Wellness, a nonprofit finance company that offers free student loan advice, says some people need to take out loans just to make payments.
âLook at the budget and what you can afford,â she says. âIf you don’t, you will be in this perfect storm that you have to make it through [debt] Debt payments, âshe says.
When you feel guilty, think of Holt’s philosophy: parents cannot help their children understand options without first knowing their own limits.
Tuition fees weren’t part of your retirement plan
According to a 2017 report by the Consumer Financial Protection Bureau, those over 60 with student loans will struggle to meet basic living expenses and are more likely to have social security garnishes for unpaid debts.
Additionally, a 2021 NerdWallet survey conducted online by The Harris Poll found that 26% of parental PLUS borrowers say they will not be able to retire as expected due to their loan debt.
Calvin Williams, CEO and founder of Freeman Capital, says he knows how to give his child the best they can. âBut if you don’t plan and take care of your retirement, you could ask your child to look after you in your later years. In many ways, your child comes first for your own retirement provision, âhe says.
Keep this in mind: if you pay that $ 788 per month for 10 years to college instead of investing in retirement, you could get $ 128,000 poorer on a 6% return.
You have no limits
Miller says many of his customers expected their child to help with payments – but it didn’t happen.
The NerdWallet poll found that 22% of Americans with PLUS parenting loan debt thought their child would make the payments, but they haven’t yet.
“It is important that parents and students discuss how to share college costs in a realistic and mutually agreeable manner,” Manny Chagas, vice president of Discover Student Loans, said in a press release. He suggested using free online budget calculators to start the conversation.
Families should discuss what’s important and be open about money, says Elizabeth Sterbenz, a marriage and family therapist who specializes in financial therapy. “You want to give your child the moon, but being really realistic gives you a lot of clarity,” she says. “We all do our best with what we have.”
Are you considering parenting loans?
Before you commit, ask yourself:
Are You Risking Retirement? While your child can borrow for school, you cannot borrow for retirement.
Are you struggling with other debts? Having a credit card balance or other high-yield debt is a red flag.
Can you afford payments? Do the math. Schedule student loan payments to make sure they fit.
Do you have an emergency fund? Don’t force yourself to choose between having a medical emergency or paying a student loan.
Have you dared to take the plunge?
If your income is lower, explore Income-Based Repayment, which caps monthly bills to 20% of your disposable income and extends the repayment period to 25 years.
If your child is financially stable, consider refinancing on their behalf. You will likely need a credit rating of over 600 and a stable income to qualify. You can also refinance on your own behalf.
If a disability prevents you from working, ask about dismissal. This is available for federal loans and some private loans.
This article was written by NerdWallet and originally published by The Associated Press. It has been updated.
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Cecilia Clark writes for NerdWallet. Email: [email protected]
The Article Are You Paying Your Child’s College? 3 Times to Think Twice originally appeared on NerdWallet.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.