Most parents who forgot to set up a college savings account early on in their child’s lives, quickly realize it’s almost impossible to send their child to college without having to borrow a considerable amount of money to do so. The growing amount of student loan debt has reached a staggering $1.3 trillion, according to Forbes, second only to mortgage debt in the United States. This poses serious difficulties for students who face hefty loan and interest payments only months after graduation. Along with the stress of having to find a job, pay rent and make ends meet, graduates now have the daunting responsibility of paying off the substantial cost of their education.
Avoid a Loan if You Can
The cost of living has continuously gone up in recent years and, along with it, the cost of tuition and college expenses have also risen. Whether attending a public university, private college or even a trade school, many students are forced to take out loans to cover these increasing costs. This is an important factor when considering which school is best for your child. Knowing the different types of higher education options available and how much each will cost over the time it takes to complete the program is vital information to have. Depending on that number and how much money was saved in advance, you may not need a loan.
If you do have funds in a college savings account, make sure you know exactly what can be covered by these funds, as some accounts, like a 529 plan, can only pay for select “qualified” expenses and do not even remotely come close to covering all of the various costs associated with college. Using that information, you can create a budget so you know whether or not a student loan is necessary. If you must borrow funds to finance college, an important thing to remember is you don’t have to accept the full amount you are approved for. The more you borrow, the more you’ll owe in interest down the road when it comes time to pay off the loan. Only take what you need and live within your means to avoid large monthly student loan payments.
Student Loan Payments
The most popular loans available for students can be broken down into two types: federal loans that are funded by the government and private loans from financial institutions such as banks and credit unions. Federal loans are generally more attractive because they’ll offer deferment options in some cases. Otherwise, students only have a short time between the time they graduate and the time they need to make their first loan payment. Some federal loans are also subsidized, meaning the government will pay the student’s interest while attending school and for the first six months after graduation. Students need to qualify for financial aid to be eligible for this subsidized loan option.
Income-based repayment plans are also available on the market and can help lower monthly payments to a more management amount. However, this should only be a short-term approach to paying off the loan. The longer you make these smaller payments, the less of a dent you make in the principal amount and the more interest that is piled on. You will end up owing more and for a much longer time frame than the initial loan estimated. The best route to take is to pay as much as you can towards the loan each month to avoid carrying the debt for an extended period of time.
How Student Loan Debt Can Affect Your Child’s Future
Today it’s all too common to find graduates who were forced to finance their entire college education with student loans, unfortunately. This means an individual could owe tens or even hundreds of thousands of dollars before ever earning their first paycheck. In particular, young adults have felt the effects of this in many ways. They often are forced to postpone important life events such as starting a family or buying their first home because of their student loan debt.
Additionally, the job market today is incredibly competitive, even for those who have earned a bachelor’s degree. Having the proper schooling under your belt doesn’t always guarantee a good-paying job, and some struggle to get their foot in the door. This can lead to delinquent loan payments and penalties on top of what is already owed. Even further down the road, your child’s credit score can be affected which will impede approval for an auto loan or mortgage.
The best thing you can do for your child is to give them the gift of education by starting to save at an early age. With several college savings options available, you can choose how to invest your money and how it will be used towards your child’s education. A College Savings Trust is an ideal way to get started by opening an account in just five minutes and offering an easy way for your friends and family to contribute towards the account. With student loan debt reaching record levels, saving early and contributing consistently will lead to a secure future for your child that doesn’t include overwhelming debt.