The summer is going too quickly! It’s hard to believe, but if you have a college student in your life, they’ll be heading back to campus in just a few short weeks. If you’re covering tuition, how can that affect your retirement savings?
According to a NerdWallet survey, 28% of parents polled said they paid, or are paying, for their adult children’s tuition or student loans.
On average, parents borrow $21,000 to pay for their child’s college education. But if the total repayments on money borrowed were directed into a 401(k) plan or IRA over ten years (the typical student-loan repayment period), these parents could have potentially saved up to $80,000 for their golden years instead.
Most parents want to do everything they can to help their child succeed, and it’s tempting to offer to chip in to cover tuition costs. But how can parents protect their own financial futures at the same time?
Many financial experts suggest that if you haven’t already taken out a loan for your child’s tuition, your child should first borrow money himself. That’s because your child will have a long time horizon to pay off federal student loans, which also tend to have lower interest rates than other kinds of loans.
Parents who are set on taking out a loan to help defray tuition costs for their child should investigate Parent PLUS loans. These are federal loans that allow parents to borrow money for children who are enrolled at least part-time in an eligible program.
Unlike other types of federal student loans, Parent PLUS loans have almost no limits on the amount borrowed, allowing parents to borrow up to the full cost of attendance minus any other financial aid received. It offers a few different options for repayment, and the interest rate is fixed for the life of the loan.
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Interested in applying for a Parent PLUS loan? Here are some things to consider:
- You must pass a credit check (although excellent credit isn’t a prerequisite for approval);
- You must be a U.S. citizen or national;
- You’ll likely pay a higher interest rate on a Parent PLUS loan than on other types of parent-student loans;
- You must pay a loan origination fee for the Parent PLUS loan, which can run up to several thousand dollars; and
- You must begin repaying a Parent PLUS loan immediately, unlike other student loans that allow deferred repayment (although you can apply for deferment, which will let you postpone repayment while your child is in school and up to six months after graduation)
Remember: while your college student can always borrow money for tuition, there are no loans for retirement.
Not sure about the best way to help your child afford college? Reach out and let’s talk.