While most grads are putting off having kids until closer to their mid to late-30s, this isn’t the case for everyone. If you’ve decided to become a parent and are still dealing with your student loans, should you start saving for your child’s college now? We wrote recently that parents are increasingly choosing to contribute less to their kids’ education, mostly because they are in dire financial straits themselves, but what should you do? Here are some things to consider.
#1 Are you eligible for Public Service Loan Forgiveness?
If you are a teacher, nurse, in law enforcement or another field that makes you eligible for PSLF, this is great. You can sign up for PAYE or IBR to get the lowest possible payments, then ride out your 10 years and enjoy the forgiveness benefits. In this scenario, saving up for your kid’s education makes sense as you shouldn’t be on the hook for your entire student loan balance.
#2 What are your interest rates on your student loans?
You may feel guilty if you don’t start a college savings account for your munchkin as soon as they’re born, but this may not be the smart money choice. 529 plans (educational savings accounts) pay interest rates akin to mutual funds. If your student loans are charging higher interest than the savings will pay, it’s wiser to focus on eliminating your debt first.
#3 Do you know the downsides of saving for college?
Planning and saving for your child’s college education is great, but it also can lower the amount of financial aid you’re offered. It counts as parental assets and can block you from some financial aid, even if you’re a lower income earner. If your child opts not to go to college, you’ll face big tax penalties to access the money you’ve saved. It’s critical to understand financial aid and how assets matter.
#4 Can someone else contribute for you?
If your money is tight and you’re dealing with student loans, asking others to chip in may be a sound strategy. You can set up a 529 account and ask friends and family to donate to that instead of buying costly birthday and Christmas gifts. A modest present and an investment in their future makes more sense than a toy box full of stuff your kid likely won’t play with for too long.
#5 Are you taking advantage of free benefits?
If you just don’t have money to spare, sign up for uPromise.com, a free program where participating retailers, restaurants and online stores donate a percentage of your purchase to a college savings account on your behalf. Register your credit/debit card and when you eat out, you can earn cash back, as well. You can also ask friends and relatives to use your uPromise portal when shopping at participating stores and restaurants to really ramp up how much you can save without impacting your wallet.
Even if it makes you feel like a bad parent, you need to slow your roll on donating significant funds to your child’s college account and prioritize your own student loans first unless you qualify for PSLF. Think of it like on an airplane when you’re supposed to put your oxygen mask on, then help your child. If you don’t take care of your own finances, you won’t be poised to help them in the future.