If you’re a college grad, you may likely be among the 44 million American adults with hefty student loans to pay off. Collectively, Americans owe more than $1.5 trillion in student debt, with an average of $37,172 owed per graduate.
Add that on top of other monthly expenses and savings goals, and many adults are struggling with making wise financial choices, particularly when it comes to deciding between paying off their own debts and saving for their kid’s future educational expenses.
Fortunately, you may not need to choose. Although it can be difficult, there are steps to help you pay off your student loans while saving for your child’s college expenses.
Starting to Save for Kid’s College Tuition
You may have heard people recommending waiting until you’ve paid off your own student loan debt before you start saving for a child’s college costs. For many, however, this may be impractical. In fact, it also conflicts with the other frequent adage parents hear about saving for their kid’s college tuition: Start early.
When you start saving early, your money has time to grow, which means that you can get more bang for your buck when it comes time to pay that tuition deposit.
So what’s a parent to do? Well, there are a few things to consider when deciding when you want to start diverting some money towards college savings every month.
First, even though you may not be finished paying off your own student loans, you may want to consider it if you’re on track with your other financial goals. For example, do you have an emergency fund and a plan for retirement?
For many, these goals may need to come first before saving for your child’s college. After all, you don’t want to end up in debt during retirement because you prioritized education expenses.
Managing Student Loan Payments While Saving
If you’ve decided to start saving for your kid’s college while still making your own student loan payments, it is important to stay organized. It can be a big mistake to miss student loan payments in favor of sticking money in savings for future expenses, as unpaid student debt can rapidly snowball.
Likewise, your unpaid student loans can continue to rack up interest if a balance remains on the debt, so making smaller payments because you’re saving for a child’s tuition might leave you owing more in interest on your own student loans, which could negate the positive effects of starting to save for kids’ college early.
If saving for their college tuition and expenses while managing your student loan payment seems daunting, student loan refinancing may help you save money on your student loans so that you can put that money towards the future.
Student loan refinancing allows you to trade in all your student loans for a new loan with a potentially better interest rate and more favorable repayment terms. Why trade in old debt for new debt?
Refinancing your loans allows you to use your current circumstances (aka a good job, good credit score, and likely more stable finances) to possibly get a lower interest rate than the current rate on your student loans. This is especially true if you also refinanced to a shorter loan term, thus expediting your repayment timeline.
Additionally, refinancing gives you one loan instead of multiple, such that you only have to make one monthly payment. You can also refinance for an extended loan term, which will give you a potentially lower monthly payment. While this will not save you on interest, it could free up some cash flow and make your student loan payments more manageable.
Saving Money for Your Child’s College
Once you’re ready to start socking away those pennies for your little one’s future art history degree, you have several options for saving. One of the main benefits of starting to save for college early is that you can start saving smaller amounts that could grow over time and offer a good return on interest once college rolls around.
But instead of just sticking $100 a month in a coffee can on top of the fridge, consider the many different savings mechanisms out there that can offer great benefits when it comes to college savings.
For example, 529 savings plans and Coverdell ESA plans are both tax-free when the money in the accounts are used for college. Both plans allow you to invest in stocks or other assets in order to save for your child’s education.
Wondering how much to save for college? The cost of college is on the rise. In fact, the average tuition cost has surpassed inflation by 3% . Over the last decade, college tuition and fees have increased to almost $35,000 per year. It is likely that by the time you’re ready to send off those tuition checks, the price will have climbed even higher.
That being said, the smartest amount to save may simply be what you can afford. If you’re juggling paying off your own student debt while also saving for your children’s future educational expenses, you don’t want to neglect other financial obligations in your life.
Navigating student loan repayment while also saving for the future can be difficult, but smart choices—like considering student loan refinancing either to lower your loan’s interest rate or lower your monthly payment with an extended loan term—could help set you up for success.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.