Will Your Child’s Student Loans Impact Your Retirement?

​Every parent wants the best for their child. In many cases, that may mean funding a child’s education. However, many parents are learning that their efforts to give their child a good education could come back to harm their own ability to retire comfortably.
 
According to estimates from the Government Accountability Office, as of 2015 there were 2 million holders of Direct Plus Loans between the ages of 50 and 64. There were an additional 200,000 Direct Plus Loan holders over the age of 65. Those numbers have more than doubled since 2005.1

Direct Plus Loans are a certain type of loan that allows a parent to borrow to pay for their child’s education. Many parents opt for this type of loan to protect their children from student loan debt or because they have greater borrowing capacity than their child.
 
Even parents who haven’t borrowed directly through the Direct Plus program could be on the hook for their child’s college debt. Many lenders require students to have a co-signer on their loans. In many cases, that co-signer turns out to be a parent. If the child is unable to pay, the parent is on the hook.
 
Of course, as you near retirement, these student loan payments can be increasingly problematic. The loan payments may be in the hundreds or even thousands of dollars per month. If you’re covering some or all of your child’s payments, that’s money that you can’t contribute toward retirement. You may even be forced to work longer than you’d like to continue making the payments.
 
Fortunately, there are steps you can take to ease the burden. Below are a few tips to help you minimize the pain of your child’s student loan debt and to protect your retirement:

Keep saving for retirement.
It might be tempting to reduce or even halt your retirement contributions so you can focus on student loan repayment. This may be a mistake. Remember, your retirement could last several decades. You will likely need a substantial sum to fund your lifestyle. To accumulate that sum, you will likely need to maximize your contributions and give those contributions plenty of time to grow and accumulate.

If you stop your retirement contributions to focus on loan repayment, you’ll lose not only those contributions but also their future growth. That could have a big impact on your savings balance when you reach retirement. Find a way to protect retirement savings as a financial priority even while you’re making student loan payments.

Temporarily cut back on spending.
It may not be ideal to cut back on your lifestyle right now. After all, if your kids are out of the house, you may want to enjoy life as an empty nester. However, you may be able to eliminate a great deal of future pain and stress by living on a modest budget for a few years so you can pay down the student loan debt.
 
Look at your spending and identify areas where you can make big cuts for a period of time. Better to live modestly now for a few years than to face serious financial difficulty in the later years of your life.

Look for refinancing opportunities.
Depending on the type and interest rate of the loans, you may be able to refinance them and obtain more manageable payments. There are a number of companies that help students and their parents restructure their loans. You could use that reduced interest rate to then pay down the loans at a faster rate.

Talk to your child.
If your child is the primary borrower on the loan, it may be time to have a frank conversation with them. Look for ways to transition the payments to them, perhaps over a graduated schedule. Maybe they can reduce their spending or take on a second job. Explain to them that your retirement could be in jeopardy if you continue to make the payments. While the conversation may be difficult, it might be very necessary.
 
Need advice on how to protect your retirement from student loan costs? Contact us at First Fidelity Group. We can help you analyze your needs and develop a strategy. Let’s connect today.

1http://www.marketwatch.com/story/college-loans-are-making-it-harder-for-parents-to-retire-2017-02-27
 
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