When families set aside money for college, that money is normally utilized before borrowing any student loans.
This traditional approach has served many families well. After all, why would somebody borrow money to pay for college if they already have some money set aside to pay for school?
Unfortunately, the escalating cost of college has caused major problems for this classic approach in many families. As more and more students need student loans, parents face some really hard questions: How much should we contribute each year? How much student debt is too much? How are we going to help our children fairly and equally pay for school? What about our retirement?
These questions may be easy for the wealthy, but most families have to be very careful how they use limited funds to cover a massive expense.
Ironically, the growing student loan crisis has created a situation where many families would be better off borrowing money to pay for school rather than dipping into their savings. Instead of helping pay for college during college, it may be best to help pay for college during student loan repayment.
The benefits of waiting to help until student loan repayment are especially obvious for families with several children.
A New Way to Divide Family College Resources Among Children
For years, families with multiple children have struggled to fairly divvy up college funds. If the firstborn gets too much help, there may be nothing left by the time the third child goes to school. Unknowns like scholarships or alternative plans for younger children make these projections nearly impossible.
Rather than spending any money during college, parents might elect to help during student loan repayment. This would allow for a more efficient allocation of resources as parents would have the opportunity to help the child or children that need the help the most.
In a family of three children, one child might get scholarships and then find a very lucrative job right out of school. Another child might get a job in public service, putting them on the path towards loan forgiveness. The third child may find a more challenging job market and feel a much bigger burden from the student debt.
Some parents might believe that each child should get an equal amount of help. Others might want their help to go where it will do the most good. In our example, the first child likely will need very little help. The second child might need some assistance, but the third child would be the one facing a major hardship.
Each family might approach this question differently, but by delaying parental assistance until after school, mom and dad have more options available and they have more information available at the time they help.
Parents with one child might still benefit from delayed assistance in paying for college.
Help with Repayment will be Greatly Appreciated
Let’s look at the two ways a parent can help pay for school from the child’s perspective:
Going the traditional route, mom and dad write a big check at the beginning of the semester and the child is able to take out a smaller student loan. This help may be appreciated, but many college students may not yet understand the difficulty in saving that money or the significance of the contribution.
Compare that to a student who has just finished college and is trying to make sure their first paycheck will cover all of their bills. For many, this is a scary time and the time when the value of a dollar becomes real. If mom and dad step in to help at this point in time, the help will be more meaningful and more tangible to the child.
The appeal to helping in repayment is more than just an emotional benefit.
Student Loan Repayment Help Can Create More Teachable Moments
Mark Twain once quipped that, “When I was a boy of 14, my father was so ignorant I could hardly stand to have the old man around. But when I got to be 21, I was astonished at how much the old man had learned in seven years.”
Many teenagers make the mistake of thinking they know everything. A twenty-something recent grad worried about their finances will be far more open to the wisdom and experience that mom or dad might have to offer.
By helping during repayment, a parent can aid their child in crafting a budget. That same parent can explain how compound interest works and help their child balance retirement planning needs against their student debt. In repayment, a child will also be far more interested in getting help tracking down the lowest possible interest rates for their loans.
Parents don’t have to be financial experts, but they can share their experiences and help their kids avoid mistakes that mom and dad may have made. Unfortunately many high schools and colleges fail to teach these financial lessons. Parents can teach lessons that might end up being more valuable than the money they contribute.
Waiting to assist can also help ensure that all four years of college get funded.
Money in the Bank is a Great Backup Plan
Right now, most families have little trouble finding student loans for school. Future developments in the economy or in politics could change the equation.
If the United States enters a recession, lenders may not have sufficient funds to lend money to qualified borrowers.
The government may choose to stop lending money to students, which could make borrowing more difficult and more expensive. New government regulations on lenders might cause them to raise interest rates or stop lending.
We can come up with what-ifs for days. The important detail is that the future, even just four years from now, is unknown.
If borrowing suddenly becomes far more difficult for the final year of school, families will be glad they set aside some money just in case.
Delaying Help Makes for Better Retirement Planning
Parents of college students may be a decade or two away from retirement.
Figuring out how much they can afford to spend on college is a very difficult question.
This site has argued in the past that you can borrow money for college, but you cannot borrow money for retirement. Pushing college assistance back five years may not remove all of the variables, but it might answer many questions.
Some parents feel guilty worrying about retirement instead of their child’s education, but it is necessary. A failed retirement could mean that the parent becomes dependent upon the child for financial support. Avoiding this situation is in the best interest of everyone in the family.
Paying up Front can Still Make Sense
Though there are a number of arguments in favor of student loans before parental assistance, there are still important reasons that mom and dad might want to help from the beginning.
For starters, 529 plans and tax breaks might make tuition contributions go a lot further than student loan repayment help.
Going beyond the math is the concern that student loans can be a very dangerous financial choice and have many pitfalls.
The idea behind this article is to propose an alternative route that may not otherwise be considered. It isn’t to suggest that borrowing student loans can’t be a mistake. Any student loan can be a risk and the more student debt that is borrowed, the more difficult the situation becomes.
The most important thing for any family is that they carefully consider all options available and make the choice that is best for their individual circumstances.
