Saving for College While Repaying Your Own Student Loans

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Brian O'Connell

By Brian O'Connell

June 4, 2019

Parents who are still repaying their own student loans, but have to save for their own children’s college costs, are between the proverbial rock and a hard place.

Some parents are stuck repaying student loans they borrowed as college students themselves or loans they borrowed on behalf of their older college-bound children, with younger siblings still needing college financing help.

This scenario creates financial pressure on parents that can last for years and even decades. The biggest issue is that when parents are repaying old student debts and saving for their children’s college education, critical household financial priorities like saving for retirement go by the wayside.

The Savings Squeeze is a Major Dilemma for Parents

Parents who face paying off their current student loan debt while targeting a child’s college funding needs also feel the squeeze on the savings end, with less money available to stash away for a younger child’s college tuition.

Additionally, many parents who straddle the line between old student loan debt and new college savings for their children face an uphill climb, math-wise.

According to data from Sallie Mae, household income is far and away the leading financial source in paying for college, at 43%. Grants and scholarships are next, at 30%.

Yet household income can be squeezed significantly. Data also indicates that 57% of parents with young children are saving for college already.

Given the high costs of college years down the line, parents are expected to put away between $720 and $1,663 monthly over 18 years to ensure their child’s college costs are fully covered once they graduate high school, depending on their college of choice, according to Wealthfront. (Most families, however, aim to save one third of future college costs.)

That, by the way, is the amount of money needed to be saved for just one child – additional children add to the college savings debt burden.


Get Ahead of the Problem

That begs a big question – how can mom and dad balance paying for their own student debt with the responsibility of saving for their child’s college costs?

It’s not easy, but there are several “sweet spots” where parents can pay off their own student loans while building college financial assets for their children. Depending on your unique household finance situation, these strategies are well worth considering.

Take a short cut with a college 529 plan. According to a recent study by T. Rowe Price, 45% of U.S. parents are saving for college via a traditional bank savings account.

Contrast that figure to the 31% who use a 529 college savings plan to get the job done.

If you’re already paying student loan debt, and you want to get maximum return out of every investment dollar you contribute to your college savings program, a 529 plan beats a bank savings account every time.

Why? Because a 529 college savings plan gives the investor the gift of tax-free earnings, while bank savings accounts do not.

With a 529 plan, all account proceeds grow on a tax-deferred basis – you don’t pay any taxes at all as long as the invested cash is used for qualified college cost purpose, like paying for tuition, room and board, books and computer equipment, and student fees.

Standard bank accounts don’t do the same, giving hard-pressed parents an easy choice if they want to make the most of every college savings collar.

529 plans also offer a higher rate of return than the interest rates on bank savings accounts.

Set up automatic savings. On its own, saving money for the long-term is difficult enough. With college 18 years away, it’s easy to rationalize buying a new car or remodeling the kitchen, which could necessitate taking a break from regular college savings payments.

Nip that issue in the bud by setting up automatic contributions into a 529 plan every month. Once you get used to the fact that money is being steered toward college, and isn’t available for any other purpose, settling in and establishing a rhythm with regular college payments can become second nature.

Get a handle on your student loan types, and leverage them where possible. Not all student loans are exactly alike, and there could be opportunities to realign your student loan debt so you don’t take a huge financial hit as you save for college, too.

Take federal student loans, for example. Most public college loans offer borrowers some much-needed flexibility that can be leveraged to leave more financial room for a family’s college savings fund for the kinds.

Federal student loans offer borrowers the chance to delay or curb monthly payments or tie your monthly payments to your income level. Or, you may be eligible for an Extended Repayment Plan or a Graduated Repayment Plan – both of which can ease your monthly student loan burden and free up extra cash for your children’s college savings.

Find out exactly what federal student loans you have at

If you have a private college loan, you’re better off paying it down first and as fast as possible. Private loans are significantly more inflexible than federal loans, and often come with higher interest rates, which eat away at your household income.

To find out what kind of private student loan you have, check your free annual credit report, which provides data from all three major credit scoring agencies (Transunion, Experian and Equifax) at

Refinance private student loans. Private student loan interest rates can be all over the board, and that includes rates you received on a private loan a decade ago – or longer.

If your private student loan is costing you 8%, 10%, or 12% in interest, that’s money you can’t use to save for your son or daughter’s college fund.

If you have decent credit and earn a good annual income (or a solid combined income with a spouse), there’s a great chance you can refinance your private student loans into a much lower interest rate.

The deal you cut will depend on your credit health and your paycheck, but knocking even two or three percentage points off your private student loansin a refinancing deal can save you thousands of dollars over the total course of your loan.

That’s cash you can use to build college savings for your children.

Keep in mind refinancing federal student loans means a loss in many benefits – income-driven repayment plans, any federal forgiveness programs, generous deferment options, and more.

Stay Aggressive on Balancing Loan Payments and College Savings

As you get closer to your child heading off to college, you can save money by targeting lower-cost, in-state schools, and by applying for as many scholarships and grants as possible leading up to your son or daughter’s freshman year in school.

College loans will also likely come into the equation by that point, so aim for federal student loans which (right now) offer interest rates in the 5% range.

In addition, strongly encourage your high-school son or daughter to take as many advanced placement (AP) classes as possible before heading off to campus, which reduces the number of college credits he or she will need to graduate. AP credits also cut back on your family’s total tuition expenditures at the same time.

It’s also a good idea to consult with a financial advisor who can help you find your financial aid “sweet spot” that gives you as much college financial aid as possible.

Using a good chunk of household assets to pay down student loans before you fill out a FAFSA should definitely be part of that conversation. The fewer assets you have, the better your odds of receiving more college financial aid.

Lastly, know going in that balancing your own student loans with your children’s college savings needs isn’t easy, but it is doable.

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