A Parent’s Guide to Student Loans After Graduation

Parents with college-aged children have several financial expenses to juggle.  They might have younger children at home to clothe and feed, plus they are frantically scurrying like a squirrel before winter paying off a home mortgage and saving for retirement, in addition to helping their child pay for college.  The most recent graduating class, the Class of 2016, has an approximate $37,000 per student in student loans that will be entering repayment status any week now.  With the first round of monthly statements arriving in the mailbox soon, now is an opportune time to consider repayment options to reduce the cost of repaying student loans.

My Own Student Loan Story

Student loan debt is one of the reasons I started Money Buffalo.  I graduated from college in 2008 with $50,000 in student loans.  My parents did what they could, primarily by acting as co-signors for my student loans, and I borrowed from federal and private lenders to cover the tuition and fees.   As a student, the magnitude of having to repay 50,000 dollars really didn’t mean much until I got was on my own in the “real world” and had to start making the monthly payment.

Fortunately, I was blessed with a high-paying job that allowed me to pay 3 years of accrued interest (I made interest-only payments during my senior year) and was able to live frugal enough to pay off my student loans in three years.  I do not have any regrets for attending the college I did as life would have been completely different if I chose a less expensive institution, but, there are a few things I wish me & my parents had known about student loans when I was a student.

Since I cannot turn back time, I encourage aspiring parents of college students and future students to know all their options before, during, and after college.  Four years of college can easily be more expensive than the first 18 years of life combined.  For new college graduates, each new graduating class enters the workforce with more debt than any preceding graduating class and the trend doesn’t seem to be reversing anytime soon.  I can only imagine how much college will cost when my own 15-month old will be old enough to attend.

Repayment Options for Parents During College and After Graduation

Below is a combination of advice my parents & I implemented and would have considered as well.  For your own college experience, you can easily start practicing some of the below repayment options, perhaps you already are doing several already!

  1. Co-Sign Student Loans

There are a couple different loan options available to finance college.  Parents can borrow directly using the Federal PLUS loan program for instance.  My parents decided the best option was to co-sign for myself and my younger brother.  You might think co-signing is a little risky.  There is an element of risk and the decision ultimately boils down to the relationship between the parent and child.  As a whole, my brother & I are pretty good at managing money so they were not too worried that we would spend all our money buying a fancy sports car and couldn’t afford the monthly payment, forcing our parents to make the student loan payments.

One benefit of co-signing is that it places some of the responsibility of earning a diploma on the student, instead of college being a free ride to party for four years before officially entering adulthood.  It also helps the student establish a credit history and qualify for the lowest student loan interest rates.

  1. Pay Loan Interest During College and Before Capitalization

The “honeymoon” period for most parents or new grads might happen when they receive a notice from the lenders stating $X,XXX of deferred interest needs to be paid before November 15th to prevent it from compounding into the borrowed principal and essentially begin paying interest on interest.  It’s the opposite of how compound interest is supposed to work.  If you have full deferment loans (no principal or interest payments required during school), it can be easy to only look at the amount of money borrowed and think that is the only amount that needs to be paid back.

I made interest-only payments during my senior year and was able to afford them by working a part-time job.  For the first three years of college, I elected to defer the interest payments and had a sizable amount of accrued interest to repay before it compounded.  Partially speaking out of pride, I drew from savings and some graduation gift money to pay off the interest before the six-month grace period ended and my student loans entered repayment status.

  1. Pay Ahead

This is my favorite repayment method because it has the potential to save the most money in interest payments.  Making the minimum loan payment each month will allow you to repay the loan on schedule without penalties, but will also be the most expensive.  I paid off my loans early because I paid more than the minimum payment each month by delaying purchases like buying a house or a new car and automatically giving any tax refund or extra income straight to the lender.  I saved close to $9,000 in interest by paying off my loan early.

  1. Refinancing and Consolidation

Another popular option is to refinance and consolidate student loans.  To avoid confusion of the two terms, you refinance private loans and consolidate federal loans, but, the process is the same.  If I did not have the opportunity to pay my loans off so soon, I would have strongly considered refinancing my private student loans.  The average interest rate for my student loans, was approximately 6.8% when I graduated although the rates did slide down some during the Great Recession.  I really didn’t know a lot about refinancing until the end of my student loan journey, when my balance was too low to qualify.

Refinancing is a great option if you need a little breathing room and the current monthly payment is too high, as you receive a lower monthly payment due to an extended loan life (i.e. 15 years to repay instead of 10 years).  I also like refinancing because it’s possible to renegotiate the loans for a lower interest rate, as low as 2.20% variable and 3.5% fixed, which makes prepaying the loan even less expensive.

Students and parents both can refinance private loans or consolidate federal Stafford, Perkins, or PLUS loans.  If you decide to refinance, be sure to choose a no-fee lender that will not charge you an origination, application, or prepayment fee.  The entire point of refinancing is to save money, and additional payments make it harder to do so.

Depending on the lender & type of loan, your minimum balance will need to be at least $5,000 or $10,000. Some lenders will bundle federal and private student loans all into one package, but, the federal loans lose their forgiveness and repayment options if combined with private loans.  For this reason, many encourage parents and grads to refinance/consolidate private and federal loans separately.

On top of this, private refinancing companies often have differing underwriting criteria, so researching different lenders is a key step towards refinancing.  Your options can get confusing sometimes, but a guide to different refinancing lenders is the perfect way to get on your feet and running with your loans.

  1. Personal Loans

There are some unconventional ways to pay for college, such as borrowing from a Roth IRA, and another option to consider is securing a personal loan instead of student loans.  As most personal loan interest rates are higher than student loan rates, the only way this might make sense is if you are a homeowner willing to exchange equity with a Home Equity Line of Credit (HELOC).  A HELOC loan is a variable interest rate loan, but, applicants with excellent credit can be approved for interest rates in the mid-3% to 4% range.

Using a HELOC to pay for college might be the modern equivalent of “betting the farm” and missing payments can cause the bank to ultimately seize your house as collateral.  So, the additional risk might not be worth the potential savings in interest compared to traditional parent education loans.

  1. Loan Forgiveness

One final option is loan forgiveness programs.  To qualify, you need to have federal loans and work in select career fields. Serving in the AmeriCorps or Peace Corps are two options, or working for a government agency or qualifying non-profit organization.  Forgiveness terms vary on the type of federal loan, however, as a general rule of thumb, you have to pay consistently for 10 years (120 qualifying monthly payments) and any remaining balance will be forgiven.

As the repayment for most student loans is 10 years, the federal loan forgiveness option can be very beneficial for grads working in low-income positions.

Summary

No doubt about, college is expensive and paying for it can be even more expensive.  Each family has a different financial situation and emphasis on who should pay for school, but, college should never cost more than it has to.

When it comes to student loans, parents and students can start saving money by applying for loans with the lowest interest rates and filling out the FAFSA to receive a financial aid package.  It might be possible to get a lower interest rate during college by selecting an interest-only loan and only electing to defer borrowed principal payments until after graduation.  And, enrolling in automated payments will save you a quarter point on all loans.

After graduation, I recommend using any additional income or cash windfalls to payoff the loans as soon as possible.  It is also a good idea to consider refinancing if you can get a lower interest rate or simply need a reduced monthly payment to make ends meet. Just remember that if refinancing extends the repayment terms beyond the length of the original loan and you only make the minimum payment, you will end up paying more in interest than with the original loan.

About the Author

Josh
I'm a personal freelance writer.

21 Comments on "A Parent’s Guide to Student Loans After Graduation"

  1. This is why I moved from Phoenix to Omaha to attend university and work. The cost of living and cost of university in Omaha is cheaper than in Phoenix. There’s no way I could do the things I could do and still attend uni if I was still in Phoenix.

    I’m able to attend without help from student loans. I wouldn’t mind moving back to Arizona once I have my business degree. Arizona is a lovely state but the cost of living is so high.

    • Many talks in many instances. At least you are able to remain west of the Mississippi, but, that’s still a haul. That’s awesome you can attend without any student loans, I most likely would have gone out-of-state as well.

  2. Nice tips Josh, I really like the different options that you put out here. I’ve luckily never had any student loan debt, but it can make life hard for other people starting out. Some students are very lucky that they have the help of their parents to get through it.

    Tristan

    • Thanks Tristan. Student loan debt isn’t fun, at least a 20-year has more time to repay it and still prepare for the future. Parents who take out loans might choose to delay retirement to make the student loan payments and might not be aware of some of the options listed above.

  3. Great information in this post, Josh! Our son is a junior in high school and interested in one, very expensive, college. Your statement, “As a student, the magnitude of having to repay 50,000 dollars really didn’t mean much until I got was on my own in the “real world” and had to start making the monthly payment.” hits home for me right now. Our son isn’t seriously considering the implications of taking on so much in student loans. I’m hoping we can help him better explore his options and, hopefully, start off at a community college and then transfer to his school of choice, as this would help tremendously.

    Thank you for the overview of the options here – it’s been some time since I went through the process myself, so it was very helpful!

    • Thanks Amanda! Choosing a college can be an important and difficult decision. It is the first big decision for many teenagers and there is an element of pride saying you are going to the most popular college in the state with the best athletics program.

      Community college is a good route to go & also considering credit by examination (Dual Enrollment, CLEP, not-so-much AP [in my opinion]) can save some money. Comparing financial aid packages might also be a great idea in making the decision.

      I had three schools on my list and I ultimately went to the one that was cheapest. It helped it was only 3 hours from home (the other two were out-of-state) and specialized in the career I wanted to enter initially. Some of my high school classmates went to lesser-known colleges because they got really good academic scholarships, but would have only received a few thousand dollars at the big-name schools in my state.

  4. Great list with pointers for managing student loan debt. It really is the challenge of our generation. I think the best thing we can start doing now is saving for our own kids college. But here’s the crazy thing — to fully pay off their education (at current rates) requires saving a fortune! I mean, if tuition ends up at $30k a year in 20 years, you have to save $500/month to cover a 4 year degree. If you have two kids that’s another house payment. Crazy!

    Fortunately there are ways to help before/during/after — and I think your list hits these nicely.

    Keep up the great writing!

    • I graduated in ’08 & the same degree would cost me 66% more now than when I first matriculated in 2004. Instead of buying the $27k I purchased when I paid off my student loans, it would go to the school instead.

      Saving for college is very important and getting more difficult as costs continue to increase. That’s why I think refinancing and loan forgiveness programs are going to be increasing, not decreasing, in regards to repaying student loans.

      Thanks for visiting!

  5. I’m so impressed that you paid off $50,000 in three years – as a new graduate. (And you saved $9,000 in interest!)That experience will see you through a life time of wise money management I think. “Pay Ahead” is definitely the best option, and while many people say they can’t do it, most can – at least to some extent. Especially is you’re single and working after graduation, it’s so wise to keep living like a student until that loan is gone – and not get comfortable with it.

    • Thanks. I’m glad I focused on becoming debt-free when I was single. In my opinion, juggling trying to pay for a mortgage, save for retirement, and save for additional children is harder than my student loans.

      My wife & I are glad that we both entered marriage debt-free. It helped our life decisions like changing careers and starting a family much easier.

  6. Thanks for the tips. Our daughter will be crossing into college territory in about 5 years, and so I’m starting to pay more attention to ways to hack the student loan process.

    • You are welcome. Student loans are mostly straightforward. Basically look for lenders or schools with the fewest amount of fees. It’s also handy knowing the repayment options as well. Especially prepayment and repayment if you can use them to your benefit to hack the loan debt as quickly as possible.

  7. If possible find a company that will help pay for your student loans. I have heard of a bunch of companies that offer this benefit and have seen people really benefit from the opportunity to pay off student debt this way.

    • I’ve heard of this as well. I cannot say I know anyone personally that has this (other than military ROTC scholarships) experience, but I do know many large companies will help pay for graduate education.

  8. Hey Josh, what is your wife’s book on the clep and dsst?

    Thanks. I’m interested now. =)

  9. Great info here, Josh. Our goal with our kids is to first of all make sure they really consider carefully before attending college. Second, we’re encouraging them to save now to cover college costs. Third, we’re helping them minimize college costs as much as possible by encouraging participation in our state’s PSEO program and encouraging them to get their generals done at the local community college. Fourth, we’re offering for them to live at home with room and board provided should they choose a local college. We likely will end up paying for some of each of their college costs, but we’re not telling them that, instead having them plan on paying for themselves and then helping where we can when the time comes.

    • Thanks. I saved what I could for college expenses. I don’t recall borrowing money to cover textbook costs and I worked part-time in school to cover interest payments my senior year, plus the annual class dues. My parents surprised us with some aid and would have allowed us to live at home for a bargain, but, I was 18 & ready to leave the nest. Going to school 3 hours down the road was a nice compromise for me.

      I think it’s great that high school students have more options to earn college credit during high school. It’s a win-win for the colleges, but I personally prefer the CLEP or Dual Enrollment options. Plus, the ability to earn technical training (instead of wasting a year in French or Spanish when you will never use it, simply to check a requirement box) is great too. Sorry for the rant…

  10. Great overview, Josh. I think this will become a bigger topic over the next 5-10 years, not that it isn’t already a HUGE issue many parents are dealing with. This is some really good advice and there are definitely a lot for parents to think about when it comes to their children’s student loans.

    • Thanks! I too think it will be an issue for the new President as we got a taste of indebted Millennials during the primary season. It will also get more interesting as the Federal employee student loan forgiveness program (started in 2007) forgives unpaid federal loans after 10 years. In late 2017, the first loans will be forgiven at the taxpayer’s expense. The forgiveness amount will probably increase as a recent Wall Street Journal article also mentions that approximately 40% of student borrowers are not making payments.

  11. Clep/DSST is a good option as well.

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