After spending your entire life working, running a business, building a career, and raising a family, retirement is an intensely anticipated phase. You try to start saving early on so you can accumulate enough money to retire with your partner at a quaint little house near the beach, to live out your days, without any financial responsibilities weighing you down.
Alas, life doesn’t always turn out aswe expect. Parent loans can set you back by years, leaving you in the pits of debt, unable to follow through on your saving or retirement plans.
Statistics show that the average borrowing amount for parent borrows has multiplied substantially over the last 25 years. Almost 8.8 percent of parent borrowers entering repayment on their last loan owed more than $100,000 in 2015, and the numbers have only risen in the previous years.
Let’s take a look at what parent loans entail and a few tips on how you can manage them, including through parent loan refinancing.
The Truth About Parent Loans
In a culture that boasts financial independence by the time people turn 18, it’s hard to ignore the challenges and economic hurdles that prevent financial autonomy.
The stigma in the United States about parents helping to pay for their children’s college education propels the idea that only the wealthy or parents of ‘incompetent” kids can pay for their children’s college education.
However, the truth is that the costs of college and housing in today’s day and age is much more expensive than it was back in the day. Simultaneously, with barely any real increase in the minimum wages, it’s cruel to expect a high school graduate to maintain a good credit history and sufficiently put himself through college.
This is where federal loans, also known as the Parent PLUS loans, come in.
Research shows that repayments have declined with more increases in borrowing across the board—meaning that a large chunk of the older American population is under a lot of debt. This dampens their saving plans and adversely affects their retirement goals too.
While helping out your children and trying to secure their future by sending them to college with the help of parent loans may seem financially stressful, there are a few ways you can reduce the burden of it all.
Advice For Managing Parent Loans
Whether you’ve already taken out parent loans or considering the possibility, here are a few key tips you should keep in mind to prevent significant losses that may potentially derail your future plans.
Don’t Jeopardize Your Retirement
There are many dangers for parents who sacrifice their retirement to help children pay for school. While offering assistance is admirable, you shouldn’t stretch yourself too thin that it compromises your retirement plans.
The last thing your child needs is watching their parents’ retirement plan fail on their account. If you decide to take out a parent loan, make sure you can afford it while saving for your retirement.
Think About ThePayment Consequences
For individuals that have to repay student loans to multiple lenders, it’s important to consider repayment options.
Makinglump-sum paymentsis more productive than sending out monthly payments because of the daily accrual of interest on the debt. If the payment is larger, the less interest it will accrue—it’s also the fastest way to eliminate debt. However, if you’re considering this option, and your payment only covers part of the debt, then the monthly student loan bill will remain the same.
You could also opt to pay off private student loans first and then move to federal loans. Since federal student loans come with borrower protections like income-driven repayment plans and student loan forgiveness, many can afford to put them off while they handle private student loans.
Don’t Forget TheTaxes
If you spread out the lump-sum payments over several years, your 401(k) withdrawals will be taxed substantially less.
Since 401(k) withdrawals are treated as income, make sure that your yearly income doesn’t become so high that it is subjected to a larger tax rate.
After the 2018 tax bill, parents can jump from the 12% to 22% percent tax bracket to the 24% to 32%. If you’re nearing the jump between the two tax brackets, discuss your payment plans with your tax advisor so you can stay within the former bracket and manage loan repayments better.
Weigh TheTax Vs. Interest Consequences
Another way to think about parent loan repayments is to weigh the tax vs. interest consequences.
If you make a large withdrawal from your 401(k) contribution to pay off the debt, you will eliminate the loan completely and save the maximum amount in interest, but you will be maximizing your tax costs.
On the other hand, if you spread out your contributions over many years, the tax burden will be substantially reduced. The downside would then be that more money will be spent on the loan interest over the life of the loan.
Try to strike a balance between the two. Make extra payments in addition to the monthly payments for debt elimination. As the balance drop, so will the monthly interest—causing a snowball effect that will unburden you far more quickly than you could’ve imagined.
Refinance Your Loans Early On
Refinancing is another great option available to you. If you have a good credit score, you can enjoy more favorable loan terms to make the repayment ordeal easier.
Loan refinancing allows you to change the terms of your original loan and replace it with more suitable ones. It gives you more freedom to choose between different lenders’ interest rates and loan repayment periods—allowing you to save money while repaying your loans.
You can choose the repayment plan and select your own repayment schedule. Loan refinancing also has a fixed rate that makesit easy for you to stick to a budgeting plan and pay off the debt as soon as possible.
Working with a trusted agency to consolidate and refinance your loans is one way to manage your expenses, often at lower interest rates and easier management. Private lenders such as ELFI will also let you refinance your Parent PLUS loans at competitive rates.
Large loans like parent loans are a huge commitment, and battling a mountain of debt while handling the pressure of saving money is downright difficult. But a few smart financial decisions can make the process substantially easier.
Refinancing is the ideal solution to pay off parent loans without putting your retirement plans at risk. But be sure to work with credible private lenders who offer low-interest and flexible repayment plans for parent loan refinancing.
Start by comparing rates and work with a well-reputed and experienced lender such as Education Loan Finance (ELFI) to pay off your parent loan, so you don’t have to carry the weight of the debt all your life.
Learn more about ELFI’s loan refinancing options here.
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