March 12, 2013

Pay Off Your Student Loans Before Saving For Childs College

Recently I've seen a couple people listing their budgets that include items for both savings towards a child's 529 plan and paying of parents student loans.   If you're in your 20's or early 30's then it may be common to have a balance on your student loans and also have children.

Most student loans tend to be in the 6-8% range and some private loans can run higher interest rates than that.     Paying interest on those loans is costing you money. 

Generally speaking most people should pay off their own student loan debts before they start saving for their children's college via a 529.

I understand how parents naturally and rightfully feel a need to put their children first.   However saving for your children while paying your own debts doesn't really benefit the children.  You need to ensure your family's finances in general to benefit the stability of your children.  Eliminating debt and having a good solid family financial condition is pretty important for your children as well.   

Theres several reasons why paying down your student loans first makes sense.

For one the relatively high interest rates on student loans are a guaranteed cost and you'll do better avoiding that guaranteed interest cost as opposed to hopping for growth in a 529.

Theres no guarantee your child will go to college or need the money.   They may not want to go to college or they might end up with a handsome scholarship. 

Financial aid can help your child pay for college or they can take out loans of their own (just like you did).


Two Exceptions : 
Low interest loans.   If your own student loans are particularly low interest rate like in the 2-3% range then I would consider it OK to pay them off slowly.  
Generous 529 incentives.    A small handful of states have tax credits for 529 savings.  Indiana gives 20% and Vermont gives 10%.   For those two states saving in a 529 can make sense so you benefit from the tax credit.  Most states only give a deduction and a deduction isn't generally worth it.


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