As college approaches for the students in your family, it’s possible that the gap between your savings and the bottom line might be further than you’d like. You might be faced with a choice: taking measures to increase your savings or taking on some sort of student loans. I’m here to help you better understand the pros and cons of student loans, and can provide some illustrations that may help you better understand how they work.
This is not to say that you shouldn’t take student loans. These loans play a role in college funding for many students who are furthering their education. It’s one financing strategy, but here’s what your student should understand:
- Interest Accumulation: Student loans accrue interest over time, and the longer it takes to repay the debt, the more interest is paid. This can increase the total amount repaid over the life of the loan.
- Loan Repayment Period: Student loans generally have repayment terms that can extend for many years after graduation. This extended repayment period can limit financial flexibility, making it harder to pursue other financial goals.
- Credit Score and Future Opportunities: Excessive student loan debt can impact credit scores, which can affect future borrowing choices and interest rates on other loans, such as mortgages or car loans.
The other choice is to prepare and invest as a way to help make money available to further education. The advantages are clear.
- Potential Growth: By allowing investments to grow over a long period, individuals can potentially accumulate a sum of money that can help manage college expenses.
- Tax Advantages: Certain investment accounts are designed to save for college, such as 529 Plans. These types of investments can help you earmark money designed for college expenses.1,2
- Flexibility and Financial Freedom: By utilizing investments, individuals can have more control over their finances. They have the freedom to choose when and how to use their investment funds, which can provide flexibility in covering college costs, pursuing other financial goals, or responding to unexpected expenses.
It is important to note that investing involves risk, and investment decisions should be based on your goals, time horizon, and tolerance for risk.
Again, student loans may be part of your family’s college funding strategy. However, avoiding the burden of repaying these loans, a process that can take years or decades, may be worth considering. Remember: this is all about the future of the student in your life and will ultimately be their responsibility. I welcome the opportunity to speak to you all about this in more detail soon.
1. SEC.gov, June 14, 2023
2. IRS.gov, April 7, 2023
A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. The state tax treatment of 529 plans is only one factor to consider before committing to a savings plan. Also, consider any fees and expenses associated with a particular plan. Whether or not a state tax deduction is available will depend on your state of residence. State tax laws and treatment may vary. State tax laws may be different from federal tax laws. Earnings on nonqualified distributions will be subject to income tax and a 10% federal penalty tax.
