Financial question--pay down debt vs. save for college??

[Moxie]

DH and I have a ton of student loan debt.  Neither of our families contributed to our college educations and we made some poor (expensive) school choices.

 

By way of background, we have been on the Dave Ramsey plan with a few tweaks along the way (we bought a house and a used van DR wouldn't have approved of) so paying down debt is important to us.

 

I did the math this weekend and there is really no way to pay off our student loans before our oldest starts college.  Talk about depressing.

 

We have been focused on our debt and have not started saving for college.  I do not want my kids to be burdened with student loan debt and we will work with them on school choice and making money where they can to pay for school.

 

With only 4  and 6 years left, should we put our debt repayment on hold and start putting money away for kids #1 and #2??

[bettyandbob]

I would pay off the debt as much as possible. When kiddos start college, slow down debt payments so you can help a little. I'd put a lot of focus on getting a college education in a financially responsible manner.

[TechWife]

Pay down your debt. 

[Mnemosyne]

IMO, take care of your own future first. You can consider it an investment in your kids' future as well - if you are still saddled with debt when you can't work anymore, they may have to take care of you financially. If paying for your kids school makes it so you can't afford retirement, they may very well take care of you then when they have their own families to take care of. Just a thought. 

 

They have many more years to get themselves financially secure and comfortable than you do (and they won't have their own families to support for quite a while). Take care of yourself so they don't have to, and then look at how you can help them (and I'm sure you can help them in many non-financial ways as well).

 

 

[Guest]

Ok, I guess I'm also interested in reasons why you pick one over another?

[linders]

What a tough spot! But you need to pay down your debt before your worry about your kids' college. Encourage them to make better college choices, encourage part-time jobs now, teach them about money management.

[Guest]

Ok, but, realistically, can a kid working really pay for school without loans?? I really do not want my kids to start adult life with debt, kwim?

[Spryte]

Ok, I guess I'm also interested in reasons why you pick one over another?

 

I would go with paying down debt also.  

 

But why don't you run some numbers?  Compare how much interest you're paying on the debt vs how much interest you'll earn on the savings for college.  Choose the option that makes the most financial sense.  

 

Do you only have student loan debt?  That's a big positive right there.  :)

[Guest]

No, we also have a home and a small car loan. DH makes good money but our SL are equal to our mortgage and that is after paying it down by half. Yeah, huge mistakes were made.

[kiana]

If you pay off yours first, it would be possible to let your kids get student loans with the understanding that you'll help them pay them back as soon as you finish paying off your own, kwim? For that reason, I'd continue paying off yours first so that you're not paying interest on it. 

[mamakelly]

Ok, but, realistically, can a kid working really pay for school without loans?? I really do not want my kids to start adult life with debt, kwim?

 

Mine is. He took CC classes while still in high school, so they were free. He's attending an in-state 4 year college, with a grant from the state of CA. As much as he wants to live on campus, he's living at home. He will graduate debt free.

[bettyandbob]

I don't think you can help launch a child into a secure future unless your own situation is secure.

 

Things to do now for your kids.

 

1. Encourage part time jobs. At 11 and 13 and they can start businesses pet sitting, dog walking, yard work, etc. Take the Red Cross babysitting and add that in as appropriate. I helped my dd start her pet sitting business at 8 (at the request of a neighbor who really wanted dd to care for her animals). We did some of the work together for a couple years. She expanded through our neighborhood. She has a bank account and puts money away. At 15 she got her first "real" job. She's 15 now.

 

2. Research all the college options available. Does your cc have reciprocity agreements so that there's no problem with transferring courses to universities. Does your cc have a direct transfer program (ours does, you must apply and be admitted in October of your senior year of high school, if you earn a specific GPA you get into state university without having to apply and all your coursework transfers without questions. There have been issues with some students thinking they are in this program when they aren't and they have to go through admissions processes at the state universities and some of the classes they take may not transfer.)

 

3. Some states have dual enrollment for free. If your dc can handle college level work this is a great deal. They can get significant credits before high school graduation and hopefully need to spend less on college.

 

4. Put effort into test prep. Some colleges give scholarships based on these scores.

 

The way you can help your kids is by paying off your debt and KNOWING all the options available.

 

 

[Ottakee]

I would pay down your debt first.

 

I would encourage your kids to get part time jobs and also as time gets closer have them take some dual credit classes at a local community college if they can their senior year.  use CLEP or other placement tests to test out of some basic level classes---these 2 things could cut 1-2 semesters off of their college time.

 

Then APPLY APPLY APPLY for ANY and ALL scholarships they might possibly qualify for.  Everything from the local $200 one to the bigger national ones.

[Joyofsixreboot]

Ok, but, realistically, can a kid working really pay for school without loans?? I really do not want my kids to start adult life with debt, kwim?

Yes

[shawthorne44]

Also, if you have savings, wouldn't that mean you have to pay more out of pocket for the kid's college?

That is why I'd pay off my own debt first.  

[*lifeoftheparty*]

Ok, but, realistically, can a kid working really pay for school without loans?? I really do not want my kids to start adult life with debt, kwim?

Yes, they can.

 

DH and I joined the military and the government paid for our college- same with all our military friends. Of course, no one ever wants to hear that solution, but I put it out there because that is our reality.

 

My husbands siblings all went to college (mix of 2 year and 4 year degrees) on (academic) scholarships and working to pay the rest. DH also has a few cousins who got athletic scholarships, and worked to pay the rest.

 

The key here, is that they didn't pick the most expensive schools in the world to go to.

 

I know a lady whose homeschooled son had UMBC not only pay for her sons tuition, but paid him a stipend as well, to attend their school (majored in physics).

 

At DH's job (federal government) they have internships for high schoolers (not easy to get, but lots of the other agencies have them too) and if you prove yourself to be a valuable asset- they will pay for your degree if you agree to work for them for a set # of years after graduation.

 

We don't save for college- at all. Not one penny.

 

*If* he wants to go to college, and things are ridiculous the way they are now, he can join the military. He can try for an internship. He can try for a scholarship.

 

We are spending time and resources to give him a stellar education now. He is being groomed so that he could get into Westpoint or the Naval Academy if he really wanted to.

 

Or he could get an internship. Or go to trade school. Or go to college overseas. Or be a missionary. Or heck, get a job.

 

I/we will give him the education and skills required to be successful- whether he acts on it or not is up to him. Whatever he does though, he'll have to *really* want it, and really work for it- because he'll be financing it.

 

We do plan to assist him in any way we can, but I won't scrimp on retirement and do without now just to save for college- that he may or may not attend.

 

Eventually, the college bubble will burst, just like all the other bubbles. If not, he can join the service like his parents did, and be better off for it.

[DianeW88]

Pay down your debt first.  Listen to Dave.

[umsami]

I remember hearing Susie Orman talk about this too.  Her advice echoed everybody else's….take care of your own debt, retirement, etc. before your kids' college.

 

There are free colleges out there. 

 

There are other opportunities depending on where you live.  (Florida has something called Bright Futures scholarships…which home schooled kids are eligible for too.)

 

 

[CAmomof4]

Agree.  If you're interested in Dave Ramsey's advice, he says to pay off your own debt first.  He would also say, do not have your DC take out student loans.  Take a year or two to work/save between high school and college, apply for all scholarships, etc.  Will be difficult if you (the parents) make good money, because the gov't assumes that you can and will be contributing to college expenses, but not impossible.  What I know now, that I didn't when I went to college, is that people do it every day.  Model good financial behavior, no matter how long it takes you to get there!

 

Hugs for support - know that you are doing the right thing.

[speedmom4]

Pay down your debt. It is so important for you to take care of your financial future. It's sort of like putting on the oxygen mask first and then putting it on your children's face next. Unfortunately it doesn't sound like you're in a position to financially help your children in college. You can support them by helping them select affordable college options. Also during their high school years work on SAT/ACT prep, leadership opportunities, volunteering, etc. That will help your children earn scholarships.

 

Good luck!

 

Elise in NC

[bolt.]

Someone asked a very similar question of Dave on a show I heard. I think this is what he said:

 

- slow down the debt payment enough (I think) to save what you will input into college for a year, by the time first year hits.

 

- once you are in the college phase, save enough each year to fund your intended contribution for the following year.

 

(It might have been, save for the target of 2 years' worth, not just the first year.)

 

Adding to that, this is my parents' funding scheme that I thought was brilliant, and I plan to duplicate it.

 

- Kid pays for first semester in full.

- At the end of the semester, if it was successful, parents "pay back" the kid for the cost of the just-completed semester (either the full cost or a set amount per semester).

- Kid uses that money to fund 2nd semester (augmented by their own earnings, as nessisary) and successfully completes that semester too.

- Parents provide again a "refund" of those costs (in full or a set amount) just in time to help/pay for the next semester up front.

 

This means the kid is always paying their own money, and always invested in their own success, and that they need to work and save up to get started. Also, on graduation they end up a semester's worth of money to buy a home, marry, move or whatever.

 

It works equally well whether it's a full refund or just a relable source of x thousand dollars per semester. Most kids can work for the rest or secure loans once they know exactly how much and when they can expect parental contributions. (My parents did $1000 per semester.)

 

In your case, it gives you 4 extra months to save up what you plan in contributing... Which might make a difference.

[speedmom4]

Model good financial behavior, no matter how long it takes you to get there!

 

Hugs for support - know that you are doing the right thing.

This is such good advice.

 

Talk to your children about the mistakes you've made in order to help them make good financial decisions in the future. This is a wonderful opportunity to teach them about financial responsiblity.

 

Also listen to the Dave Ramsey show as often as possible for support or even attend Finacial Peace University if you haven't done so already.

[Jane in NC]

First of all, please be upfront with your kids about your financial situation if you have not been already.  Both should already be saving for college (says the mean Mom who required that a portion of those small holiday and birthday gifts be saved). 

 

It sounds like you may have what some financial advice people would call a debt emergency.  You may be doing extreme things already but I think I would round up the family, tighten the belts and take on debt busting as a family project. 

 

I understand not wanting your kids to be in your shoes when they are older, but I think it may not be reasonable for you to assume more debt for their sake in your position.  That said, the average amount of student debt is about $25K, the amount from Stafford loans. This could be a reasonable investment for a student with earning potential.  I would not necessarily suggest that an engineering major avoid all debt.  Staffords can be paid off quickly with discipline that can be modeled on the homefront.

[Pawz4me]

I'm not a DR fan (and that's putting it mildly).

 

But I do think in this case that unless you have some solid retirement savings you need to concentrate on getting you and your DH in good financial shape by paying down the student loans.  As the saying goes -- Someone will loan your kids money for college.  Nobody's going to loan you money for retirement.

[Lolly]

I agree with paying down your debt first. This will probably put you/them in a better position for getting grant money from fafsa than saving it would. Let the kids know they need to be saving for college. Look into the best scenarios for them to keep their loans down to a reasonable amount. Take advantage of dual enrollment if possible. Take advantage of community college first if feasible. Our state now pays for two years of cc completely! For the final two years, compare the costs of the schools available instate. when you get closer to the actual college freshman date, run some numbers at small LACs with your fafsa included. you might be surprised.

[SKL]

Do a financial analysis based on what the options are for subsidized student loans etc.  Project the various scenarios forward until your youngest is done with the level of education you plan to help with.  Choose the option that leaves you, collectively, with the most money / least debt in the end.

 

This will depend on things like student loan payment options (interest is generally deferred while the student is in school and, up to a point, is not capitalized); relative interest rates (credit card interest may be higher than student loan interest so it gets paid down first); and tax benefits (mortgage interest may give you a tax deduction; putting money away for college may have tax incentives; student loan interest may be deductible).  Check both federal and state subsidies.

 

In general, if you itemize deductions, you might as well keep your home mortgage as long as you don't have spare cash to pay it off.  Other kinds of debt tend to be more expensive and risky than student loan debt, so I'd pay them off first, probably.

[lynn]

Ok, but, realistically, can a kid working really pay for school without loans?? I really do not want my kids to start adult life with debt, kwim?

Depends where you live.   We have a great CC here and a few univerisities withing driving distance so ds lives at home while working and going to college.  He received merit scholarships for 2 years at CC that covered most expenses.    He is applying for internship locally for next summer.  We cover car expenses and whatever balance is needed to cover books and expenses.  So yes a child can go to school without loans.  Can they go to any college/university of choice without loans probably not. 

[Anne]

Someone asked a very similar question of Dave on a show I heard. I think this is what he said:

 

- slow down the debt payment enough (I think) to save what you will input into college for a year, by the time first year hits.

 

- once you are in the college phase, save enough each year to fund your intended contribution for the following year.

 

(It might have been, save for the target of 2 years' worth, not just the first year.)

 

Adding to that, this is my parents' funding scheme that I thought was brilliant, and I plan to duplicate it.

 

- Kid pays for first semester in full.

- At the end of the semester, if it was successful, parents "pay back" the kid for the cost of the just-completed semester (either the full cost or a set amount per semester).

- Kid uses that money to fund 2nd semester (augmented by their own earnings, as nessisary) and successfully completes that semester too.

- Parents provide again a "refund" of those costs (in full or a set amount) just in time to help/pay for the next semester up front.

 

This means the kid is always paying their own money, and always invested in their own success, and that they need to work and save up to get started. Also, on graduation they end up a semester's worth of money to buy a home, marry, move or whatever.

 

It works equally well whether it's a full refund or just a relable source of x thousand dollars per semester. Most kids can work for the rest or secure loans once they know exactly how much and when they can expect parental contributions. (My parents did $1000 per semester.)

 

In your case, it gives you 4 extra months to save up what you plan in contributing... Which might make a difference.

 

This.   Exactly!

 

Anne

 

[SKL]

Since you have already figured out that loans will be your family's reality, you might need to get over your aversion to student loans.  If they are less burdensome than other sources of needed cash, then they are a net benefit to the family.  Adult kids who have a college education should feel responsible to defray the costs of their own education rather than saddle debt-ridden parents with it, IMO.

[bettyandbob]

If you haven't talked to your kids, you need to now. 4 years is a very short time. You need to be why they should not make the same choices you did and why you can't help them. Talk about Return on Investment. If you have a good income and live like you have good income ( decent house in decent neighborhood, more than one car) they may be surprised. Better to get over the surprise now and help them prepare now, rather than tell them in 4 years.

 

I don't advocate ROTC or military service solely for the purpose of college money. There are people who've done this and not been able to handle doing what the Army told them to do during service (deploy to a war zone). Military service is great. It is a fantastic way to pay for college IF you are also prepared to follow through with your end of the bargain.

[solascriptura]

Pay off your own debt first. You will do them a great service if they don't have to worry about your financial situation. I have too many friends that are already having to help their parents with parent's everyday expenses.

[Guest]

Since you have already figured out that loans will be your family's reality, you might need to get over your aversion to student loans. If they are less burdensome than other sources of needed cash, then they are a net benefit to the family. Adult kids who have a college education should feel responsible to defray the costs of their own education rather than saddle debt-ridden parents with it, IMO.

Sorry, you misunderstand. Loans ARE NOT our reality. We WILL NOT let our kids take out student loans. Period. I'm just trying to work out the other options.

[Acorn]

I would adjust your views on students loans. My inlaws are "no loan" people and it definitely has hurt us. My dh used a rotc scholarship for college. It was a financial catastrophe. He graduated and then had to serve making low to mid 20,000s. Our classmates made 50-70,000 a year after graduation. If only dh could have used student loans, he could have paid them all within a year and saved for a house.

[wapiti]

Sorry, you misunderstand. Loans ARE NOT our reality. We WILL NOT let our kids take out student loans. Period. I'm just trying to work out the other options.

 

FWIW, I agree with Jane's point above.  A hard position against any loans whatsoever may be unrealistic, all the moreso when family finances may not allow for much contribution *and nearly any financial aid package will probably include Stafford loans* outside of a more rare merit-only scholarship.  Whether a loan amount is reasonable will depend entirely on the particular circumstances of the student, primarily with regard to the likelihood of ability to repay the loan, considering school, degree, likely job prospects, etc.

 

I would use your own finances as a teaching moment, an example of what turned out to be an unreasonable amount of student loans (or whatever other financial decisions since that time didn't turn out to be the smart move, that got in the way of student loan repayment).

 

Eta, before going forward with a loan, I'd also come up with a possible repayment schedule, probably accelerated from whatever the loan source is offering, including a discussion of the frugalities involved.  Student loans aren't inherently wrong or evil, though they do require some personal judgment that would benefit from the careful guidance of grown-ups.

 

Eta again, as to your original question, I would pay down the debt first.

[SamanthaCarter]

Pay down the debt, contribute to the kids educations as much as you can in real time. My parents were in the same boat I think and they were able to pay for me to go to community college for my first two years and then I easily transferred to UGA for my specialized coursework (Masters of accounting). At that point I was on my own and took out loans. They are paid (by DH and I) now. Student loans are not the end of the world if you/they make savvy educational choices. 

 

ETA: I said on my own, but not really. Mom and dad were still shoving some cash in my pockets on the way out the door when I visited. :) :heart

[Pawz4me]

Sorry, you misunderstand. Loans ARE NOT our reality. We WILL NOT let our kids take out student loans. Period. I'm just trying to work out the other options.

 

I don't think you're doing your kids any favors by categorically ruling out the possibility of student loans.  I see a student loan for a degree in a field that pays well as a very good investment.

[maize]

Pay down debt, and help your kids work towards scholarships and plan an inexpensive college path.

[maize]

I would also make sure you are putting some money away for retirement before you invest in college funds for your children. There are many ways to finance college, but not a lot of ways to finance retirement.

[bolt.]

Sorry, you misunderstand. Loans ARE NOT our reality. We WILL NOT let our kids take out student loans. Period. I'm just trying to work out the other options.

 

The DR hard line against reasonable, proportionate and useful loans is one of the major points of disagreement where I stand firmly against him.

 

A loan can be frivolous, or it can be fruitful. Many loans are *obviously* frivolous -- those should be avoided with all vehemence. Sometimes loans seem likely to be beneficial, sustainable (ie a car loan) or even fruitful (ie a student loan)... but, yes, those have the potential to go badly some of the time. I see it that way, but I also think that reasonable people can assess whether any kind of loan is right for them and appropriate for their situation. Guiding that assessment process is much wiser than saying, "No, not ever, not for any reason."

 

The reason DR is against *ALL* borrowing is because he has read certain Bible verses hyper-literally -- with the result that he actually seems to believe it is usually sinful for Christians to willingly enter a debtor/creditor relationship. (Yet, he does allow for reasonable, proportional mortgages on houses... I don't know how he fits that into his theology as I understand it... which means I might not completely understand it.) In any case, his reasoning is theological on this point, and not financial. It isn't advice that makes 100% financial sense.

 

---

 

In addition to that, it's only 4 years before you will have to face the reality that parents of adults don't have the authority to "let" or "not let" their grown children choose loans if they want to. Using your influence is a good plan, and I think you plan on using it reasonably well... Just a heads-up that it might be time to start getting used to the idea that it will become quite normal for them to go against your wishes from time to time. Don't let it break the relationship. Don't try and steer too forcefully.

[Starr]

As you think this through consider seriously how many hours your children would be able to work and do well in school. The above poster mentioned 30 hours a week. I think that's generally unrealistic. Colleges start with 10 hours a week. And many jobs do not pay $10.00 an hour. 

[Jane in NC]

As Wapiti noted, Stafford loans are often a part of a financial aid package.  Your kids can take them and you can pay them back if you are in a financial position to do so. 

 

Financial Aid changes with the family's economic situation, number of students in college, etc. Merit aid is a beautiful thing, in my opinion.  Students are told upfront how much they will receive and the GPA needed to maintain it.  One of the greatest things that we as homeschool guidance counselors can do is help our students find a college that is a good fit and one that is generous with merit aid.  They are out there. 

 

But our students need to do their part with grades, test scores, portfolios if needed.  There are many creative and clever paths for post-secondary education.  If you do not usually read the WTM College Board, I would start now.

[SKL]

Sorry, you misunderstand. Loans ARE NOT our reality. We WILL NOT let our kids take out student loans. Period. I'm just trying to work out the other options.

 

Well, I meant debt, which is the same thing as loans.  What debt are you needing to pay down?

[TranquilMind]

Ok, but, realistically, can a kid working really pay for school without loans?? I really do not want my kids to start adult life with debt, kwim?

Yes, IF the kid is a strong academic performer.  There are schools that provide full rides for that, even if they might not be your first choice. 

[gardenmom5]

what is the interest rate on the loan?

what is the interest rate on the savings/investment?

[MBM]

Have your children study for the PSAT -- do a lot of practice tests -- and take it their sophomore year for practice and then their junior year. If they can make at least National Merit Semifinalist, they stand a good chance receiving some scholarship offers from various universities. Some of these can be very generous. Hate to say it but practicing for the test can help. As the parent, what you can do already is to read about the PSAT, how it works, when your children can take it. Your kids will also probably want to take the SAT before December of their senior year because the PSAT score and SAT score somehow get combined at some point.

 

Your kids could also do something like the 2 and 2: 2 years at community college and then transfer to your state university. How much it would cost would depend on what the schools charge and their financial packages.

 

Also keep in mind that some state universities don't charge much for in-state students while others do.

 

I agree to pay down your student debt first and then start socking money away for retirement if you aren't doing that already.

[wapiti]

Yes, IF the kid is a strong academic performer.  There are schools that provide full rides for that, even if they might not be your first choice. 

 

To add to this, I had a full-tuition merit-and-need-combo scholarship to a selective school. I had a Pell grant.  I *still* had Stafford loans, to cover a portion of the room and board.  As far as I recall, I had the maximum Stafford amount.

 

Need-based financial aid packages will almost always include Stafford loans first before any grants are awarded.  It's nice to say, well we just wouldn't take those, but then if a family had that money to begin with, they would not be eligible for the need-based grant.

 

I would definitely expect that a full-ride that included room and board would be not the highest-ranking program on a student's list as the whole point of full-ride merit scholarships is to attract top students to a program who otherwise would be likely to attend elsewhere.

 

OP, it's a great idea to hang out on the college board, ask lots of questions, read the merit aid discussions, etc.  College without loans is not impossible, but it involves not only great credentials but potentially certain compromises in programs, compromises that might even make great sense for the student, but which should be considered on a case by case basis.

[City Mouse]

Whe you do the FAFSA for you kid(s) it will expect higher contributions based on you income and savings. It does not take debt into account. If you save now, instead of paying down debt, you will have to contribute more and you will still have the debt.

If you pay down as much debt as possible before the kids get to college, then you might have a little more room in the budget to pay as you go for college.

[EmilyGF]

My hubby and I both took on small student loans to get through school. We both paid them off in a lump sum the first month we were required to make payments (9 months after graduation). We would both have been hurt by the philosophy of never taking out student loans. It isn't like borrowing money to buy clothes or go on vacation; if you do it right, you're borrowing money to make yourself employable.

 

We were only delayed in home buying because DH had to move around a lot for his career.

[Mrs Mungo]

There are lots of roads to consider. For example, many public universities offer really good merit based scholarships to transfer students (there are more of these than there are merit based scholarships to incoming freshmen). So, paying out of pocket for a year of community college, then transferring on to a 4 year school might be an easier investment. You need to start investigating the options now.

[Upward Journey]

In addition to that, it's only 4 years before you will have to face the reality that parents of adults don't have the authority to "let" or "not let" their grown children choose loans if they want to. Using your influence is a good plan, and I think you plan on using it reasonably well... Just a heads-up that it might be time to start getting used to the idea that it will become quite normal for them to go against your wishes from time to time. Don't let it break the relationship. Don't try and steer too forcefully.

Yes. This.

 

I had to gently remind my husband last night that we can't protect our grown children (this was in reference to our stb 18yo) from making the same poor choices that we made. We can only steer them in the right direction by letting them know how those choices have affected our lives.