Higher education is still one of the best investments someone can make in their future, but there is no doubt that student loan debt is hamstringing young adults for years, even decades, following graduation. In fact, the average student loan debt for a graduate in the class of 2017 was more than $39,000, according to Student Loan Hero. Recent statistics also show that there are 44.2 million Americans living with student loans, amounting to $1.48 trillion in total U.S. student loan debt.
Entering the working world with a significant amount of debt poses many financial challenges. Balancing new living costs on an entry-level salary is a challenge in itself, and student loan debt only serves to add another layer of difficulty.
Put yourself first
With life expectancy on the rise, many Americans will need to live off their retirement savings for 20-30 years.
Significant unplanned expenses, such as helping a child repay student loans, can jeopardize both your ability to make future retirement contributions and your current nest egg. If you want to help your child or loved one pay off student loan debt, it has to be carried out in a way that puts your financial future first.
Most importantly, avoid using 401(k) funds to help with student loan repayment. This may create a retirement savings shortfall, ultimately placing the financial burden back on adult children who might have to provide financial assistance during your retirement.
For those with younger children or children currently enrolled in college, consider setting money aside now to help repay student loans in the future. You can even set up automatic contributions to a separate savings bucket specifically for student loan repayment, to ensure there are funds reserved for the expense once your child graduates.
Many parents grapple with the best mechanism for actually helping with the repayment process.
You may want to think outside the box and consider student loan repayment matching. Essentially, you would either match the monthly student loan payment dollar-for-dollar or 50-cents on the dollar. Say, for example, your recent college graduate owes $300 monthly. Assuming he or she makes the full $300 payment, a dollar-for-dollar match brings the total payment to $600. Regardless of the exact amount, matching is a great strategy for motivating recent college graduates to make consistent payments, while also shortening the overall lifespan of the loan.
Student loan contributions also make for great birthday, holiday, or special occasion gifts. Instead of gifting a new gadget or pair of designer shoes, consider writing a check or making a deposit with funds specifically earmarked for student loan repayment. Though not as flashy or exciting, any extra money to supplement regular payments can truly make a difference.
Finally, do not be afraid to let your recent graduate move back home for a pre-determined amount of time. While it might have been thought of as taboo in the past, data from the most recent census shows that more and more young adults are returning to the nest. Among many reasons, boomeranging home provides a terrific opportunity for recent college graduates to save money while using income to make a significant amount of progress on student loan debt.
The desire to assist with student loan repayment is quite gracious, a boost your adult children will greatly appreciate for years to come. However you choose to help, ensure the strategy takes into account your own long-term financial goals.
More from Make It Better:
- 5 Ways to Teach Your Kids How to Save Money
- Saving for College: Tips, Tricks, and Mistakes to Avoid
- Key Takeaways From Chicago’s Premier Investment Ideas Conference, Invest for Kids
Sabina Sewillo is a Family Wealth Advisor, Vice President and Financial Advisor with the Wealth Management Division of Morgan Stanley in Chicago. The information contained in this column is not a solicitation to purchase or sell investments.