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Save for College or Pay Down Student Debt? Here’s What You Need to Know

Wednesday, August 26, 2020

Americans are facing a crisis of college costs and coupled with the financial struggles brought upon by the pandemic, families with student loan debt are more impacted than ever by this burden. Knowing that the cost of college is rising on average 3-4% per year, parents are caught in a vicious cycle of having to decide between paying off their own debt and saving to help protect their children from a future of higher education debt. 
Both goals are of paramount importance to your family’s financial freedom – and ideally, families should incorporate both loan payments and college savings into their monthly budget. But as a parent, how do you begin to go about approaching the balance of payments, and which goals should be prioritized? 
It’s complicated. And the answer will depend on your financial situation and individual goals. To help make the right choice, consider these factors. 
1. Your Current Loans
Not all student loans are the same, and the nature of your loans will help determine your payment approach. First, look at your interest rates. The average student loan interest rate is approximately 5.8%, taking into account both federal and private loans. If your interest rate is below 6%, it is recommended to direct money toward college savings in order to benefit from market growth over time. However, if your rate is above 6%, it may be wise to focus on paying down this debt quickly to avoid long-term, snowballing interest. 
Additional factors to take into consideration are if your student loans are public or private. If you owe federal student loans, there are various payment plans available for you to choose from, depending on your financial situation. Make sure that you have chosen a payment plan that leaves room in your budget for college savings. For those who have taken on private student loans, you may not have as much flexibility. However, if your private student loans have high-interest rates, you may have the option to refinance, securing a lower rate that will free up your budget for additional college savings contributions. 
2. Your Saving Strategy
There are numerous ways to save for college, including personal savings, mutual funds, a Roth IRA, Coverdell Education Savings Accounts, and more. However, one of the most efficient and tax-smart savings strategies is to save for college with a 529 college savings plan.
In a 529 college savings plan account, contributions grow federally and state tax-deferred, with tax-free withdrawals when funds are used for a broad list of qualified higher education expenses. Furthermore, many states offer an income tax deduction or credit for 529 contributions, making the plans an even more beneficial choice. Several states’ 529 plans also offer various scholarships and giveaways throughout the year, which can help boost savings significantly at no additional cost. 
With the optimized growth and tax savings that a 529 college savings plan can provide, this strategy may help allow room in your budget to balance student loan payments as well. It is also important to keep in mind that the sooner you start saving for your child’s higher education, the more time these funds will have to grow. 
3. The Resources Available
Remember, you are not alone in your struggle against the overwhelming costs associated with higher education. Friends and family can be an excellent and untapped resource when saving for college or paying down debt. With Gift of College retail and e-gift cards, loved ones have a simple and meaningful way to help contribute to your 529 and student loan accounts. 
The resources don’t stop there. A growing number of employers are offering educational benefits programs to employers through platforms such as Gift of College At-Work. These programs may include gift contributions for rewards and recognition, payroll direct deposit into 529 savings or student loan accounts, or even employee matching. Educational benefits can help to significantly magnify your contributions, meaning that whatever balance between savings and loans you choose, your efforts will go that much further. If your employer does not offer educational benefits, take the opportunity to suggest this critical benefit. 
Both saving for higher education and paying off student loan debt are financial goals, and unique for each family – and for many often take even a decade or more to accomplish. This large time window leaves plenty of room for financial situations to change, and the opportunity to adjust payment strategies accordingly. As you evaluate your finances and determine the best balance that meets your priorities, take a holistic and flexible approach, and do not forego other important financial goals, such as emergency funds, retirement savings, and paying off other high-interest debt. 
Whether your financial situation prioritizes saving for college, paying down student loans, or a balance of both, Gift of College is here to provide the platform and tools to achieve financial freedom from the cost of higher education. 


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