Balancing Student Debt and Education Savings

College is a big investment—in both your personal development and your financial future. But a major investment often comes with a major price tag.

In the U.S., the average cost of attending a four-year college, including books, supplies and daily expenses, is more than $36,400 per year—or nearly $146,000 in total.¹ So it’s understandable that many have turned to student loans to finance their degrees. Today, there are 43 million federal student loan borrowers each owing an average of more than $37,000.²

Student loans don’t only impact borrowers right after college graduation—well over half of all student loan debt is held by those between the ages of 30 and 50.³

The “Standard Repayment Plan” for federal student loans is set up for 10 years, but it takes the average borrower twice as long to pay off their debt in full—meaning you may be thinking about helping the next generation pay for their college experience before you have finished paying off your own.⁴

Many parents want to assist their children financially so they can avoid student loans, with three in four parent borrowers saying they put their own financial goals on hold to take out student loans for their children. ⁵

If you’re in this situation, maintaining your financial well-being will require finding a balance between your obligations and your support for your children. At Morgan Stanley, we work with clients to plan for these sorts of milestones and shifting priorities, helping to guide each to find solutions that meet their personal needs. Let’s go over some approaches for managing these two important goals at the same time.

Strategies for Paying Down Student Loan Debt

Making certain adjustments to your student loans can potentially impact the total amount you’ll pay.

One option to consider is consolidating or refinancing your loans, which could lower your monthly payment, making room for contributions to a college savings account for your child. However, if you go this route, pay attention to any impacts on both your interest rates and repayment schedule. A single, lower monthly payment may offer ease and convenience, but it could extend your repayment term without offering any savings in the long term. You may also have the option to refinance federal student loans with a private lender, but keep in mind that there are potential downsides, such as giving up the benefits and protections that federal loans provide.

You may also want to set up automatic bill-pay. Not only does this help you avoid missing or being late on your payments, but it also can occasionally come with interest rate incentives.

Paying more than the minimum monthly bill, when possible, may help lower your total interest owed. One way to do this is to allocate any windfalls to your debt. If you receive a bonus, tax refund, equity compensation payout or other extra cash, consider using at least some of it to pay off your student loans. And if it’s a recurring increase—such as a raise—you might consider putting a percentage of it toward your monthly payments. These occasions would also be good times to revisit your budget.

Lastly, remember that if you’re in a deferral period—when payments are not required—any unpaid interest that accrues during this period may be added to the principal balance when your loan enters repayment. This “capitalized interest” can increase your overall debt load. As such, it can be wise to continue paying down interest to keep capitalized interest at bay and save you in the long run.

Strategies for Saving Up for a Loved One’s Education

First, if you’re saving for a loved one’s education, begin early. Giving yourself more lead time to build up your savings will spread out the financial burden and make it more manageable. And if you invest the funds using a specialized education savings account, such as a 529 plan, even small amounts of money will have the potential to grow, thanks to the power of compounding. You might experience some tax advantages, too.

Note that you don’t need to have the full amount saved by enrollment day—you can continue contributing to education savings accounts and potentially growing earnings over the course of your child’s schooling.

While you’re saving, it’s important to know exactly what you’re saving for. Will you be covering the costs in full, or only covering some, like tuition? How many people will you ultimately be saving for? Does your plan account for public or private school? Knowing that level of specificity about your goals can help you define a path to achieving them.

As part of building out your roadmap, you’ll also want to reevaluate your budget. While carving out room for the essentials, including your own student loan payments, an emergency fund and retirement savings, identify opportunities to steer some dollars toward your education savings goal for your children.

Using Morgan Stanley’s Spending + Budgeting Tool, Financial Advisors can help you monitor incoming and outgoing cash, gain insights on your spending habits and create custom budgets no matter where your money is held—both at Morgan Stanley and externally.

Other Ways to Pay for College

As you well know, if you have student loans, there are several ways to cover education expenses beyond personal savings. If you need to supplement the amount you’ve saved, you and your child can look into financial aid, scholarships (local, national and through any affiliate groups) and work-study opportunities. You may wish to speak with a professional, such as your guidance counselor, financial aid officer or Financial Advisor, to discuss your options.

If needed, you can also take out a loan. You might consider co-signing on a student loan with your child, or taking out a personal loan or parent PLUS loan (also known as a Direct PLUS Loan), which is specifically designed for parents helping their children pay for college. For more information on eligibility and other details on parent PLUS loans, visit studentaid.gov.

The Bottom Line

We recognize the challenges that come with paying down student debt, including the ability to save for all of your other goals, like financing your child’s education. But you have options.

Connect with your Morgan Stanley team today for more information on your options and guidance on how to strike the delicate balance of saving up while paying down debt.