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How to Make Sure Your Child’s Student Loan is an Investment

I have worried that putting money into a 529 might not work out well enough to fund a college degree for my kid. This post covers how to make sure your child's student loan is an investment - you want that money to grow! Otherwise, they might not be able to afford college.

It’s no secret that higher education is expensive. Even in countries where there are a lot of financial aids for students, not all costs are covered, and once you get beyond degree level, you’re on your own in most places. This means that taking out a student loan is a big deal. It can be a huge expense, and is a major financial decision. If your son or daughter does well in their studies, then there’s no reason that this loan won’t be a great investment, but costs can still spiral. You can give things a helping hand by following these three rules:

1.      Use the Government First

Whether you’re in the US, UK or anywhere else, it’s vital that you check to find out how the government can help you before you take a look at private lending. It’s often cheaper, easier to obtain, and there can be other benefits such as deferring costs. In many cases, the government department that lends the money isn’t really looking to make any money back on loan interest. They want to make money back on the taxes your child will pay when they’re earning a successful wage.

2.      Limit Borrowing

There’s a general rule of thumb often used when it comes to working out how much you should take out. Quite simply it is that the total loan you take out should not exceed the total earnings that can be expected in the first year of employment. Why is this? Simply because it means that, all things being as expected, you or your child will be able to pay off the loan quickly – in approximately ten years after graduation.

3.      Limit Overall Costs

You can limit the size of the loan taken out, and the amount your child spends, by making them budget and cutting out unnecessary outlays. There’s no point taking out additional loans for things like accommodation and transport if you can help out or share. Even if there are emergencies when there’s a gap between loan payments, there are companies like Smart Pig that specifically help students. Time spent at university is not a time for partying and luxury, whatever people might want you to believe. Teach your son or daughter how to keep costs down, and you’ll be left with a much smaller bill at the end of their education.

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