College Savings

Saving for College While Paying Off Student Loans

When deciding which to prioritize, use tools to determine the cost of delaying saving for college and the interest you will save by prepaying your loan.
Parents and young son using laptop together

These days, paying for a college is a multi-generational affair. Parents have to juggle saving for their children's college while at the same time paying off their own college loans. I know this from personal experience. After 20 years and at the age of 41, I just finished paying off my federal student loans. I also have a 7-year-old son for whom I am saving. There's only so much money available every month of course. If you're like me, you have also wrestled with how to prioritize between saving for college for your kids and paying off your own loans. Like every question of personal finance, this is going to be up to you and your family to judge for yourself. But as you make this decision, there are some things you can consider.

Your monthly student loan payment is calculated to fully repay your student loans by a specified date. So if you keep making your minimum monthly payments, eventually your loan will be paid in full. This isn't like a credit card minimum monthly payment that may not ever be paid if you only make the minimum. So it may benefit you, like it did me, to have patience and not try to pay more than your minimum payment. It would feel really good to pay off your student loan early, and it would actually reduce your total loan cost, but if you are making your minimum monthly payments, that day of you last payment will eventually come, and that extra money that you are using to pay off your loan could be going to your child's college savings.

But wouldn't paying off your loan early free up money to use for college savings once your loans are fully repaid? Yes, but at the same time, one of the wisest strategies for saving is to start early and use time to your advantage. So we always recommend starting to save for college, even a small amount each month, as early as possible.

Now let's assume that you are saving some money every month towards college savings, and also making the minimum monthly payment on your student loans, and you find that you have some extra money that you can designate towards one or the other. How do you know which method would take your money further?

It ultimately comes down to the question of whether you are losing more money by delaying saving or by paying more interest on your loans. If that sounds a little confusing or complicated, well, it is. But as luck would have it, there are tools that can help you figure it out. MEFA's comprehensive College Planning Tool contains a cost of delaying savings calculator. This will tell you how much more money you will need to contribute if you delay saving for college now. You can compare this with a loan payment calculator like this one that will tell you how much interest you will save by prepaying your loan.

You may also consider lowering your monthly loan payment and overall cost by refinancing. If you have private loans that you are paying, you can apply for a refinance loan to take their place and hopefully provide you with a lower interest rate and monthly payment. You could direct the savings towards your child's college plan. If you have federal loans, you may be able to lower your monthly payment without refinancing by selecting a different repayment plan. Talk to your federal loan servicer about your options.

It is much harder to make up for lost time in saving for college than it is to refrain from paying off your student loans early. That's why I set a schedule that balanced paying off loans and saving for college in amounts I thought were prudent. And I used time to my advantage. As stated above, you need to use your money in a way that makes the most financial sense for your family. But make sure you understand how each choice will affect your long-term finances before you make your final decision.