Millennials have been having fewer kids than previous generations—or at least are waiting until later ages to have them. There’s not much debate about that. What is subject to lots of debate is how big a factor the burden of student debt plays in discouraging folks from starting families.
Let the experts argue. In my financial planning practice I see real people who are struggling to balance student loans and having children. Currently, I’m working with someone who likely has to make a choice between paying off her student loans and starting a family.
If she pays off the loans, it’ll be nearly impossible for her to afford having a child. If she has a child, it would introduce expenses that make it extraordinarily difficult to keep repaying the loans.
What would you do? How do you possibly pick among such choices, or realistically, lack thereof?
Admittedly, this client is an extreme example. But millions of Millennials, as they begin their lives and careers, need to consider how to balance paying off their student loans with their other financial goals—be it children, homeownership, or saving for retirement. Here are some points to keep in mind.
1. Be Wary of Negative Amortization
Income-driven student loan repayment plans are a great way for those just coming out of school to have a manageable monthly payment. The flip side of a small payment is that it may be smaller than the interest that is accruing, so you end up having negative amortization. That’s financial planner speak for “You owe more today than you did last month, even after making a payment.”
This is fine if you are going for a forgiveness program, but may lead you to having to repay far more in the long run than if you were on a standard repayment plan. For example, I consulted with a married couple who took out a total of about $160,000 of student loans. They started their careers in lower paying jobs and on income-driven repayment plans, paying a few hundred dollars monthly.
A decade into their careers, the balance sat at $210,000. By then, their income had risen enough that their income driven repayment was no longer helpful, so they had to repay the loans on a standard payment plan. Only they now had $50,000 more to repay than when they started.
So before you jump straight to the plan that gives you the lowest monthly payment, consider the balance between low payments now and more total debt to repay later—at a time when you might, for example, want to be starting a family.
2. Seek Loan Forgiveness Opportunities Wherever Possible
There are dozens of loan forgiveness programs out there. There’s the big one many of you have heard of, Public Service Loan Forgiveness. But there’s also the Teacher Loan Forgiveness Program. The Attorney Student Loan Repayment Program. The Veterinary Medicine Loan Repayment Program. A program for healthcare workers in Alaska. A Program for STEM Employees who live in Maine.
The point here is that there are many options for loan forgiveness, each with its own dizzying set of rules. But one of these programs just might get your student loans to a manageable spot much faster. Make sure you’re actively researching which ones apply to your current field, as well as if there are any jobs you could apply for that would make you eligible for additional loan forgiveness opportunities.
3. Don’t Feel Pressured to Buy a Home
For most people, your home is not an investment. Don’t be misled by the conventional wisdom (perhaps even spouted by your parents) about homeownership being the way to build wealth. To the contrary, sinking money into a home when you have barely manageable student loans may lock you into a situation where you have no financial flexibility. And flexibility is key if you’re trying to repay student debt and build for the future.
Once you’ve committed to a mortgage, you lose the ability to move to a lower cost of living area, or seek jobs in other states with higher pay or better loan forgiveness opportunities. You’ll also be on the hook for all the maintenance costs of running a home. Buying a home should come only after you’re on a clear and manageable path for student loan payoff.
4. Look for Employers Who Offer Student Loan Repayment Assistance
This is a rapidly growing benefit being offered by employers. The programs vary in amounts they cover and exactly how they’re structured, but anything extra you can get to go towards your loans will make a huge difference over time. This is an important consideration if you’re comparing job offers. In some cases, it could easily offset a slightly higher salary offer that doesn’t come with the student loan repayment assistance.
5. Save Enough for Retirement to Get the Employer Match
Saving for retirement when you have a mountain of student loans can feel impossible. But getting the employer match is the only way out there to instantly turn $1 into $2. Prioritize this before paying down students loans faster. In the long term, keep in mind that the amount you must save to get your employer’s match is likely a minimum, not maximum, amount you need to save for retirement.