By Richard Wesselt, Founder and Principal, Wesselt Capital Group
In 2019, almost 2 million Americans will graduate with a bachelor’s degree and 70 percent of them will have student loan debt averaging about $33,000 each. Some will have much higher debt. While much of the focus today is on the difficulties these young adults face paying back that debt, the true cost goes even deeper.
One factor to consider is lost savings. For example, when Joey graduates at age 22, he has $100,000 in student loan debt and a 10-year payback period. At the end of that payback period, he will be age 32 and have paid back $150,000. It is unlikely he will be able to save and invest very much, if at all, over this time.
Now consider Mary. Her parents saved throughout her childhood, and she did not have to take out student loans. By the time she reaches age 32, she has invested $100,000, assuming a 5 percent return, and by the time she reaches the age of 74, she will have $1.2 million.
Of course, the best way to avoid these problems is not to borrow money for an education or borrow a minimal amount. But if you do, there are other types of loans that make more long-term financial sense.
Alternative Borrowing Methods
For example, if a parent has a whole life insurance policy with a $1 million policy death benefit, they can borrow against it. If this policy has $400,000 in cash value, and the parent takes a $50,000 loan each year for four years, the $200,000 borrowed will have to be paid back. Instead of the child borrowing from a bank, they can pay back some or all to the parents without interest.
This example highlights just one of the benefits of buying a whole life insurance policy rather than a term policy. While the initial outlay for whole life may be more than for a term policy, the premium paid becomes a savings and investment vehicle. It earns cash value in the insurance company’s general portfolio and becomes another form of forced disciplined savings—which can be used for things like college education.
Another strategy to help students avoid student loan debt is for parents to take out a Parent Plus loan for some or all of the money needed and pay interest every year, so the balance does not become too high before the student graduates.
Payback Strategies and Planning Ahead
What about all the students graduating in 2019 with substantial student debt? How do they save when they are saddled with high monthly payments? One strategy is to take the student loan to the bank and restructure it on a 25-year payback schedule. This lowers monthly payments and the difference can be invested for the future. This naturally assumes that the interest rate spread makes good economic sense.
The cost of a college education is just one more reason why young adults need to start financial planning when or before they start a family. Disciplined saving and strategic investments over 18 years can put parents in a much better financial position when their children are ready for college and help the entire family avoid the burden of student debt that is crippling so many college graduates today.
Do you have a novel strategy for avoiding student loan debt? Do you want to share your student loan borrowing or repayment strategy? Leave a message in the comments below. And if you would like to start planning for your children’s college education, give our office a call.