17 Jan Before you pay your student’s college loans

Q. My daughter will be a college freshman next year. If she takes federal loans and I want to pay them for her after graduation so my investments can grow, will I have to pay the full interest on the loan (like some loans) or will the payoff be just a little interest?
— Dad

A. If you have a crystal ball that will tell us what the markets will do over the next five years, please share.

Without that, or a Magic 8-Ball, you could be taking a chance.

“When people ask me to invest for them, the first question that I have is the timing of when you need this money back,” said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton. “If she is a freshman next year, you are cutting it rather close.”

Lynch said if you invest for five years or less, generally, it’s not investing, but speculating.

He said we’ve seen a tremendous market run-up since 2009, so it’s very reasonable that we could have a substantial decline.

“In addition, with a new president, anything is possible, so be careful,” Lynch said. “With the timing that you have, you can end up with less then what you started with if we have a market decline.”

Now, to your question on the student loans.

There are subsidized loans, for which the government pays the interest while your daughter is in college. Then there are the unsubsidized ones, and interest accrues from the day the lender gives you the money, Lynch said. Finally, there are private loans and the terms will vary depending on the lender.

Generally, Lynch said, you will have to pay interest from the time the loan is made.

Lynch says as you consider taking loans, you don’t have to take every penny you’re offered.

“Unrealistic student debt is a major issue that is destroying retirement plans and new careers,” Lynch said.

And you should think about after-tax dollars.

“If you have $50,000 in student debt, that is really $70,000 to $75,000 that you need to earn to pay that off,” he said.

He recommends students consider community colleges, which he says is a great way to get core classes out of the way on the cheap. Then you can transfer to a school with a good reputation.

“Generally if you finish your last two years at a college, you graduate with a degree from that school,” he said. “That can save you over $100,000 versus a private school. That’s the same as $150,000 pre-tax. Something to think about.”

And make sure you pay attention to gifting rules if you decided to pay off the loans.

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This post was first published in January 2017.