5 Ways Parents Can Prepare for Student Loan Repayments . If you’re a parent who took out a federal student loan for your child and you’ve been taking advantage of the payment freeze as part of the COVID-19 emergency relief, then things are about to change. Starting January 31, 2022, payments will resume and no further extensions are expected.
For many parents who were financially impacted by the pandemic, restarting these payments may pose quite a challenge. In this post, we’d like to offer five strategies for how you can get prepared to manage them.
1. Adjust Your Budget
Just like any other loan or expense you have, the best way to be ready for it is to work it into your budget.
Don’t have a budget? Then use this guide to learn how you can easily create one. Any good budget is really just a balance of income and expenses. As long as the sum of your expenses doesn’t exceed your income, then you’re off to a good start.
If it appears that these student loan repayments are going to put your budget in the red, then you’re going to want to make some adjustments immediately. Start by taking a hard look at your discretionary expenses like eating out or entertainment, and decide where cuts can be made. It may be hard at first, but it’s what needs to happen to make sure that you don’t miss your payments and avoid further financial trouble.
2. Plan to Use Your Windfalls
Are you expecting a big refund check when you file your tax return this year? Maybe you’ve got a profit-sharing check or end-of-the-year bonus coming your way?
Regardless of the source, if you’re expecting to receive a sizeable chunk of money in the near future, then earmark it for these student loans. Depending on the size of this windfall relative to your payments, it may be enough to cover them for the next few months.
One helpful way to keep yourself from using this windfall on something else is to partition it from the rest of your money. This can be done easily by putting it in a separate savings or checking account. Once this money is “out of sight, out of mind”, you won’t be nearly as tempted to spend it.
3. Look into IDR Options
Sometimes despite your best efforts, making those student loans fit into your budget just isn’t going to be possible. When that happens, one thing you can do is apply for an IDR or “income-driven repayment” plan.
IDRs adjust your payments so that they are more affordable relative to your financial situation. This is generally not only dependent on your income but also your family size. Most people who apply for an IDR will qualify for at least one of the four available options:
- Revised Pay as You Earn Repayment Plan (REPAYE Plan)
- Pay as You Earn Repayment Plan (PAYE Plan)
- Income-Based Repayment Plan (IBR Plan)
- Income-Contingent Repayment Plan (ICR Plan)
Under each of these options, your term will last 20-25 years. Any outstanding balance after this time will be considered forgiven.
For more information or to see if you qualify, check out this webpage from the U.S. Department of Education. Note that if you took out a Direct PLUS loan, then you will only be eligible for the ICR plan (as long as you first apply for a Direct Consolidation Loan).
4. Apply for a HELOC
Is your mortgage paid up to date? Have you built up a sizeable amount of equity in your home? If so, then you might want to consider a HELOC or “home equity line of credit”.
A HELOC works more like a credit card than a traditional loan. Instead of borrowing a lump sum of money, you take money out of HELOC as needed. Your move here would be to use these HELOC funds to make the student loan payments.
Although it might sound a little funny to use one loan to pay for another, there is some logic to this approach. When you consider that the average HELOC interest rate is 3.88% versus the average federal student loan interest rate of 6.28%, you’re effectively reducing your interest payments by 2% annually.
Plus, the structure of HELOC can also be used to your advantage. Most HELOCs only require you to pay the interest on the money you borrow during the draw period. The repayment of the principal doesn’t start until about 10 years later, so you’d basically be offsetting the loan by a decade into the future.
HELOCs let you borrow as much as 80-85% of your home’s current market value minus the balance you still owe on your mortgage. For instance:
- Let’s say your house is worth $300,000
- But you still owe $200,000 on your mortgage
- This means you could borrow up to ($300,000 x 0.8) – $200,000 = $40,000
5. Take Up a Side Hustle
Whether you’re coming up short or just want to pay off your student loan faster, one sure-fire way to do this will be to increase your income. How? By taking up a side hustle.
Side hustles are great because they’re extremely flexible. There are literally thousands of different things you can try based on what you like or are willing to do.
For example, you could:
- Become a rideshare driver using Uber or Lift
- Deliver food for Grubhub or Uber Eats
- Grocery shop for other people with Shipt or Instacart
- Become a freelance writer, graphic designer, or social media manager for clients on Upwork or Fiverr
Want some more great ideas? Check out this list here.
Get in Front of Your Payments
Regardless of what effect the pandemic has had on your finances, don’t ignore your obligations or assume you’ll be able to handle your payments when they come due. The best path for success is to take responsibility and make a plan. Consider each of these tips and which ones might be the most effective. The sooner you determine how you’ll make your payments, the easier it will be to manage them.