4 considerations for parents with 529 plans

Posted on September 17th, 2013

This summer, college students and their parents narrowly avoided a student loan interest rate hike that would have raised interest rates on new subsidized Stafford loans from 3.4 percent to 6.8 percent. The deal set Federal Stafford Loans for undergraduates at 3.85%, Graduate PLUS loans at 5.4%, and Parent PLUS loans at 6.4%.

While college-bound students and their families breathed a collective sigh of relief, the deal came with a catch: student loan interest rates would be tied to the health of the economy. If the economy improves as economists predict, rates would increase in coming years. In fact, rates would likely climb higher than they were this past spring.

For families who have saved for college with a 529 plan, the new deal presents an interesting conundrum. Should you use the funds in your account now to pay for your student’s education or save them for the future, when it might be more expensive to borrow?

Experts say that families and students should take advantage of low student loan interest rates over the next few years to maximize their college savings. U.S. News & World Report put together a list of 4 considerations for families with both students already in college and those starting soon.

Here 4 things for parents with college savings to think about as they prepare to send their children to college.

1. Is your child planning on attending graduate school?

If so, it’s better to borrow student loans in undergraduate, rather than graduate school. Even if federal student loan interest rates rise, interest rates on federal loans for graduate school will always be higher. So if you have college savings, such as a 529 plan, it might be wise to save these funds for graduate school. This will give your investment more time to grow as well.

2. How much does the student actually need for school?

Even though interest rates are low, don’t borrow money you don’t need. Students who borrow more than they need will likely end up spending more for college in the long run.

However, experts say that if a student qualifies for subsidized student loans, these loans should be borrowed up to the amount needed. These loans are a good deal because they do not accrue interest while the student is in school. And since they aren’t available for graduate students, students would be wise to take advantage of them while they’re available.

3. Will your investment returns will offset interest rate charges?

Remember, interest accrues on unsubsidized loans while the student is in school. Your financial advisor can give you a good idea of what makes sense for your situation. The earlier you borrow, the more time there is for interest to accumulate on the loans.

Some experts say that the best decision may be to use equal amounts of borrowing and college savings throughout college. This is a conservative approach that makes sense even if interest rates rise.

 4. How will interest rates change in coming years?

While we have no way of knowing exact what the interest rates will be in future years for student loans, the one trend likely to continue is that tuition and the price of college will rise. Experts advising saving as much as possible for your child’s college education. That way, no matter what interest rates turn out to be, you’ll be in the best financial position to send your kids to college.

Category: Financial Aid

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