The Hidden Costs of Student Loans Parents Should Know About

Think you know the cost of student loans? Think again. Hidden fees, compounding interest, and more could catch you off guard.

Hello Discerning Parents and Future Graduates,

Today, we dive into another essential chapter in the financial labyrinth of higher education. For all the Jills and Jacks walking the tightrope between funding college and safeguarding your own financial future, this one's for you.

Student loans can feel like a simple solution to a daunting problem—until the hidden costs begin to emerge. Let’s break them down so you’re prepared for what lies ahead.

Interest Costs—Compounding While You Wait

• The Reality:
  Interest starts accruing on unsubsidized loans the moment they’re disbursed. Parent PLUS loans are even less forgiving, requiring you to shoulder all the interest.

• Why It Matters:
  Borrowing $20,000 today could easily grow to $30,000 or more, especially if payments are deferred until after graduation.

• Pro Tip:
  Consider making interest-only payments while your student is in school. Even $50 a month could save you thousands in the long run.

Origination Fees: The Hidden Tax

• The Reality:
  Federal loans, including Parent PLUS loans, charge origination fees. For example, PLUS loans currently carry a 4.228% fee. Borrow $20,000, and you’ll receive only $19,154—but owe the full $20,000.

• Solution:
  Factor in these fees when calculating your borrowing needs and consider applying for scholarships to bridge the gap.

The Cost of Deferring Payments

• The Reality:
  Many parents defer Parent PLUS loan payments until after graduation, but interest doesn’t take a holiday.

• Example:
  A $50,000 Parent PLUS loan deferred for four years could accrue $10,000–$15,000 in additional interest.

• Pro Tip:
  If possible, start small monthly payments to minimize the ballooning balance.

Variable vs. Fixed Interest Rates: A Double-Edged Sword

• The Risk:
  Private loans often entice borrowers with low variable interest rates—but those rates can increase dramatically over time.

• Why It Matters:
  A manageable payment today could strain your budget tomorrow.

• Pro Tip:
  Opt for fixed-rate loans for predictability, even if the initial rate is slightly higher.

The Opportunity Costs of Repayment

• What Parents Miss:
  Paying off student loans can delay retirement savings, purchasing a home, or other financial goals.

• Solution:
  Borrow only what you absolutely need and focus on balancing college costs with your long-term priorities.

Loan Forgiveness Programs: Not a Sure Bet

• The Assumption:
  Programs like Public Service Loan Forgiveness (PSLF) seem like a safety net.

• The Reality:
  Stringent requirements mean many borrowers fail to qualify. Missing just one payment can disqualify you.

Emotional Costs: Debt Stress Is Real

• The Reality:
  Carrying significant debt can impact both parents and students, leading to stress and financial strain.

• Solution:
  Set clear boundaries with your student on how much you’re willing to borrow and have an honest conversation about realistic college choices.

Plan Ahead to Avoid Surprises

Student loans can be a lifesaver, but their hidden costs can catch families off guard. By understanding these risks and planning strategically, you can help your student achieve their college dreams without jeopardizing your financial future.

Want to create a college funding plan that works for your family? Schedule a Getting Acquainted Call today to explore smarter ways to manage education expenses.

Warm regards,
Julie Bray

Your Family's College and Retirement Champion
GW Financial, Inc.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by GW Financial, Inc. to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2024 GW Financial, Inc.