The pandemic has not only impacted the methods used by professors to deliver coursework, but also the funding sources available to fund a good college education. When it comes to planning for college, it is critical to understand the options you have with available funding sources such as a 529 plan or a student loan. It is also critical to learn about the financial planning strategies that can help you reduce anxiety over funding a good education.
For many students, their source of higher education funding comes in the form of federal and/or private student loans and for some of these students, employment income is a source of funding to pay down their loans. Considering the current economic downturn and the unprecedented level of unemployment, many students have lost the income source that was paying for their education. For those students who are still enrolled in a degree or certificate program, you may have a six month grace period post-graduation, before you are required to pay down your federal loan but if you are already past the six-month mark, it may benefit you to know that the recent enactment of the CARES Act provides further relief for federal student loan borrowers. Through the CARES Act, the interest rate on federal loans owned by the U.S. Department of Education has been temporarily reset to 0% and borrowers have the option to suspend monthly payments until September 30, 20201. When it comes to private student loans, repayment options are dependent on the private lender. You may consider refinancing your private loan to obtain a lower interest rate and thus reduce your monthly payments. During this unprecedented time, many lenders are also taking into consideration the financial hardship that their borrowers may be facing and are offering a deferment or forbearance period.
Another source of education funding comes in the form of 529 College Savings plans. In addition to after-tax contributions, the accumulation of savings in these plans is highly dependent on the performance of the investments within these plans. Market volatility during recent months has impacted the performance of the investments in many of these plans, which in turn has taken a toll on account balances. The debate that arises is whether to liquidate the account, reallocate to safer investments, or ride the wave. The answer lies in the time frame of when the distributions will occur. The longer the time you have before distributions begin, the better it is to stay invested. Although reallocating to safer investments seems like an attractive choice, you may want to consider a strategy that allows you to keep your investments in the plan intact while you make use of alternative resources2. The SECURE Act that was put into legislation earlier this year allows for federally tax-free distributions of up to $10,000 from 529 plans to pay for student loans. Therefore, one such strategy that you might want to consider is the use of a student loan for immediate needs while keeping your investments in your 529 plan intact to reap the rewards of market growth.
In conclusion, education is priceless and the benefits reaped from a good education are boundary-less. It may seem like a never-ending battle with a multitude of decisions to make when it comes to finding a good education, but as best quoted by Benjamin Franklin “An investment in knowledge pays the best interest”.
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