Don’t Wait to Live Your Life
The not-so-scary guide to adding a new member to your clan while paying off your college education.
Having a child; biological, foster, adopted, or whatever, might be the biggest decision you make in your life. There may be a few that have a larger financial impact over your life, but none that are as impactful, as you are actually deciding to create a life and be responsible for the formative years of another human being.
This article is not about your decision to have children or how to raise them. That is way beyond the scope of this article, and I wouldn’t presume to know your personal situation. However, I am aware of the financial impact that children can have and how to prepare for the unavoidable expense they incur.
I will also admit that I have neither lived nor witnessed every permutation of a family that exists. They say to “write what you know”, so I am writing this from the perspective of a husband who brought way too much in student loan debt to the table when marrying his wife, who then had an unplanned, premature baby 7 months after the wedding.
When I write “your husband” or “my wife”, I am writing from a cis-gender, heterosexual, traditionally married, college-educated, white, male point of view. Also, any reference to a “baby” can be filled in by any child that is newly dependent upon you. We will discuss adding a family member in a non-traditional fashion (adoption, foster care, grandchildren, etc.) later in this article.
Before we get too far into the weeds of dealing with student loans while starting a family, I want to go over the costs of raising a child.
If you are already a parent, then you are intimately aware of just how expensive a child can be. If you are not already a parent, the following articles may have alarmed you to the various cost estimates.
There are three main types of expenses associated with raising children: direct, marginal, and indirect.
Direct expenses mostly include consumables such as food and clothing but also cover non-tangibles such as extracurricular activities and lessons. The biggest direct expense will be education and child care. We touch on child care further on, so let’s focus on education
You need to identify what type of education you would like for you child. If the schools in your area are great, then this might not be stressful. However, if the schools are bad, then what do you do? Move to a better school district with higher housing costs? Pay for private schools? Home school?
I don’t have the answer, but I will tell you what we decided. Early on in our daughter’s life, we decided that a Montessori education was important. Even though we lived in a top 5 school district in our state, we viewed conventional schooling with skepticism and are now paying $12,000/year for a private Montessori education. You may not agree with us (many certainly won’t), but our priorities dictated that this is the choice for our family.
Marginal expenses are those that just increase the cost of things you are already paying for. Examples are housing and transportation. A studio apartment for two in SoHo probably won’t cut it for long with a new baby. Neither will the sports car without a back seat that you love to go cruising in. More space for more humans is the name of the game.
One of the biggest marginal expenses is health insurance. The cost increase from Single to Married is usually small relative to income. Add in a child, though, and your costs could double or triple. Add in the fact that children get sick or visit the doctor more often, and you’ll be maxing out the deductible and out-of-pocket maximum that you barely made a dent in during your childless years.
Indirect expenses are what I call the shadow costs of having children. Having kids changes your whole world, and it has effects beyond what you can control.
Career-wise, having a kid could be a bane or boon. Stereotypically, having a child helps men and hinders women. Men with children are both more likely to be hired over childless men and receive higher increases in pay. Conversely, women average a large drop in salary after the birth of their first child and never catch up to their childless peers.
Socially, you might find that your social circles shift, sometimes dramatically, after having a child. Rarely will anyone ever directly express that your child is the reason for moving away or closer to you. Rather, your relationships will gradually move in a new direction. You might also be surprised by how things change. You might expect childless friends to drift away and become closer to other parents, but the opposite frequently occurs.
Finally, having a child has an environmental impact. In fact, it is the most environmentally impactful decisions that humans can make, especially in the developed world. The quote below is from a 2017 meta-analysis of environmental impact research papers.
…a US family who chooses to have one fewer child would provide the same level of emissions reductions as 684 teenagers who choose to adopt comprehensive recycling for the rest of their lives.
If one of your high priorities is the environmental impact of your actions, then this might affect your decision to have a child now, or at all.
These are expenses are just the beginning. There are myriad resources that expand on the costs of raising a child, and I encourage you to read as many as you can. To get an idea of how much money you will need annually for each child, go to this calculator from the USDA. It breaks down the estimated costs per kid by category, adjusting for your geographical region and approximate income.
Once you have a good handle on the financial impact of starting a family, the next step is to identify your financial goals and how your student loan debt will factor into those. Pre-baby and post-baby life will never fully resemble each other, so while your financial goals may look similar in the end, you need to decide that sooner rather than later. Otherwise, you may end up with a 10-year-old and wondering why you’re still paying student loans after 120 PSLF-qualifying payments.
Debt Payoff / 10-Year Plan
If you were working towards paying off your student loans ASAP, or even just happy with the standard 10-year plan, then a baby may have significantly interrupted those plans. Weigh the pros and cons of keeping with your debt plan. Some things to think about include your debt payoff timeline and the number of kids you currently have/plan to have.
If you have been paying off your student loan debt aggressively and have only a short amount of time until it is finished, you might want to consider keeping your current strategy. First, it will eliminate a large financial debt from your future, as well as giving you piece of mind. Second, babies don’t remember much, if anything, from their first 4-ish years, so expenses can be kept to a minimum without any fuss from the baby.
However, if you just started your debt payoff plan but still have many more years to pay it off, you might want to reconsider. Maybe your plan was to pay off your debt in 6 years while keeping on a 10-year plan. You cold now just keep with your 10-year plan and sock that other money away for the unexpected yet inevitable expenses that come from having a new human in your household.
Another aspect to review is the total number of babies you will have with this pregnancy. Most families just have a single baby born per pregnancy, but multiple births are rising in frequency, especially for those families using fertility therapies. You only need to watch one episode of This Is Us to realize the impact that triplets have on a family. If multiples are indeed on the way, take some extra time to evaluate your debt payoff plan to see if it really holds up under the additional expense.
Reduction in Monthly Payment
In this scenario, you have decided that a 10-year or less student loan payoff is not the right choice for your family and are looking for ways to reduce your monthly payment by the maximum amount. There are several strategies outlined further in this article, but let’s use an example family so we can work with some concrete number.
The sample family below roughly represents the situation my wife and I found ourselves in shortly after getting married. Three weeks after returning from our honeymoon, we found out we were pregnant. Once we got over the shock of being newlyweds with an unplanned pregnancy, we started figuring out how best to address our student loans.
As a disclaimer, our daughter arrived in 2011, and it has taken us several years to get on a path to student loan payoff that we are comfortable with. This didn’t happen overnight for us, and it won’t happen overnight for you. We have made family, career, and geographical changes over the years and adjusted our student loan strategy accordingly. If something isn’t working for you and your family, don’t be afraid to change course.
Meet Our Sample Family
- $134,673 in student loan debt
- $50,000 salary in private sector
- $1,467/month student loan payment on standard 10-year plan
- $43,375 in student loan debt
- $35,000 salary in public sector
- $495/month student loan payment on standard 10-year plan
They recently moved to a new city where they both started new jobs within weeks of each other. The mother is currently 8 weeks along in April, with a due date in late November.
Both parents have a career track that will keep them in the private sector, so PSLF is not in the works at this time. If you are interested in learning more about how to qualify for this program, see my article on The Basics of Public Service Loan Forgiveness.
I will be using them to illustrate the impact of the techniques listed in this article to reduce their monthly payment while still making strides towards discharge of their loans. The couple mostly knows where their spending is going every month; now they just need to reduce that spending to afford additional expenses due to a new baby.
This is the most important step for two main reasons.
- It significantly reduces your monthly payment. This reduction accounts for 80% of the monthly cost savings in a single action.
- It gets your loans on a qualified IDR that can either be forgiven after a certain time (e.g. 20 years for PAYE) or after 10 years if on PSLF.
- Most IDR plans allow you to count your spouse’s loans and income along with yours, which oftentimes lowers both of your payments even more.
If you have a large student loan portfolio, I would encourage you to take the first step of consolidating as many student loans into a Direct Consolidation Loan, especially if you are at the beginning of your repayment timeline. This streamlines the payment process and verifies the loan eligibility for the IDR plan. The Federal Student Aid website has the student loan eligibility guidelines by loan type and IDR plan.
Also, if you ever plan on switching to PSLF, it is a requirement that all loans to be considered for forgiveness be Direct Loans. Consolidation fulfills that requirement early, so you don’t need to think about it again.
Once you are on the appropriate IDR plan, the next step is to update your family size as soon as you can. IDR plans are capped as a percentage of your discretionary income, which is determined by your family size. Discretionary income is defined as, “your adjusted gross income minus the poverty guidelines for your family size.” The poverty guidelines are published every year by the Department of Health & Human Services.
The definitions of family size for various IDR plans are below, per studentloans.gov.
- Family size always includes you and your children (including unborn children who will be born during the year for which you certify your family size), if the children will receive more than half their support from you.
- For the PAYE, IBR, and ICR Plans, family size also always includes your spouse.
- For the REPAYE plan, family size includes your spouse unless your spouse’s income is excluded from the calculation of your payment amount.
- For all plans, family size also includes other people only if they live with you now, receive more than half their support from you now, and will continue to receive this support for the year that you certify your family size. Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, and payment of college costs.
- For the purposes of repayment plans, your family size may be different from the number of exemptions you claim on your federal income tax return.
I want you to focus on the first item;
Family size always includes…unborn children who will be born during the year for which you certify your family size.
Since our example family is expecting in the same year as conception, they can call up the student loan servicer as soon as they feel comfortable and report the unborn child as an additional family member. This increases the 2019 annual poverty guidelines from $16,910 to $21,330, reducing “discretionary spending” by $4,420. At the 10% level, that mean this family now has a reduction of $36 in student loan payments every month.
Equally important is the fourth item in the list above. As you can see, family size does not just include adding a new baby, biologically born to a heterosexual couple. The concept of “family” is vast, and the student loan servicers have policies that reflect that. If you are adding anyone that could be considered a dependent, update your student loan profile to reflect that.
Look into whether one of the parents will stop working and stay home. This has a HUGE impact on your finances. Below is a snapshot of the child care financial situation for many Americans.
Also, a quote from an article on Fatherly:
As the economy changed [in the latter half of the 20th century], women went back to work. Much of the return was spurred on by women seeking independence, but many families felt it was necessary to have both parents earning in order to stay afloat. The problem? Dual-income families earn more than single-income families (by up to 75 percent), but they have 25 percent less money to spend than single-income families. That’s because spending on housing, child care, and medical expenses increase.
As with everything else, your household finances will encounter a whirlwind of change upon arrival of a new baby. Below show some of the most common changes, by type.
- Student loan payments
- Childcare (this may be huge depending on your location)
- Eating out (assuming the stay-at-home parent does most of the cooking)
- Mortgage/rent (assuming you don’t get a bigger place)
- Car payment (assuming you don’t get a bigger car)
- Credit card
- Food (you’re now feeding an extra person)
Aside from the purely financial outcomes, think about how you want to raise your family, and whether a stay-at-home parent is a high priority, or if you would prefer two parents who are pursuing fulfilling careers.
If you choose to have one parent leave his/her job and stay at home, then you need to update your student loan provider ASAP. Like, the last day on the job. Assuming you have already updated your family size before your child was born, just use the alternative documentation of income form to show the loss of income immediately. Once your taxes are done the next spring, update your income using your AGI.
If both of your choose to stay at your jobs, an awesome tool to use is the Dependent Care Flexible Spending Account, which saves you both tax money and reduces your monthly student loan payments.
Both parents in our example family found new jobs this year, so the previous year’s tax returns were unusable for the IDR application from earlier. They had to use the Alternate Documentation of Income, which just shows gross income. This will lead to a larger payment than if the Adjusted Gross Income (AGI) on their tax returns was used.
Your tax return cements your family size in the IRS. Prior to this, your student loan service was merely taking your word that you added a dependent. While you may not have lied about a new baby, that doesn’t mean others have not. It would be best if you had a government agency show proof of your new bundle of joy rather than Nelnet or Sallie Mae putting you on their watch list as a potential fraud.
Tax Deductions to Reduce AGI
Reducing your AGI is at the heart of using tax returns to calculate your monthly student loan payments, and the easiest way to do that is through the tax code.
Our example family’s combined gross income was $85,000. At a family size of 3, that leaves discretionary income of ($85,000 — $21,330) = $72,670. 10% of that is $7,267, or $605.58 per month for the combined student loan payments.
The first item that reduces your AGI is the standard deduction. The 2018 Tax Cuts and Jobs Act almost doubled the standard deduction for married couples to $24,000 in 2018, increasing with inflation afterwards. The 2019 standard deduction for married couples is $24,400.
Using just the standard deduction, gross income now becomes Adjusted Gross Income, equaling ($85,000 — $24,400) = $60,600. Subtracting the $21,330 poverty guideline for a family of 3 gives us annual discretionary income of $39,270. 10% of that is $3,927, or $327.25 per month for the combined student loan payments. Quite a difference from merely using gross income.
The second tactic for reducing AGI is use of a Dependent Care Flexible Spending Account (DCFSA). Like the Health FSA, you pay into the DCFSA using pre-tax contributions from your paycheck, which are then used to pay for child care expenses throughout the year. While the main attraction to this account is the hundreds of dollars of direct tax savings, and added benefit is the reduction of your AGI for student loan payment calculation purposes.
Using the example above, our family’s initial AGI was $60,600. Reducing that by the maximum limit of $5,000 for the DCFSA gives us $55,600. Subtracting the poverty guidelines results in discretionary income of ($55,600 — $21,330) = $34,270. 10% of that is $3,427, or $285.58 per month for the combined student loan payments.
Having a baby is a most wonderful thing and fretting over your student loans shouldn’t take away from your enjoyment. Using the techniques described above, our example family was able to reduce their monthly combined student loan payments from $1,962 to $286, a reduction of 85%. While this does not pay off their loans in 10 years or less, it does free up almost $1,700 every month to provide for their child.
As with any decision, don’t buy into the hype that student loans are holding you back from starting a family. They are a hurdle that needs addressing, sure, but so is finding a larger place than the above referenced studio on SoHo. There is never going to be a “perfect” time to have kids, so go forth and procreate. Just be sure to be armed with the facts and crunch some numbers before expanding your clan.