As of August 2010, when our first child was born, my husband and I owed about $35,000 in student loans.
To make matters more complicated, my husband and I moved to a new state during my pregnancy so he could take a new job. I took a year off from my previous career of teaching (which has now stretched into six years and a new career), plus we bought a house in our new town, even though it took nearly a year to sell our previous residence.
In short, our first few years of parenthood did not look like we were in the best financial shape for welcoming a new baby – particularly considering the fact that costs about $245,000 to raise a child born in 2013 (when we had our second baby) from birth to age 18, according to the USDA. And that nearly-quarter-of-a-million-dollar price tag does not include college costs.
The USDA’s estimates might convince many student loan borrowers that there is no way they can afford a baby while still owing student debt. But it is possible to fulfill your dreams of starting a family before you pay off your student loans.
Here’s how to afford having a baby while you pay your student loans.
Create a post-baby budget ASAP
Before you start trying for a baby (or as soon as you know a little surprise is on his or her way), sit down and calculate your post-baby budget.
Now is the time to estimate your expenses for everything from diapers to childcare to medical care. The First Year Baby Costs Calculator from BabyCenter.com can give you a good introduction to the various costs to consider and what you can expect in your area of the country.
Once you have a sense of how your monthly budget will change post-baby, commit to living on that budget starting today. This will help you get used to living on a reduced amount while also allowing you to bank the extra money to build a financial cushion for when baby arrives.
Reduce your student loan payment
For many expectant parents, no amount of budgeting and fat-cutting can make their current student loan payments work with new baby costs. That’s when it’s a good idea to start exploring options for reducing student loan payments.
This option allows you to postpone or reduce monthly loan payments for up to 12 months during a period of financial hardship.
Since having a baby does not qualify for mandatory forbearance (wherein your lender is required to grant you a postponement of payments), you will have to request your forbearance with your lender and continue making your normal monthly payments until you are officially enrolled in forbearance.
Requesting a forbearance can be very helpful to borrowers without access to paid maternity or paternity leave, since it can put your student loan payments on hold during the time that you are not working.
Apply for an income-driven repayment plan
Uncle Sam recognizes that not all federal student loan borrowers are able to swing the standard repayment schedule, which is why borrowers may enroll in income-driven repayment plans.
These plans allow you to reduce your monthly payment based upon how much you earn and the size of your family.
Pay As You Earn (PAYE) is available for anyone who was a new borrower as of October 1, 2007 and who received a direct loan disbursement on or after October 1, 2011.
PAYE allows your monthly payments to be capped at 10 percent of your discretionary income and your payments will never be higher than what they would be through the Standard Repayment Plan.
REPAYE is very similar to PAYE, except that more borrowers are eligible. Additionally, your cap of 10 percent of discretionary income could be higher than your standard payment amount, depending upon your income.
Income-Based Repayment (IBR) caps your monthly payment at 10 to 15 percent of your discretionary income, depending on when you took out your loans.
To qualify for IBR, you generally need to owe more than your annual salary. Also, like PAYE, you must be a new borrower as of October 1, 2007 and have received a disbursement of a Direct Loan on or after October 1, 2011.
Income-Contingent Repayment (ICR) caps student loan payments at the lesser of two options: 20 percent of discretionary income, or what the payment would be on a fixed, 12-year payment plan, adjusted according to income. Like the REPAYE plan, ICR is available for most borrowers.
Switch to a graduated repayment plan
If you anticipate that your income will increase over the years and you just need a reduction in monthly payments for the first few years after your baby is born, consider a graduated repayment plan.
With these plans, your payments start out lower but increase over time – generally every two years. You can expect payments under such a plan to be spread out over the course of 10 years, which makes this a good option for new parents in fields with strong future earning potential.
Most federal loans are eligible for a graduated repayment plan.
Get on an extended repayment plan
Borrowers are allowed to extend their repayment schedule for up to 25 years and make fixed or graduated payments during that extended time. While tacking more time onto your repayment schedule does mean you will end up paying more overall for your student loans, it can make enough of a difference right now to make starting a family much more financially feasible.
Take advantage of tax breaks
You are probably aware that you can deduct student loan interest from your adjusted gross income (AGI) on your annual tax return. But your little bundle of joy also comes with some helpful tax breaks that can help you to better afford his care and feeding.
The IRS offers taxpayers an exemption of $4,050 (as of 2016) for personal expenses. That means that you do not have to pay taxes on $4,050 of your annual income – and married couples filing jointly can declare $8,100 in personal exemptions.
Once baby makes three, you can claim an additional dependent exemption for the same amount for your new child, meaning a family of three can exempt up to $12,150. This exemption is not phased out until you reach an adjusted gross income (AGI) of $259,400 for singles, and $311,300 for married couples filing jointly as of 2016.
Child Tax Credit
Unlike the exemption, which reduces the amount of income you need to pay taxes on, the child tax credit reduces your tax bill by $1,000 per qualifying child. Married couples filing jointly with an income below $110,000 and single parents with an income below $75,000 qualify for this credit.
The Child Tax Credit is non-refundable, meaning if your tax liability is lower than the credit, you will not get the difference back from the IRS.
For example, a family with two children with a tax liability of $1,500 would actually owe nothing to the IRS because of their $2,000 child tax credit – but they would also not receive the $500 difference in the form of a refund, either.
However, families in that situation may still receive a refund because of the Additional Child Tax Credit.
Additional Child Tax Credit
While the child tax credit is nonrefundable, the Additional Child Tax Credit is. That means that even if you lose out on a refund through the Child Tax Credit, you may still be eligible for one through the Additional Child Tax Credit. Here’s how:
If your Child Tax Credit is higher than the taxes you owe and your earned income is greater than $3,000 for the year, then you will receive your credit refund in one of two ways:
- As the amount of unused child tax credit. In the example of a family with two kids and a $1,500 liability, then unused credit would be $500
- 15 percent of your taxable earned income over $3,000.
You will receive whichever of these two amounts is lower. Form 1040 (Schedule 8812) can help you determine if you are eligible for the Additional Child Tax Credit.
Though this is unreasonably confusing, the good news is that any e-file software will calculate the child tax credit and additional child tax credit computations for you.
You can afford a baby while paying off student loans
Owing money on your student loans is no reason to put your big dreams on hold. It certainly makes sense to work hard to get your financial house in order before you welcome a new baby, but it’s also possible to afford major life changes before you send in that final payment. Just be willing to make savvy financial choices and strategic sacrifices to be ready for the stork’s special delivery.
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