How to Help Your College Student Build Credit & Save Money

Parenthood is full of hard decisions and conflicting goals. You want your kids to be self-sufficient but you also want them to feel nurtured and cared for. You want your kids to be successful but you also want them to learn to deal with failure. You want them to learn to navigate relationships but hate to see their hearts broken. You want them to build credit but you don’t want them to waste their limited funds paying interest on debt.

While the Bible offers wisdom on these topics and we’d be happy to have a conversation with you about any of these goals, the one that we’re going to focus on in this article is the last one.  Our thoughts will be especially helpful if you have a child in college or nearing college age.

Types of Student Loans

Before getting into the strategy, we need to define some terms so you understand what we’re talking about. 

If your child is going to borrow for college, in most situations we recommend first taking out federal student loans. There are two types of federal student loans—subsidized and unsubsidized. With subsidized loans, the government pays the interest while the student is in school and up to 6 months after leaving school, which means you don’t have to! With unsubsidized loans, the interest starts accruing immediately. With both types of loans, payments are not required while the student is in school and up to 6 months after leaving school. 

Why do we usually recommend taking out federal student loans? Because in most cases they are more advantageous than the alternative of private student loans. Some of the disadvantages of private student loans compared to federal student loans are that private loans:

• Have potentially higher interest rates
• Have less flexible payment options
• Typically require a cosigner
• May not be discharged/canceled if the borrower passes away
• Are not eligible for federal loan forgiveness programs

Subsidized Loan Rules

Subsidized loans are a great deal, as you can see, but they are in short supply. First, you have to demonstrate financial need, which is determined by the school. Next, the federal government only offers a limited amount of subsidized loans. These are the current limits:

What often happens when a young person goes off to college is that parents or other family members have saved or otherwise provided funding for some expenses. Since there is money available, the student doesn’t take on any loans until that money runs out. Once that money is gone, they then borrow the full cost of their remaining tuition and expenses. Because of the low limits on subsidized loans, this often leads them to take on unsubsidized federal and private loans during their last years of college. 

A more strategic approach would be to take out the maximum allowed subsidized loan each year and save their funds to cover the excess costs in later years. This way, they maximize the subsidized loans and minimize the more costly unsubsidized loans or private loans.

Example

Let’s see how that works in real life. Olivia and Sophia are headed off to the same college that will cost them $20,000 per year ($80,000 for 4 years). They each have $60,000 that their parents and grandparents have saved into 529 plans for them but they both still qualify for the maximum amount of subsidized loans.

Olivia, like most college students, uses her 529 funds to pay for the first three years of school and then needs to borrow the full $20,000 for her final year. She is only eligible for $5,500 in subsidized loans for her fourth year and she can only borrow up to $7,500 total in federal loans for her fourth year, so the remaining $12,500 must come from private loans. Her $2,000 in unsubsidized federal loans and $12,500 in private loans start accruing interest right away. Six months after graduating when she starts working, she has already accrued $1,390 of interest on her 6.39% interest rate loans (the current rate for federal loans disbursed between July 1, 2025 and June 30, 2026). This assumes the same interest rate on her private and federal loans (in reality the private loan may have a higher interest rate) and also that the private lender offers a 6-month grace period, which is not always available. 

Sophia read this article, so she decided to take out the maximum in subsidized student loans each year. Her first year of college, she borrowed $3,500 and used $16,500 from her 529 account. Her second year, she borrowed $4,500 and used $15,500 from her 529 account. The third year, she borrowed $5,500 and used $14,500 of her 529 funds. Her final year, she used the remaining $13,500 from her 529 account and borrowed $6,500, of which $5,500 was subsidized and $1,000 was unsubsidized. Six months after graduating when she starts working, she has only accrued $32 of interest because the majority of her loans were subsidized by the government. 

In this example, Sophia paid $1,358 less than Olivia for the exact same college education just because she thought ahead and timed things differently. Also, Olivia ended up with $12,500 in private loans. 

What happens if you have money left over after graduation because of taking on those subsidized loans in the early years? Just pay off the loans! If you do so during the first 6 months after leaving school, then the loans don’t cost you any interest at all.

Building Credit

Even if you know you have enough funds set aside and your child won’t need loans, it can still be a good idea for them to take out the maximum subsidized loans.

First of all, nothing is 100% certain. They could end up needing to take out loans. More importantly, it allows them to build their credit without costing them any interest (if you pay off the loans before interest starts accruing). Nowadays, credit scores are used for a lot more than borrowing—from insurance rates to job and rental applications. Starting adulthood with a solid credit score can be very valuable for more than just financial reasons. 

If your student has money saved in a 529 plan, you’ll need to be a little bit more careful. Many states now allow up to $10k of 529 funds to be used to pay off loans for the account beneficiary and their siblings. You will want to be aware of your state’s limits as you determine how much of your 529 funds to use for college and how much to save. Remember, excess 529 funds can be transferred to cover the education costs for a new beneficiary, subject to limitations. Also, 529 funds can be used to fund a Roth IRA once the beneficiary is working, subject to certain restrictions. 

Do you have a plan for getting your kids through college with your retirement savings intact? If you need a plan, we are here to help. We even have a Certified Student Loan Professional™ on our team that can help you and your kids understand the ins and outs of student loans and how to pay them off wisely. To learn more about the services that we offer, schedule a free introductory phone call today.  

About Guide Financial Planning

Guide Financial Planning is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner® and Certified Kingdom Advisor®. He has a passion for helping people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.