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As college approaches, your high schooler is likely excitedly discussing potential universities and majors. While this is an exciting phase for your teen, it’s essential to be mindful of avoiding significant debt in pursuit of their dreams.
Student loan debt is increasingly prevalent. Your teen may view loans as an effortless way to finance education, but substantial debt can hinder their post-graduation aspirations. Here’s how to help them grasp the broader financial implications.
Highlight alarming student loan statistics
A 2016 study by Citizens Bank revealed that millennial graduates devote nearly 18 percent of their income to loan repayments, leading many to spend decades before freeing themselves from student loan obligations.
Not only are graduates spending more on loans, but they are also postponing significant life events like weddings and home purchases. Fifty-four percent of millennials report reduced travel and 40 percent say their housing budgets are limited due to debt.
Discuss future plans with your teen. Would they prefer to spend 20 years paying off debt, or invest that money in a car, a wedding, or a home? Talk about the implications of being forced into a higher-paying job they dislike just to manage their student loans. Starting their life with debt can restrict their career choices.
It’s important to remind them that debt persists. They can’t assume that declaring bankruptcy will eliminate their student loans.
Encourage prudent financial decisions
Once your teen understands the burden of student loan debt, they can explore alternative funding solutions. Encourage them to apply for scholarships and complete the FAFSA for financial aid and school-sponsored scholarships. Treating scholarship applications like a part-time job can yield substantial benefits, even from smaller awards.
Suggest they earn money through part-time work and save any birthday gifts. Every bit helps, especially when managing debt while in college. Starting at a community college can significantly reduce their debt load.
If they don’t need to max out their loans, they shouldn’t. Testing out of subjects they’re already familiar with can save time and costs.
Many jobs also offer tuition assistance that can supplement their education costs.
Prioritize federal loans
Understand the distinction between federal and private loans. Federal student loans offer better repayment plans, lower interest rates, and more flexibility in cases of job loss or disability.
Your teen can apply for income-driven repayment options with federal loans, even if they earn minimum wage after graduating. These loans may also be eligible for forgiveness programs after consistent payments or for those in public service roles.
Clarify your support
Having supported your child their entire life, they may expect assistance during college as well. Clearly outline what you will contribute, whether it’s tuition, loans, or housing. Being transparent helps them budget effectively.
If you decide to assist with student loans, consider making small contributions while they are still in school. Even a modest monthly payment can alleviate future debt.
Avoid borrowing the full loan amount
Your teen might qualify for $40,000 in loans for the year, but they don’t need to borrow the entire amount. Encourage them to live at home and budget wisely, reminding them that every borrowed dollar incurs interest that must be repaid.
Make payments during college
Even though there’s a grace period after graduation, encourage your teen to start making payments while still in school. This is particularly beneficial for unsubsidized federal loans, which accumulate interest while studying and during the grace period.
Emphasize that any repayment effort counts, suggesting small, routine payments such as $10 to $20 per week. This may require cutting back on discretionary spending, but it will pay off after graduation.
