Why Your Kids Should Take Student Loans, Even If You Can Afford College
At first glance, it might seem like a great gift for parents to fund 100% of their child’s college education.
College can give a head start in the world, and what a joy for a student to graduate without a loan! Especially now, when the class of 2015 graduated with an average of $35,000 in student debt, according to a analysis of government data by Edvisors.
This line of thinking is reasonable if parents can afford to pay for a college education in full. However, when students have no financial skin in the game, the opportunity for an impactful teaching moment is lost. Deciding on a career, applying to college and learning how to pay are the first important financial decisions a young person must make.
Now is the perfect time for parents to educate their children when they need the financial education the most! After all, there’s a reason why financial planners like me, when advising parents on their estate planning paperwork, never recommend giving an 18-year-old full access to insurance proceeds. -life or an inheritance.
At 18 or 19, most young people don’t have the experience to make big financial decisions. So use their college experience to teach them.
Paying for college is serious business. According to college council, the average “total fee” for a public college in the state for 2016-2017 is $35,370. For private colleges, that figure climbs to $45,370 per year. If you’re able to get your bachelor’s degree in four years, a degree can cost upwards of $140,000.
For many parents, the cost is a huge sacrifice. Indeed, according to Forbes article, many millennials end up repaying these loans to their parents. This type of investment must make business sense for both parties, the parent and the student. Involve your teen in the process and provide guidance.
Whether it’s taking out student loans or working part-time or summer to offset the cost of an education, parents must use the college experience to teach their children important money lessons. .
Here are some ideas:
1. Ask them to take ownership of the finances.
Taking out loans allows students to face reality, even if the loans are small.
There is a Grace period six months after a student graduates for federal student loans. This means that they will need their college degree to translate directly into a job that pays them enough to make the payments. The six-month calendar is a positive monkey on the back for students.
Work with your student to research the current employment climate and determine which careers are supported by which academic specializations. Consider a track for the highest paying jobs in today’s economy that matches your child’s interests and skills.
The money lesson: return on investment.
Students (and parents) need to consider ROI when allocating significant resources to any investment, especially towards your most valuable financial resource – your lifetime earning potential!
2. Develop and implement a monthly budget for college living expenses. Students will learn how to manage cash flow under changing circumstances.
The money lesson: Keep your overhead low.
3. Sketch out a repayment plan early in the borrowing process.
The Money Lesson: Never borrow without the ability to repay the money, and at least a plan to do so. Lenders use a student’s future earning capacity as collateral for the loan.
4. Make every semester count.
Work on a plan to graduate in four versus five years to save tens of thousands of dollars. A report of Complete College America reveals that only 50% of full-time students at the vast majority of public colleges graduate in four years. Many take six years or don’t complete their degree at all.
The money lesson: take on as little debt as possible to get the job done. Along the same lines, spend as the least possible to do the job.
I might be preaching to the choir, since 7 out of 10 college students graduate with some kind of student debt, according to a 2015 study by The Institute for College Access and Success. If your student takes out loans because they have to, the financial education component is even more important.
Parents, don’t waste this opportunity.