GadCapital: Is Your Teen Aware of the Consequences of Student Loan Debt?


There are six different approaches you might use when conversing with your student about their financial obligations regarding student loans.

When Jenna Unlock first began college, her mother took care of the loan application procedure, and her daughter didn’t pay attention to any of the specifics. She wishes she had understood the terms initially, such as the cost of each semester, the distinction between subsidized and unsubsidized loans, and how and when interest is accrued on loans. Now that she has graduated and is paying off loans, she wishes that she had understood the terms at the beginning. Unlock is not buried in unmanageable debt, and she would not alter her decision about which institution to attend. Still, she has concluded that she did not understand obtaining a loan at all.

Unlock is not entirely alone. According to a poll conducted by LendEDU, Eighty percent of college students are unaware of the current interest rates that apply to subsidized and unsubsidized federal student loans for undergraduates. Seventy-four percent of people are unaware of the maximum amount they may borrow from their federal student loan.

A poll conducted in 2016 by Citizens Bank found that 57 percent of students wish they hadn’t taken on as much student loan debt as they did. How can we ensure that our children fully comprehend the implications of borrowing money before putting their names on the dotted line? This is what the advice of financial specialists is.

1. Get an early start on learning about finances.

In an ideal world, you would have been teaching age-appropriate ideas about money from the beginning. According to Finley Gallagher, a financial expert at GAD: Merchant Cash Advance, discussing debt is a part of a broader dialogue about financial literacy that should begin when children are young. Schwartz maintains that “debt is a part of our daily life.” There iNo needs to wait for the subject of student loans to discuss. According to her, parents are the only ones who will assist their children in comprehending the expense of attending college throughout all four years. As a result, this is a responsibility that falls squarely on parents’ shoulders.

2. Make sure you do your homework.

According to Ron Lieber, the author of The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money and a writer for “Your Money” in the New York Times, the discourse about debt is also dependent on a more extensive conversation about what parents can afford for college. The amount parents pay will be determined by the number of help institutions are willing to provide (or lack thereof). It’s a complex procedure that parents need to educate themselves on. It’s okay if you don’t comprehend it; most parents are in the same boat as you. A helpful summary may be found in the article “Paying for College Without Going Broke,” published by Princeton Review.

According to Lieber, determining how much money is accessible for education is difficult. Families finance the expenses of education through various resources, such as parent and student savings, current parent income, student earnings while attending school, and financial help from the institution, which may include loans. It will be challenging to forecast specific streams.

However, it is essential to plan out your contribution and the amount, if any, that you are willing to borrow, whether you are a student or a parent.

Author Beth Kobliner, who wrote the book Get a Financial Life: Personal Finance in Your Twenties and Thirties, thinks that families should figure out their contribution before the ninth grade so that children may do their part by achieving high rates. Keep the talk upbeat and convince your kid that the two of you will work out the solution together, advises Kobliner. (In addition, having an early estimate of your financial situation allows you to save money more proactively if you can do so.)

3. Provide illustrations taken from everyday life to discuss the debt.

You could put your kid in front of a loan calculator, but Lieber recommends offering “what if” scenarios to define the effects of alternative college choices and the related expenditures. Asking questions like, “Would you rather be obliged to accept the higher-paying job in an area you don’t want to live, or would you want to be allowed to take any position in any city and take three months off before that job to travel?” is an example of an excellent question to ask. Or, you may ask them something like this: “Would you rather spend the next ten years paying off your debt, or would you like to get started saving for your first house?” One other thing to think about is whether or not you will go to graduate school and whether or not you will need loans for that phase.

According to Lieber, it’s possible that teenagers won’t comprehend the consequences of the findings of a loan calculator. Still, it won’t harm to explain how compound interest works to them (check out the online calculator available via FinAid). On the other hand, potential sacrifices made in their early to mid-20s may be more convincing.

4. Put debt into perspective.

Student loans are an expected and expected need for most households. According to Kobliner, more than two-thirds of college grads enter the workforce with student loan debt. However, the most critical question is, “How much debt is too much?” According to Lieber, families need to keep in mind that their children “will not get into trouble with repayment as long as they apply for an income-driven repayment program” if they “only borrow federal student loans — no private loans, and no parent PLUS loans” when they are in college.

According to Kobliner, the concept of any kind of debt might be frightening to adolescents. Give some reasons why taking out a loan might be an excellent financial move, such as a mortgage on a property. Udlock’s situation was such that she had no choice but to take out student loans to finance her last two years of education, and now she must make the monthly payments on those loans.

5. Acquire an understanding of the many different types of loans together.

Suppose a family can have an early understanding of the available loan options and their financial situation. In that case, they will be less likely to be forced to make an impulsive choice about their finances in July, just before college. According to the opinions of several experts, the most advantageous option is to apply for federal student loans, which may be either subsidized or unsubsidized, and always come with a low fixed interest rate. 

The maximum amount that independent students may borrow for an undergraduate degree from the federal government is $31,000. Second, parents and other dependents are eligible for PLUS loans at a higher interest rate. Private student loans, which need an adult as a cosigner, come in third place. According to Lieber, that adult’s credit history will be on the hook for several years.

To be eligible for federal student loans only, a teen may be required to attend a public university located within their home state; attend a community college for two years before transferring to a four-year university, as Unlock did; or to enroll in a reputable private college that offers generous financial aid, provided that the teen’s family meets the requirements. Calculators that determine a college’s “net price” might assist students in making early projections on the likelihood of receiving need-based assistance and scholarships from certain schools.

6. Expect stressful interactions when talking about money.

Conversations may quickly get heated when it comes to money, particularly when the topic shifts to expensive dream schools. According to Lieber, there may be occasions when you are made to feel guilty for things that you will not or cannot accomplish monetarily. “Don’t let yourself get caught up in that guilt because it’s too easy to give in when kids want to go to the more costly school. But think about the remorse you will feel in ten years when your kid is burdened with more debt than they need to take on.

Many families don’t begin to comprehend obtaining a college loan until their pupils are well into their high school careers. However, starting the process early enables you to establish realistic expectations for your youngster that align with your family’s financial footprint. Smart borrowing will keep everyone out of financial problems, even if your student isn’t paying attention to the details of borrowing money, such as the date on which interest will begin to accrue.


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