When Jenna Udlock started college, her mom took care of the loan process, and she didn’t pay attention to the details. Now that she’s graduated and paying off loans, she wishes she’d understood the terms at the beginning, including what each semester cost, the difference between subsidized and unsubsidized loans, and how and when interest accrues. Udlock wouldn’t change her decision about her college choice — and she’s not buried in unmanageable debt — but she now realizes she didn’t understand the loan process at all.
Udlock isn’t alone. According to a 2017 survey by LendEDU, 80 percent of college students don’t know the current interest rates on undergraduate federal subsidized and unsubsidized student loans. Seventy-four percent don’t know there is a federal student loan borrowing limit. In a 2016 survey by Citizens Bank, 57 percent of students wished they hadn’t taken on as much debt as they did. How do we help our kids understand what loans mean before signing on the dotted line? Here’s what financial experts recommend.
Begin financial literacy early
Ideally, you’ve been teaching age-appropriate money concepts all along. According to Debbie Schwartz, founder of a college service called College Money Search, explaining debt is part of a larger conversation about financial literacy that starts when kids are young. “Debt is part of our everyday lives,” Schwartz says. “We don’t need to wait for the student loan topic to explain it.” Parents also need to take the lead on helping kids understand college costs — for all four years — because, unfortunately, no one else will, she says.
Do your own homework
The debt conversation also hinges on a larger conversation about what parents can pay for college, says Ron Lieber, New York Times “Your Money” columnist and author of The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous and Smart About Money. What parents pay will be contingent on colleges’ financial aid offers (or lack thereof). It’s a complicated process parents need to learn about. Most parents don’t understand it; don’t feel bad if you don’t. Take a look at Princeton Review’s Paying for College Without Going Broke for a good overview.
Assessing available money for college isn’t easy, Lieber says. Families cover costs with different sources, including parent savings, student savings, current parent income, student earnings in school and financial aid, including loans, from the college. Some streams will be difficult to predict.
However, it’s important to sketch out your own contribution and the amount, if any, you’re willing to borrow — both parents and student.
Beth Kobliner, author of Get a Financial Life: Personal Finance in Your Twenties and Thirties, believes families should figure out their contribution by ninth grade, so kids can do their part by earning good grades. Keep the conversation positive and reassure your student that you’ll figure this out together, Kobliner says. (Additionally, estimating finances early allows time to save aggressively, if you’re able.)
Explain debt with real-world examples
You could plunk your student in front of a loan calculator, but Lieber advises posing “what if” scenarios to frame the outcomes of different college choices and associated costs. For example, ask, “Would you rather be forced to take the higher-paying job in a place you don’t want to live, or would you like to be able to take any job in any city and take three months off before that job to travel?” Or this: “Would you rather spend 10 years paying off debt, or would you prefer to get started on saving for your first house?” The other possibility to consider is the likelihood of graduate school and necessary loans for that step.
Teens might not understand the implications of a loan calculator’s results, Lieber says, but showing them how compound interest works certainly can’t hurt (try FinAid’s online calculator). However, possible sacrifices in their early and mid-20s may be more persuasive.
Put debt into context
For most families, student loans are necessary and normal. More than two-thirds of graduates leave college with debt, Kobliner says. However, the key question is, how much debt is too much? According to Lieber, families should remember that if students “only borrow federal student loans — no private loans, no parent PLUS loans — they will not get into trouble with repayment as long as they apply for an income-driven repayment program.”
Teens might be intimidated by the idea of any debt, Kobliner says. Explain why borrowing can be a smart investment — a mortgage for a house, for example. For Udlock, borrowing for her last two years of college was a necessity, and paying the monthly bill is just part of her reality.
Learn about the different loan types together
Families that understand the loan landscape and their own financial picture early will be less likely to make a desperate financial decision in July before college begins. Federal student loans, both subsidized and unsubsidized, with low, fixed interest rates are the best option, experts say. The federal government limits dependent student federal borrowing to $31,000 for an undergraduate degree (with some exceptions). Second, parents can get PLUS loans, at a higher interest rate. Third, and least attractive, are private student loans, for which an adult will need to cosign. That adult’s credit history will be on the hook for several years, Lieber says.
To receive federal student loans only, a teen might have to stick to an in-state public university; or two years of community college and transferring, as Udlock did, or attend a private college known for good financial aid, if a family qualifies. College net price calculators help you cast early predictions of possible need-based aid and scholarships from specific colleges.
Expect money talk to be stressful
Money discussions get emotional, especially when high-priced dream schools become part of the conversation. “There will be times you will be made to feel guilty for what you will not or cannot do financially,” Lieber says. “Don’t get caught up in that guilt, because it’s too easy to give in when kids want to go to the more expensive school. But think about the guilt 10 years on, when your child is saddled with more debt than they needed to take on.”
Many families don’t begin to understand the college loan process until their students are well into high school, but starting early allows you to set realistic expectations for your student according to your financial footprint. Even if your student doesn’t pay attention to little things such as when interest starts accruing, smart borrowing will keep everyone out of financial trouble.