Teaching Kids About Their Student Loan Options

The following is a guest post from The Student Loan Report, a blog that focuses on helping the 43 million student loan borrowers stay up-to-date with the latest news regarding something that (unfortunately) affects their lives so much. It is written by Drew Cloud, a journalist who typically writes about student loans, personal finance, and education.

 

Teaching Kids about Their Student Loan Options

finances; student loan optionsCollege is a fun and exciting time, especially if you are about to enter as a Freshman.  As a parent, you can remember the uncertainty that young students feel as they leave home for the first time.  After all, there is plenty that needs to be squared away before making that move.  While school supplies and textbooks are important, figuring out the logistics of financing each semester is even more important.  Unless you happen to have saved thousands in a college fund, you will most likely resort to student loans to fund your teenager’s college excursion (or education).

 

While applying for and obtaining student loans is relatively easy, the second half of the bargain is what gives everyone trouble, especially young college students.  Student loan debt has become a serious issue that is currently plaguing millennials.  There are currently about 1.3 trillion pieces of evidence that suggests this.  This should worry you as a parent because you know about the troubles that debt can cause.  If your kid is going to need financial aid, then there is a whole lot you can do to prepare them for the responsibility.  Of all the things you can do such as co-signing or helping pay interest, one of the best ways to prepare your teenager is by educating them.

 

Student Loan OptionsStudent loan debt is serious, and the default rate is evidence that graduates and students are having trouble with their loans.  One significant root to this problem is the lack of education on basic student loan principles.  Many go to college without actually understanding the financial responsibilities that tag along.  This is a serious problem that helps catalyze the overall student loan issue.  Before your child takes out any student loans, you need to spend some time learning the ropes before it is too late.  Here are some of the basics to student loans.

 

Federal Student Loans vs. Private Student Loans

Federal student loans are offered by the U.S. Department of Education and they are available to all students, no matter your credit situation or your past payment history.  There are two main types of federal student loans, which include subsidized and unsubsidized.

 

Student Loan OptionsThe main difference between a subsidized and unsubsidized loan is their eligibility criteria.  Subsidized loans are awarded to individuals who display a clear financial need while unsubsidized loans are awarded on looser criteria (therefore they are more common).  Subsidized loans are much more popular for obvious reasons; for instance, the government pays off the interest while the loans are in deferment during school (hence why these are awarded to financial needy applicants).

 

The amount of money you receive from federal student loans does have a cap on it, but in most situations, the amount is enough to afford your semesters at college.  For example, undergraduate students can receive totals of $5,500 to $12,500 in both subsidized and unsubsidized loans.  Graduate students can receive up to $20,500 per year in unsubsidized loans.  The loan amount is heavily dependent on financial background and need which is all relayed in the FAFSA.

 

Student Loan OptionsPrivate student loans are offered to you by privately-owned banking and lending companies, hence the term private student loans.  Unlike federal student loans, no private student loans are subsidized, so there is no help for a financial needy applicant.  Loan amounts are usually determined with a classic underwriting criteria which means decisions are heavily influenced by credit history.  Due to this factor, private student loans are much harder to qualify for as a young adult such as your teenager.  This means that you, the parent, would have to cosign on a private loan and assume partial responsibility for the loan payments. If you are weary about picking up more debt, then a private student loan may not be the ideal choice, but there are other perks to these loans.

 

Since this part of the industry is privatized, there is competition between lenders in the marketplace.  This leads to competitively low interest rates which can only benefit borrowers.  Additionally, borrowers can choose between variable or fixed interest rates as opposed to fixed federal interest rates.  On top of this, there is much more flexibility in terms of different payment plans than federal student loans.

 

Your Options with Federal and Private Student Loans

There are plenty of options available for student loans both during and after college.  It is extremely important for your college student to understand these options if they are to effectively handle their loans.

 

  1. Refinancing

Student Loan OptionsRefinancing is available for both federal and private student loans, but student loan refinancing is a service that is only offered by private companies.  It is important to understand that the U.S. Department of Education does not refinance any student loans.  When you refinance your student loans, you are essentially transferring your debt to a private institution.  Multiple loans with multiple interest rates are “refinanced” together into a new, single loan with one new interest rate.  In most cases, this situation leads to hundreds if not thousands saved on interest over the life of a loan.  In addition to a new interest rate, a new repayment plan is drawn up.  It is a complete restructure of your current loan situation that often leads to savings.

 

Refinancing student loans is a great option for saving money, but it is difficult for someone with bad or nonexistent credit history to qualify.  One option you may need to consider as a parent is co-signing on a refinancing deal in order to help your teenager out.  This is generally encouraged by the private refinancing lenders, but it is not mandatory.

 

  1. Loan Forgiveness Programs

Student Loan OptionsStudent loan forgiveness programs do exist, but they are only available for federal student loans.  Loan forgiveness programs are not available for all career choices either, but the federal government offers loan forgiveness programs for anyone with a public service, nursing, or teaching career.  Federal student loan forgiveness is also provided for someone who experiences death or disability, but you really don’t want that as an option for your kid.  You should make sure your teen is up-to-date on these programs, especially if they are planning on pursuing any of the career options mentioned earlier.  These programs are characterized by a low approval rate, but recent legislative actions have pushed towards looser restrictions in terms of forgiveness eligibility.

 

  1. Income-Driven Repayment Plans

Income-driven repayment plans are ONLY available for federal student loans.  An income-based repayment program takes a portion of your discretionary income, usually 10%, and puts it towards your student loans each month.  These programs are gaining in popularity because they are especially useful to someone who has trouble making monthly payments.  The fractional amount of income taken away is also very helpful to someone who is just starting out in the real world.  There is one more extremely beneficial aspect of this program.  After ten years of monthly payments, the remaining loan balance is forgiven.  This is a great option to relay to your teen.

 

What are your thoughts?  Do you have personal experience with student loans?  Have you brought up this topics to your teenage kids yet?  If not, do you plan to do so?

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22 Comments

  1. Interesting article! One aspect of student loans that I don’t often see mentioned is that the ones that accrue interest while you’re in school capitalize that interest when you graduate. That means it gets added to your balance, and you can’t deduct it as interest anymore. It increases the balance of your loans and the interest is calculated on your new, higher balance. So even if you don’t have to pay your loans while you’re in school you want to try and pay the interest if you can, to avoid capitalization.

    I’ve brought up college with my kids since they were little, in a general way, and more specifically with my 8th grader. Now that he’s about to enter high school I find it important he’s clear on what college costs, what I’m willing to pay for, and what other options he has (and the pros/cons of those options).
    Liz@ChiefMomOfficer recently posted…From Community College to MBA – My StoryMy Profile

    • Thanks for great points Liz!!! I think it’s great that you’re bringing up college now so that it won’t be a surprise later on down the road. Thanks for sharing!!!

  2. Educating our children about finance is so important. This blog post reiterates this and reminds me that this education should come before the kids leave for college (although I’m a big believer in required financial classes during college). Prior to even selecting a school our kids should be aware of the associated cost. Not only will it help them understand that money doesn’t grow from trees, but also it might help them study harder in effort to get more out of their time in college.

    • You are absolutely right!!! I plan on definitely teaching my son about finances as soon as he’s old enough to get the concepts. On top of that I really want him to understand all that goes into college and make sure that he’s super prepared. I applied to two schools and got into one. Made it pretty simple where I was going but I wish I explored a bit more looking back.

  3. Great post. It’s a shame how poor of a job we do as a whole educated kids about finance. Coupled with educating kids about student loans, we should also be providing them guidance on deciding whether college is right for them and what major they should be choosing. Too many kids go into this blind and rack up tons of student loan debt without a plan for what they want to do in the future.
    Go Finance Yourself! recently posted…Love and MoneyMy Profile

    • Those are great points Go Finance Yourself!!! I am definitely glad I didn’t go out of state. I had too many friends that did and have massive student loan bills that they are still trying to pay off. I think borrowing as a college student has become way too easy at this point and colleges don’t educate how long someone will potentially be in debt. I think that’s a shame.

  4. Great post. Student loans can be very confusing and I don’t think enough time is spent on learning the options that are available. Especially this day and age when college costs are astronomical. I had student loans and thankfully my parents took the time to find the right options. I certainly wasn’t mature enough at the time to pay attention to it but I did pay the majority off myself with little help from them. It is scary how some kids can be $100k in debt right from the start.
    Mr Defined Sight recently posted…Sight From Other PerspectivesMy Profile

    • I am super lucky that my parents were able to help me. But I agree, 100k in debt is scary to think about. I feel like it’s almost starting backwards in life having that anchor tied around your neck.

  5. So little time is spent explaining to kids what they are signing up for in terms of costs when they go to college. It’s all about getting into the best available school. What I remember is it didn’t hit me until near my 3rd year in school when I started a money making internship and was using it to pay some of the debt that there was a significant cost to whole college life. Before that I’d just taken loans but I really didn’t understand how the 60K in debt I eventually tacked on from my education would impact my life. I’m now quite removed from the whole college phenomenon. However its good to see these type of posts as they remind me that I don’t want to put my own kids in the position of not understanding what they got themselves into.
    Full Time Finance recently posted…The Financial Impacts of HoardingMy Profile

    • Thanks for sharing Full Time Finance!!! Isn’t it amazing our carefree attitude to money when we’re in college. It’s not until we get out that we actually take things seriously!!!

      I hope to be in a position to help my son out in the future with college so that he doesn’t have to deal with these issues 🙂

  6. Interesting and informative post… stuff I wish I had known myself before starting college and med school. Like others have said, this post highlights the importance of teaching your young ones about finance and laying the groundwork for making good financial decisions.

    • I think this is why I wish it was required to pass personal finance in high school. No offense to my weight lifting teacher but I think this is a skill set that would have set me up better in life.

  7. I graduated in 2008 with $50k in student loans. Thankfully I was able to pay them off in about three years. I know they had IBR & forgiveness programs back then but I was surprised how the enrollment in these programs has grown in recent years.

    I also think refinancing is a good option. I didn’t know anything about it until I was almost debt-free. Otherwise I would have seriously considered it to get a lower interest rate to make prepayment even more affordable.
    Josh @MoneyBuffalo recently posted…7 Christmas Charity IdeasMy Profile

    • Congrats on being able to pay off the $50k in three years. That’s quite the accomplishment.

      Isn’t it amazing how sometimes we aren’t aware of various programs that are available until they are too late. Funny how that works out 🙁

  8. Wow very informative post! Like many, I attended college blindly based on the assumption that it would be the only way to get a good job. I really didn’t even know about half of the stuff discussed here haha!

    Luckily I made it out somehow! I was lucky enough to get some great grants that allowed me to graduate an in-state university debt free.
    Andrew recently posted…6 Ways To Save Time And Money At The AirportMy Profile

    • I think you are like a lot of people Andrew. I wish college counselors did a better job of explaining things or maybe I needed to do a better job of listening. Thanks for stopping by and sharing!!!

  9. We’ve been able to save in 529 plans for quite a while, so we should be able to cover in-state college costs for our two sons. Our older son is a freshman at one of our state universities and our younger son is a high school senior.

    Our younger son has been looking at some schools out of state where the tuition cost is higher. We are hoping there is a chance that he may get some merit based grants or scholarship money, as we (parents) are only willing to pay what we would for in-state schools. In the end, I don’t think he wants to take on any loans… so we will see what happens over the next few months!
    Mr. Need2Save recently posted…What is a Millionaire?My Profile

    • I know in the state of Virginia that if they don’t have a major available in state that you can get in state tuition out of state.

      I know some friends who’s son is going to an out of state school for supply chain management since VA doesn’t offer this major and he’s getting in state tuition.

      So always a path if it’s applicable.

    • I agree that it’s great that refinancing is becoming a more viable option and there are a lot of great companies offering really reasonable rates, BUT it’s not always a great decision to refinance. A lot of recent grads who I meet with who have a lot of student debt get enticed by SOFI offers and think they should refinance, but I always encourage them to actually run the numbers since there are many hidden terms in a lot of student loan refinance plans that actually make it MORE expensive even though the interest rate looks lower. Long story short – it’s not always best to refinance and students need to be careful out there. I also have seen A LOT of student loan refinance scams popping up, which a lot of people don’t know about. Great guest post BTW!

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