Talking to Your Children About Student Loans
Financial education is best given as early as your child starts spending money. Education on loans can be given a bit later. Know how to talk to your child about Student Loans. Tell them how to do a proper study or research on Student Loans so the loan they take helps them power their career on a successful path.
Talking about money is notoriously controversial. Traditionally money talks are something that stays private and in some cases is even considered to be taboo. Break with tradition as it regards to preparing your child for what they will face with their student loans. The relationship between a borrower and a lender is extensive and long term, and as a parent, if you elect to involve yourself in that conversation you can be giving your child both tangible and emotional benefits related to this undertaking.
Assisting your hopeful student in this stage of their development also creates an open-door policy specific to conversations about finances. Essentially giving them permission to use you as a resource can be comforting and ease any anxieties and fears that they may have because of not having any experience with or knowledge about student loans. The transitional time between high school and college can be tricky to navigate in general, for both the student, and the parent, so it is assumed that both parties will benefit from the creation of this conversational comfort. Various Lenders
Odds are your child does not even know where to apply for their student loans, nor the difference between types of lenders there are. Explaining the options as well as the circumstances that are associated with them is a solid knowledge base. Federal loans, as well as private ones both, have their place in this discussion since students potentially will have to use a combination of the two. You can even obtain the paperwork related to both, and go over it with your child in a mock scenario, so that when they eventually apply this is not the first time they are seeing these forms. Exposure like this provides an opportunity to ask questions and seek out additional information that is not on a timeline.
Once a base understanding has been developed you can go into further detail, and add into the discussion, for example, how the base amount of the loan taken out will not equal the final amount repaid. Talk to your child about how interest loans will vary depending on the type of loan, and the specific lender they use, and how they will affect them on both a monthly basis as well as how they relate to their bottom line. Since student loans can be pushed to the back burner mentally once the collegiate experience begins, as is the common theme of this discussion in general, preparing your student for this impact ahead of time will decrease the element of shock down the road.
You can research on Earnest.com what borrowers need to know about taking out a student loan consolidation to combine existing balances into one payment. While this research may seem premature, it really is not. Doing these exercises with your child on the front end gives them exposure without pressure. Discussing debt consolidation and how it relates to monthly payments will help show your child that the responsibility of student debt can be somewhat simple if the time to make it so is taken. Showing your child the benefits associated with an organized financial approach can help them develop those skills before they have an opportunity to develop ineffective ones that might negatively impact their relationship with money in general. Budget-Based Living
Even if your child held a job in high school, they likely did not live on a budget. The freedom of lifestyle that comes with going away to college provides an opportunity to establish habits, but if those habits are good or bad, is a case-by-case situation. Doing everything you can to encourage good habits is a real gift to your child. Talking about budget-based living, and why it is important for financial health and how veering away from your budget can negatively impact your finances is a great place to start. People tend to view borrowed money as free money, especially when they have no practice with money management. Explain that while this money does not come from their wallet directly at the time that they spend it, it will eventually come out of their wallet, so spend it now with that caution in mind. For example, spending student loan money on non-essential items, like carry out food, or vacations might seem harmless at the moment, but a $5 burrito might end up costing you $10, or more, by the time you pay it off, that hardly seems worth it, right?
Introducing your child to the importance of a successful grace period is also a worthwhile topic to cover. Some potential students might not even know what a grace period is, let alone how to take advantage of it. Typically lasting six months, a grace period is an amount of time that exists between graduation and when the debt repayment period will begin. Speak about how using this period to find work and reassess their budget to fit new monetary demands is going to make it easier once their first student loan bill arrives. How their budget looked as a student is no longer going to work post-graduation since paying off student debt is mandatory, creating a manageable debt-to-income ratio is essential. Overall impacts
Scare tactics might not be the best approach, but do not underestimate the need to be open about the consequences of mismanaging student loan debt. Borrowers of any age need to understand what is at stake if they do not hand their loans with a responsible mindset, and what it will cost them as each domino falls. For example, with defaulting inevitably lowering credit scores, even one missed payment can make them an unattractive candidate for future loans, like a mortgage. Your financial behavior will follow you forever, and while blemishes are easy to make, they are not easy to recover from. Conversely, talk about how good habits, like advance payments, can be of great benefit to your credit score in the opposite way. If you did not have this talk with your child before they began their college career, it is not too late. Opening this door can still be helpful and impactful. If you avoided this conversation because of your own personal lack of knowledge, then use it as an opportunity to learn together.