Fortunately, the easiest way for parents to help their teens understand student loans is the same strategy for selecting the appropriate student loans: Researching options and recognizing their differences.
While mom and dad may be concerned with mortgages and auto loans, the first major borrowing that teens will encounter is typically associated with college costs. Unfortunately, student loans and how they work are a mystery to many teens today.
According to the Credit Union National Association’s High School Student Borrowing Survey, nearly half of high school seniors in the U.S. don’t know how much money they’ll need for college, while an even greater percentage aren’t familiar with basic student loan terms.
“These troubling findings suggest not just a lack of awareness of college cost or how debt works but also a lack of basic financial knowledge,” said CUNA Executive Vice President Paul Gentile. “The results suggest that some students could be challenged in managing basic expenses or using such payment tools as credit cards in a consistently responsible manner as they enter adulthood.”
Even if teens rely on their parents to arrange or co-sign on their loans, it’s essential for them to understand what they’re getting into, especially since 74 percent of survey respondents said they will need a combination of federal and private loans to pay for tuition, in addition to jobs and monetary support from their families.
Fortunately, the easiest way for parents to help their teens understand student loans is the same strategy for selecting the appropriate student loans: Researching options and recognizing their differences.
Federal loans vs. private loans
Federal student loans are backed by the U.S. government, while private student loans are made available by private lenders. Both types have their advantages and disadvantages, but for students seeking the most affordable deal, federal loans are often the best choice.
Federal loans come with many benefits, such as not having to be repaid until a student graduates, leaves school or changes their enrollment status to less than half time. Additionally, the interest rates on federal loans are generally lower than those of private loans. Since it usually takes many years to pay off student loans, lower interest means less money spent over the lifespan of the loan.
Federal loans can also be easier to qualify for, and in most cases do not require co-signers or credit checks. Also, federal loan repayment can be more flexible. If a borrower is having trouble making payments, different options exist to help them reduce their payment amounts or even temporarily suspend payments.
On the other hand, if a borrower qualifies, private student loans can provide more funding than federal loans. This can be a great benefit to students if their tuition and living expenses aren’t covered by federal loans. While private loans can also feature different options for borrowers struggling to keep up with their payments, there are generally tighter restrictions regarding repayment when compared to federal loans.
Regardless of which loan type they choose, it’s important for teens to realize this money will have to be paid back. Failing to repay a federal or private student loan can result in severe damage to an individual’s financial reputation, including their credit report.
Planning ahead
Simply borrowing money with no plan in place for repayment is not just unwise, it’s dangerous. When determining how much money they need for college, borrowers need to make sure they understand all of their loans’ rules and regulations, including repayment schedules and any penalties that may come from late or even early payments.
In addition to carefully reading and understanding student loan requirements, parents and teens can plan ahead by using a college cost calculator. Not only can this tool give borrowers a better idea of average college costs, in can also provide detailed breakdowns of costs relating to tuition and fees, room and board, books, supplies and other expenses associated with college, both in-state and out-of-state. With a truer approximation of how much money will be necessary to borrow, parents and teens can make a more informed decision regarding which loans best suit their needs.
By taking the time to understand all aspects of student loans and their impact on a college-bound teen’s financial outlook after they graduate, both parents and teens can ensure they have the clearest possible picture of what to expect. After all, a student loan should be a valuable tool that helps young people obtain a first-class education, not a financial burden that hangs over their heads for years to come.