When your kids are 18 and thinking about venturing out into the real world of college, they probably aren’t thinking about student loan debt and the impact it can have on their lives. Instead of letting your son or daughter take on enough debt to purchase a small home, sit them down and have a frank discussion about student loans so they can make an informed decision on which college to attend.
1. Make them understand what the numbers really mean
At first it’s easy to just think of student loans as an abstract number with no real meaning in life. Sit them down and show them what the monthly payments will be and for how long. If you’re unclear on the exact cost, assume that the student won’t get any financial aid after their freshman year.
2. Know what kind of help is available
Many students assume they will be making handsome salaries when they get out of college, but in reality, entry level jobs often don’t pay enough to cover student loan payments. If that describes your student, there are things they can do to get help.
Giving up on payments carries the same risk as defaulting on a mortgage or car loan, except there’s nothing to repossess or foreclose on. Never the less, missing loan payments will wreak havoc on your credit score and cause problems later down the road when your student goes to buy a house or get married.
Let your graduate know that there are income based repayment programs that are capped at a specific percentage of your income, but this payment plan extends the life of the loan to 25 years, so you’ll be paying more on it in the long run. That may be a small price to pay compared to defaulting on payments that are too high.
3. Talk about the worst case scenario
In a perfect world, every graduate would find a job in their field with a handsome compensation package to match. However, that’s not always the case and sometimes students can’t make their payments at all. If that’s the case, your student needs to have a contingency plan before they default.
Student loan providers often offer forbearance or deferment plans to give students in financial trouble a break on their loans for a certain period of time, typically around 6 months. In order to take advantage of this, the student will need to call the lender as soon as they are certain they can’t make any payments to set up the deferment. Know that the loans usually still accumulate interest during the deferment period.
4. Keep up with the repayment plan
Once your student finds a plan that works for them and their budget, it’s important to stick with it. Give your student plenty of emotional support and help them find the tools they need online to create and maintain a repayment plan.
If your student consistently needs a little extra money to make their payments and budget work, make sure you’re not acting as the bank of mom and dad. Don’t become a part of their income each month, but instead point them to freelancing sites where they can pick up extra work on the side. Night jobs, babysitting and handyman jobs are all great ways to make extra money. Give your student support, not cash.
5. Don’t give up
This is the most important lesson to teach your student. A positive outlook can help them keep the faith even if they run into a few snags along the way. Tell your student to keep the eye on the prize and work towards paying off their student loans to eventually be debt free. There will always be hurdles and keeping a positive outlook and never giving up is the key to success.
These 5 lessons will help your student be realistic about their debt and create a plan for paying it off. In today’s world, an education is more of a requirement than a luxury, so talk to your student now and help them develop the tools they need to be successful now and in the future.