On the one hand, student loans may be good debt, because they are an investment in your child’s future; on the other, too much of a good thing can hurt their financial futures. So, it’s best for parents to teach their children about smart borrowing, so they don’t get into trouble with their student loans.
Below, I’ve compiled some words of wisdom that parents can share with their children about the real benefits and challenges of student loans:
- Student loans are dangerous. Student loans are borrowed money that must be repaid, usually with interest. It’s too easy to get in over your head.
- Minimize the amount of student loans you borrow. Borrow as little as you need, not as much as you can.
- Focus on free money first, such as savings and scholarships. Every dollar you save or win is a dollar less you’ll have to borrow. File the Free Application for Federal Student Aid (FAFSA) to apply for grants from the federal and state governments.
- Live like a student while you are in school, so you don’t have to live like a student after you graduate. Student loans may seem magical, and it may be fun to splurge, but you will pay for it later.
- Every dollar you borrow will cost about two dollars by the time you repay the debt.
- Borrow federal money first, because federal student loans are cheaper and have more flexible repayment plans than private student loans.
- If you find yourself needing to borrow private or parent loans, chances are you are borrowing too much money. Consider enrolling in a less expensive college, such as an in-state public college or one of the six dozen colleges with no loans financial aid policies.
- Keep student loan debt in sync with your income after graduation. Aim to have total student loan debt at graduation that is less than your annual starting salary and, ideally, a lot less. If total student loan debt is less than your annual income, you should be able to repay your student loans in 10 years or fewer.
- Otherwise, you will struggle to repay your student loans within a standard 10-year repayment term. You’ll need an alternate repayment plan, like extended repayment or income-driven repayment, which reduces the monthly payment by stretching out the term of the loan to 20, 25, or even 30 years. This increases the total cost of the loan.
- Choose the repayment plan with the highest monthly payment you can afford. This will save you the most money over the life of the loans and help you pay off your student loan debt more quickly.
- Target the loan with the highest interest rate for extra payments. This will reduce the average interest rate you pay on your student loans.
- Pay attention to your student loans. Take your monthly repayment obligation seriously. All it takes is one late payment for your credit to be ruined. Keep track of all your student loans. Sign up for auto-debit, so that the loan payments are automatically transferred from your bank account to the lender. (You may also get a small discount on your student loan interest rates as an extra incentive.)
- Claim the student loan interest deduction on your federal income tax returns. This is an above-the-line exclusion from income that can reduce your taxable income based on up to $2,500 in interest you paid on federal and private student loans.
Knowing what taking out student loans entails will better position you and your child to repay them without any unforeseen issues in the future.
Mark Kantrowitz, Publisher and VP of Research, savingforcollege.com, [email protected]