And thatâs a mistake many will no doubt regret.Â
Millions of Americans are saddled with student debt -- borrowers collectively hold nearly $1.6 trillion of it. Unfortunately, many of those who took out student loans now struggle to pay them off. Some are even at risk of defaulting on their obligations.Â
Part of the issue, however, may stem from the fact that people who take out loans have no idea what theyâre signing up for. And can you blame them? Many college students sign up for these loans as teenagers, when theyâve had little financial education.Â
And if you think it's on parents to warn their kids of the dangers of student loans, think again: A recent survey from COUNTRY Financial found that only 9% of parents talk to their children about managing student debt. If youâre not part of that minority, it pays to sit down with your kids and explain what taking out loans really entails -- and warn them not to go overboard.Â
The dangers of student debt
Many students who borrow money for college donât understand what that will mean in terms of monthly payments. As such, they wind up getting in over their heads. If youâd rather your children avoid that fate, find a good loan repayment calculator, crunch some numbers, and give your kids a sense of how much money theyâll need to fork over each month to pay off the amount of debt theyâre thinking of taking on.Â
At the same time, be sure to explain the difference between federal student loans and private loans. With the former, youâre protected from exorbitant interest rates because federal loans are more strictly regulated than private loans. Private lenders can charge as much interest as theyâd like and impose variable rates that climb over time, resulting in higher monthly payments for borrowers.Â
Furthermore, managing student debt is often easier when those loans are of the federal variety. Thatâs because federal loans come with protections that can save borrowers from defaulting. For example, if your children take out federal loans, they may be eligible to apply for an income-driven repayment plan after graduation once those debt payments start coming due. Or they may have the option to defer their payments for a while. These protections donât exist with private loans (although itâs worth noting that some lenders will negotiate repayment terms after the fact).Â
Just as importantly, emphasize the need for your kids to follow a strict budget once they graduate from college and start having to pay those student loans back. Incidentally, thatâs something they should do during their studies as well to avoid other types of debt (namely credit card debt).Â
Many students who take out college loans do so when theyâre not even old enough to vote. If you donât want to see your children struggle after the fact, carve out time to talk to them about borrowing smartly and managing that debt after graduation.
If youâre hesitant to have those conversations because of your own lack of knowledge, read up on student loans to understand them better yourself. That way youâll be in a better position to help your kids make the right decisions.Â
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