May 24, 2016

Do You Need to Fear College Loans?

The average 2017 college graduate left college owing $39,400.

Although many students and their parents view debt as extremely undesirable, the reality is the majority of students take on debt in order to finish college and it’s not always a bad thing. In many ways, a little debt can actually be a good thing.

Paying off debt helps students:

  • Contribute towards their education
  • Learn to budget
  • Live within their means
  • Build their credit

A study by American Progress reminds us that student debt is typically a non-issue for students who graduate:

Borrowers who earn a degree are much less likely to default on their loans than those who do not, and dropouts represent an estimated 60 percent of all people who default on their loans.

This means the risks of adverse effects of debt is greatly multiplied by those without a college degree.

The reality is that most students need to take out loans to finish college, and that’s not always a bad thing.

No Easy Road

Many parents (and politicians) want students to contribute some money towards their college education in order to be more invested in the outcome. They need to have some skin in the game so to speak.

There is some truth to this statement. Students who contribute to their own education can be more motivated to complete their degree more quickly and get into the workforce as soon as possible.

For example, students who have loans learn first-hand the necessity of having a budget. They can get used to making payments while still in college by paying off interest every month. This will help them after they graduate when they need to learn to set aside money every month for payments like rent and gas.

Discuss long-term goals and how your child will be able to achieve them. When does he want the loan paid off? What must she do to pay it faster? Does he need a promotion, more education, and better job performance? The pressure of debt should inspire her to push his way out from under it.

Factor in retirement savings and goals like home ownership or a new car. Illustrate how a small amount of investment while young will add up to big things in a couple decades of diligence.

How Much Should Parents Contribute?

Are you able to pay for some or all of his education yourself? Consider your options before you make a decision.

Students can sometimes get much better terms for federal loans and they have more options to pay it back. Sometimes parents can get much better rates from private lenders if they have a good credit rating.

Discuss the situation together as a family and decide what works for you.

Income-Based Repayment Plans

One of the advantages of a federal loan is the option to enter into an income-based repayment plan after graduation. This can be a life-saver for a student who becomes overwhelmed with monthly payments before they’ve landed a decent job.

However, there are some downsides to an income-based repayment plan. They can be good in the short-term, but in the long-term students will pay thousands more in interest with these types of payment plans. Make sure they have a good understanding of what they’re getting into.

Depending on their situation, they may be better off consolidating or refinancing their loan to reduce interest rates.

View Debt as a Tool

Life is expensive, but certain things are worth it. Your child’s education will open the world to him. Debt should be viewed as a tool your child can use to achieve his or her goals. The experience of paying off debt can also be a valuable lesson.

All that to say, you and your student should have a realistic idea of what you can afford right from the get-go. Many families make it a priority to get into as little debt as possible. However, there are hidden costs to choosing the cheapest education possible.

Taking on a little more debt to go to a school that supports your student and offers them more opportunities is usually worth it.

Has your child picked a school that is a good financial fit for them? Start with your free College Factual account.

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