For most parents, their biggest dream is sending their children to college. They know a college education can give their child a head start down life's highway. But for many parents the dream of college can become a financial nightmare. Many don't understand the college financial aid process, and too many fail to explain student loans to their children.
Right about now parents across the nation are receiving financial aid award packages from the schools to which their children have applied. These letters will detail the estimated costs of attending that particular school; list out grants, financial aid, and scholarships their child can receive; and provide an estimate of any remaining financial obligations. This is when the reality of the situation sets in if the parents don't have sufficient savings or a 529 plan in place. The next step is to think about borrowing, either in the form of a federal student loan or a private student loan. Personal loans or credit cards should always be a last resort.
If you or your child decide to rely on federal or private student loans to cover some of the costs of college, it is a good idea to sit down before the freshman year even begins and talk about the implications of being in debt. The Federal Student Aid website has a great explanation of student loans, and provides information about the different types of loans and dollar amounts available. Stress to your student that any money borrowed through student loans is only to be used for education purposes. This money should not be diverted to entertainment or living expenses. If your child feels that he or she needs extra money beyond the amount of the loan, talk about controlling expenses and employment opportunities.
It's Never Too Early to Think About Repayment
Together you will need to think ahead in order to come up with a plan now about how these loans are going to be repaid in the future. You or your child will be signing a promissory note, whereby you are agreeing to repay the loan even if your child does not complete his or her education, cannot get a job after graduation, or does not like the education received. Failure to repay a student loan can result in serious financial consequences.
You can look at the amount of money you expect to borrow and use the online repayment estimator to calculate payment amounts for federal student loans. You can also research what your child is expected to earn based on information from the college about its graduating classes or from the U.S. Department of Labor's Occupational Outlook Handbook. If your child will not be able to earn sufficient money to repay the student loans, you may have to discuss a different major or additional income opportunities.
After graduation, you and your child may be faced with a confusing amount of paperwork, payment plans, and interest rates based on the various student loans which were taken out during the school years. It may be possible to consolidate federal student loans together and private student loans together to result in one monthly payment for each. You will have to look into total repayment amounts at that time as sometimes extending the length of repayment may result in total higher costs.
Federal and private student loans are a great way to bridge the gap between college costs and financial aid, but it is crucial to have a talk with your student now so that you both know what financial obligations are ahead.