Talking to Kids about Heading Off to University/College Part 3 (of 4)
Posted by Gail | Filed under Kids & Money
6. Does your child know what their student loans will cost them? It’s easy to head off to school and rack up debt with nary a thought to how you will pay it back. In fact, it’s all the rage. Young people end up graduating from school without a clue as to what the cost will be to their cashflows now that they are no longer students. Some manage fine. Many others struggle to make ends meet, delaying the rest of their lives – marrying, home buying, having children – because student loan repayments are swallowing a huge amount of their income. Or worse, they don’t delay, and just keep racking up more debt.
Kids also go into the student loan system with all kinds of misconceptions. They think that the six-month grace period they’re given comes interest free. Wrong. They think that the interest rate on student loans is lower or comparable to what they can get through the bank. Wrong. They think that the payment amount they’re given by the student loan system is designed to get them out of debt. Wrong again!
The six-month grace period comes with a cost: interest. If you’re a student in the Maritimes, you’ll graduate with an average debt of about $28,000, and that six month deferral could cost you as much as $1,000 in additional interest. You’ll have the option of paying it in a lump sum. But most people just add it on to their principal, and end up paying interest on interest. Talk about putting compounding to work AGAINST you.
Don’t fall into the trap of thinking that student loans have lower interest rates than private bank loans. The interest rates are actually higher on student loans. Why? Well, remember all those years you were in school, using the government’s money and paying not a red cent in interest. The interest rate clock was completely off. Well, the government is going to get it’s pound of flesh, so your student loans come with a hefty price tag once the interest rate clock is turned on. In fact, if you choose a variable interest rate, you’ll pay prime + 2.5% while the fixed-rate loan charges prime + 5%. Whew!
As for keeping you in debt for a long, long time, the student loan system default repayment term is 114 months, which is 9.5 YEARS and most people go with the default without giving a second’s consideration to the cost of the loan. If you graduate with $20,000 in student loans and go for the default at today’s rates you’ll pay $10,748 in interest. Ouch!
7. Does your kid know how the banking system works? Most kids have a clue, but just. Sure they know how debit cards work, but do they know that they have to keep track of what they’re spending so they don’t end up bouncing debits/cheques? Think if you start with “Hey, I want to talk to you about banking” you’ll get “Gee, mom, I’m not a noob.” Try this: “So do you know what it’ll cost if you try to spend money that isn’t in your bank account?” Yup, fees are always a great place to start because everyone hates paying bank fees. Get yourself the fee schedule for the bank your child will be using at university (very likely the one on campus) and go over the fees explaining what the various services and accounts are. Of course, that means you’ll have to understand what you’re talking about!
Encourage your child to keep a regular eye on his finances. Not only is it easy to lose track of your spending, but id theft problems can be thwarted quickly if people are vigilant about watching their bank accounts online. If kids are using a shared computer, reinforce how important it is to sign off fully when finished. And clear the cache.
Tomorrow — Part 4: id theft, credit histories and tax returns
Part 2: contracts, impulse control and credit cards
June 3, 2010 at 7:06 am
I remember seeing that it would take 9.5 years to pay off my student loans, had I not paid them quicker I’d still be working on paying them off.
regards,
Jason
June 3, 2010 at 7:28 am
I wish I had done things differently with my student loans. I would have worked more too during the school year so not to spend what feels like an eternity dealing with student loan payments.
I used my interest relief for a period as well which adds even more time to paying it off. One more year and it should be gone – 12 years is way too long and I don’t even want to know about the total interest paid.
It is like a boulder around me. I don’t even like people to know that I am still paying on it after all this time. Thankfully there is a light at the end of the tunnel.
Michelle
June 3, 2010 at 8:00 am
I racked up about $30,000 in student loan debt for 2 degrees, and was quite happy making the minimum default payments – until the first year when I got the tax statement and it showed I had paid a whopping $5 off my $4000 loan for the year! That was the wake up call I needed. I immediately increased my payment and started saving, and was able to make lump sum payments. I had 3 loans, so I snowballed them. Fortunately I have never been a huge spender and was able to manage my cash flow. I did make the decision to buy a house before paying off the loan (but paid 26 % down) and 1.5 years after I bought my house, I paid off my loan (about 3.5 years after graduating from the second degree) – accomplished by working 2 jobs. Today I have been student loan free for over a year and still can’t believe how freeing it is. I still work 2 jobs but am now paying for vacations and home renos
June 3, 2010 at 8:48 am
I am working 3 jobs now to get things under control and had worked 2 jobs for the last 5 years. The third job is a business I started last year and is making a great difference in clearing debt and having cash flow.
I bought a house 2.5 years ago prior to having all my consumer debt paid off which postponed my student loan being paid off. Probably not the best idea but I am working through it.
Michelle
June 3, 2010 at 10:04 am
I couldn’t stand the thought of having my student loan debt hanging over my head. I worked two jobs and was able to pay it off in two years. Then I was able to let one job go and really enjoy the other one.
Students need to see the long range picture and not just think about the present. There’s nothing wrong with working a couple of years before going to university in order to save a substantial amount if your parents aren’t footing the bill. Mine weren’t able to.
June 3, 2010 at 10:04 am
I think students still in highschool need to made aware of other financing options. I think the old saving standby is a good plan for one but most schools offer awards and bursaries.
The post secondary school also offer bursaries and scholarships. I remember not really being aware of exactly what else was availale untill part way through grade 12 and that is a bit late. Some employers also offer tuition assistance for their employees and their immediate families.
I currently work full time and go to school part time. I have been paying for my classes on my own so far but I just found out that I can get assistance through a work trainning program offered at my work place so I will defenetly be appling for that. Every little bit helps.
June 3, 2010 at 12:10 pm
The student loan website has a calculator much like Gail’s get out of debt calculator. You input the loan amount and the number of months in which you’d like to pay it off and it’ll calculate the monthly amount you need to pay. You can do 3 calculations at once so you can compare different amortizations.
Not only should kids have a plan to repay their student loan, they should make a career plan for how much their degree will pay them and who will hire them. Gone are the days when simply having a university degree guarantees you a better job and better life.
June 3, 2010 at 4:06 pm
i graduated with my Bachelor’s degree in 1998 with about 25,000 in loans (approx 15,000 was forgiven off the top). I thought it was great so much was forgiven, until reality set in. It was difficult to get full time work in my field (teaching) so I was living below the poverty line and paying 12% interest. Fast forward 12 years later, I STILL owe about $5000 on my loans. What I didn’t realize is that life was going to eventually get in the way – mortgages, children, maternity leaves, etc mean that my $300 per month is all I can pay. I wish my parents would have taken a more active role in my education and finances and helped me find other ways (ie forced me to save from working) to pay for my education.
June 3, 2010 at 5:41 pm
Your post is timely.
http://www.canada.com/business/Students+knowledge+loan+system+Report/3108131/story.html
With roughly 75% of those students polled failing the money test, I think this is a major problem. Until I began repayment, I was completely in the dark about how loans, interest and credit worked.
The availability of student loans is a double-edged sword. On one side, you want everyone to have access to post-secondary education. On the other, giving a child (and at 17/18 — we’re talking about children) $12,000 – when the biggest pay out they had probably ever had in their lives was $500 at a part-time job – well, we’re just asking for trouble.
My student loans are keeping me from buying a house and having children. I put a third of my income towards repayment and I make a good living. Imagine those with their BAs working at minimum wage. It’s a mess. All because I wasn’t taught to budget or to understand the true impact of a loan. Talk about an expensive learning curve.
June 3, 2010 at 6:31 pm
I can’t imagine paying 12% interest on a student loan. I consolidated mine from a variable (4.75% minimum-8.75% maximum) to a fixed rate 3.125%. Up until the last year and a half or so the interest rate on my savings account was higher. The one loan that I didn’t consolidate I paid off during my grace period. I read every last word related to my loans and understood how they worked. There was a class I was required to attend before they would release the loan funds to the college. It was a complete joke as it basically amounted to you have to pay back what you borrow. There were no guidelines on how much to borrow or the cost of the loan in terms of interest. I did a budget every year to figure out how much of the loan to accept and am so glad (lucky) because now I am not paying back student loan money I didn’t really need. There was also an exit class (online) for the student loans that amounted to you have to “you have to repay your student loans”. Needless to say hindsight is 20/20 and my college financial experiment worked out well but it would be nice if good information was provided to students before they signed on the dotted line.
June 3, 2010 at 7:07 pm
Ashley,
You’re clearly putting forth a great effort to pay off your loan and although the learning curve is expensive, as you say, you sound as though you’ve learned a lot.
It’s so important to pay off any debt before you take on a mortgage or reduce your income due to maternity leave. You’ve got your priorities straight. Keep up the good work.
June 4, 2010 at 12:49 am
I don’t know why but my parents never sat down with me to discuss how my university education would be paid for. I just figured on getting student loans because that’s what everyone did. I think it would have been very helpful to have all my options laid out on the table before I went to school. Also, it would have been extremely valuable to understand budgets and planning my spending for the term or for the year.
This has given me great food for thought when my husband and I talk to our daughters about money and school.
June 4, 2010 at 10:44 am
My husband had to go to Japan to earn enough money (teaching English) to pay off his student loans (BSc – Zoology). He got a bank loan before he left, used it to pay off the gov’t, then sent pots o’ money home every month to pay off the bank loan. Saved LOTS of interest that way … PLUS he paid off his $15K+ loan in less than a year!!
We weren’t married yet then but it was certainly a good reason to tie the knot!! 
June 7, 2010 at 1:32 pm
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