Student Loans - Use with Caution

Loans should be your child’s responsibility and only when absolutely necessary. It would be great if your child could graduate without any student loan debt, but sometimes life happens over the course of four years.  As parents, we all know that only one accident, lost job, or trip to the emergency room can crater even the most well planned college finance strategy. If your child has to take out a loan to finish his college education, it’s certainly not the end of the world.  And just because your child graduates with debt doesn’t mean that he will be sentenced to a lifetime of poverty. Every generation has had to start small and pay its dues. We did too, and we’re doing fine. You can always help your child pay off loans later if your family budget allows.

Contrary to sensational news coverage of students with six-figure debt, the current average amount of student loan debt for students who do take out loans is about $26,000.00. Considering the typically low interest rates of 3.4%-6.8% and usual 10-year payment period, students who graduate with that amount in loans will pay a very manageable $250.00 to $300.00 per month.

In fact, if you’ve been paying bills on the school’s monthly payment plan for the past four years, and your child has to borrow in the last year, just keep paying as usual during the final year and then pay the same amount toward the loans after graduation. This will greatly reduce the total interest paid and pay off the loan early. If you agreed to pay for a portion or all of your child’s college expenses, this can probably be considered part of that commitment as well.

I am a big fan of having the student take out a Federal loan first and then only resort to parent or PLUS loans under extreme circumstances. There are a few reasons for this. First of all this is your child’s education and he should be responsible for it. Just like you wouldn’t expect to attend classes and take tests for him you shouldn’t be expected to borrow money when other loans are available.

Secondly, if your child hasn’t established a credit record by his junior year, he needs to consider ways to do that. A federal student loan for a modest amount can establish a good credit history. And third, there’s absolutely nothing keeping you from helping him pay his loans after graduation. Many parents and grandparents help pay off college loans as birthday and holiday gifts and even more are paying off a portion of their child’s loans as a way to give an inheritance before it is gobbled up by long term care expenses.

Student loan calculators

Are wonderful tools that can give you and your child a realistic look at what borrowing various amounts will cost in the long run. Just insert hypothetical amounts to be borrowed and the terms to see what loans will cost. Some of these calculators even estimate a minimum salary to make these payments. A helpful tool when planning majors and estimating starting salaries. I like the one at http://www.bankrate.com .