Student Debt: Should Your Child Have It?
When your child is preparing to head off to college, the amount of money involved and the ways to fund that expense can be overwhelming. Even if your child qualifies for scholarship and grant money, you may need to consider student loans to cover any gaps in costs.
Here are a few things to keep in mind when considering student loan options.
Borrow Wisely
Develop a plan to finance your student’s education well in advance. A strong plan can help prepare your family to pay for the cost of higher education and minimize your child’s debt. If you’ve saved enough money with a 529 plan or another college savings plan, or if your student plans on working to pay for school, you may be able to swing a debt-free education. But for many families, student loans are inevitable.
You’ll want to prioritize funding options. Karie Bedford, Relationship Manager with Sallie Mae® suggests a “1-2-3” approach:
- Maximize options that don’t need to be repaid.
- Explore federal student loans.
- Consider a responsible private student loan.
Only borrow what’s necessary to cover tuition. “For those that do borrow, it’s important to remember to do so responsibly,” Bedford says. “That means borrowing to fund your education, not necessarily a lifestyle.”
Build Credit History
“It’s important to pay your bills on time,” says Bedford . While repaying student loans is a major responsibility, it’s also an opportunity for your child to build his or her credit history. Developing a credit history of responsible repayment habits and a strong credit score can help students secure their first apartment lease or auto loan.
Also, it’s important that students have a plan for repayment before they graduate, according to Bedford: “If you consistently make on-time payments, that credit history can have a positive impact on your credit score.”
Purchasing Power Impact
Depending on the size of the loan and the loan terms, the minimum monthly payment may limit a graduate’s spending and saving. After graduation, an indebted adult will have less discretionary income than one without debt, making it harder to save for a down payment on a home or even afford an apartment. He or she may become a boomerang child, returning home to help offset the cost of student loan repayments and other monthly bills. Having a student loan may also impact your ability to obtain other credit due to less income being available after all other expense are paid.
Loan Repayment
Making payments on a student loan while in school or when the loan is in deferment may reduce his or her overall outstanding debt that will be owed after graduation. Additionally, any private or unsubsidized federal loans may accumulate interest while your student is in school, so it may be beneficial to at least pay the interest while the loans are in deferment so they are not added to the principal. It is very important to understand all loan terms and to pay particular attention to payment due dates, how payments are applied, and if there are any additional fees or costs.
Typically, students have a grace period for six months after graduation before student loan payments become a monthly expense. The length of time it will take to repay a loan will depend on how much debt a student has taken on while in school, the loan terms, and the student’s ability to make extra payments.
As you decide whether or not your child should incur student debt, consider your financial capacity and your child’s future. There are many ways to manage student debt without delaying major life decisions.
