Borrowing for College

Helping your kids manage student loan debt

Helping your kids manage student loan debt
 

According to the most recent 2015-2016 research conducted by the College Board, a “moderate” yearly budget (tuition, fees, room and board) to attend a private college averaged $47,831.1 Without factoring in inflation, that equates to a cost of more than $190,000 to obtain an undergraduate degree. It therefore shouldn’t come as any surprise to see a flurry of news reports every spring bemoaning the record high student loan debt being assumed by that year’s average graduate. In 2016, nearly seven out of every 10 graduating seniors needed to borrow for their educations and are on average saddled with in excess of $37,000 of student debt as they enter the workforce.2

Not only does this emerging “debt crisis” place an immediate heavy burden on the shoulders of new graduates, it can have an adverse long-term impact on both the individual and the economy. The more a millennial’s debt capacity is consumed by student loans, the less likely they will be to maximize contributions to their 401(k) or other retirement plans, the longer they’re likely to delay building equity through home ownership, and the more reticent they will become to take on the inherent risks associated with entrepreneurship.

Managing time, budgets and expectations

Be honest with your kids about what sort of financial support you can commit to comfortably. It’s far better to have an up-front conversation with your high school-aged kids about what you can and cannot provide financially for their education, rather than paying for a year or two and then suddenly having to tell them that the well has run dry.

Even if you’re fortunate enough to have the means to pay their way throughout the four years, shifting some of the financial responsibility onto their shoulders may still be desirable. Get them used to managing a monthly budget; have the various bills for tuition and other related expenses sent directly to them rather than you so that they see exactly what their education is costing.

Don’t be hesitant to require that your child find an on or off-campus job during the school year, as well as working during their summer break. In addition to helping minimize their student debt upon graduation, it will also help imbue them with a strong work ethic and teach them valuable time management and multi-tasking skills that will be invaluable as they enter the workforce.

After the cap and gown are packed away

First and foremost, make sure your child knows the outstanding loan amounts, interest rates and repayment terms for any and all loans. If they have multiple student loans, they may want to explore opportunities to consolidate them into a single loan payment. It can greatly simplify the repayment process, and depending on interest rates could potentially reduce their monthly payment.

For any federal loans, they have a six-month grace period after graduation before they will need to begin repayment. If possible, urge them to use those six months to start putting the requisite monthly payment aside, so they begin getting accustomed to the payment schedule. Then, when actual loan payments begin, they’ll have a six-month emergency fund to draw on if needed, or they can apply the money saved to reduce their outstanding loan principal.

Keep in mind that in addition to the 10-year standard repayment plan, federal student loans offer a number of alternative repayment options including extended, graduated and income-based repayment plans. More information about all of these plans can be found at the Federal student aid  site.

Most importantly, make sure your child understands that their future creditworthiness depends on adhering to a plan and not defaulting on their loans. Between various repayment, deferral and forbearance options, there should be no reason for them to have to default.

Talk to your SunTrust Financial Advisor for more ideas to help you help your kids manage their finances.

For more information about retirement, investing, and financial planning, consult with a SunTrust Investment Services Financial Advisor or learn more how SunTrust can help you with your retirement and investments needs.

College Board, January 2016

Wall Street Journal, May 2016

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