Talking to Kids about Heading Off to University/College Part 3 (of 4)
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 sent in interest. In fact 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 you’ll $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 kids 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.
Next -- Part 4: id theft, credit histories and tax returns
Part 1: cash flow management
Part 2: contracts, impulse control and credit cards