If you’re a parent, you probably dream of the day you send your child off to school. With 18 years of hard work in the rearview mirror, you may have plans to convert bedrooms to home offices, book a well-deserved vacation, and consider the job of parenting as over.
I hate to be the bearer of bad news, but you need to rethink your plans.
The average college graduate leaves school with $30,000 or more in student loan debt, and over 6% of all student loan borrowers owe more than $100,000 for an undergraduate degree. The average salary for an early-career, college-educated worker, however, is only $50,556. This is to say nothing of the fact that many college graduates end up going back to school for advanced degrees in pursuit of a living wage, racking up even more debt along the way.
In short, your kids aren’t entitled – they’re dealing with a reality unlike the one you faced.
So you’ve got a few choices. You can let them flounder until they figure it out, or you can choose to fund them until you’re either broke or dead. Neither makes for a good outcome.
Thankfully, there’s another option. Take these steps to help your kids take control over their financial lives.
Map out all student debt. Most new graduates have no idea how much they owe in student loans, and the terms of each of those obligations. Sit down with your child and create a list of each loan, including not only the balance but also the interest rate, monthly payment and name and address of each servicer. This helps your child understand who needs to be paid, how much, and on what date.
Create a list of monthly income and expenses. When your child gets their first job, it’s easy to lose a little control. For many, this is the first time they have their own money; without a solid understanding of the expenses that come along with adulthood, your graduate is unlikely to manage their money effectively. Helping them document it all provides context for their spending and lifestyle choices.
Consider the “wants” and the “needs.” Sacrifice in never easy, particularly when you’re just coming into adulthood. For many children, this is the first time they don’t have to ask permission to buy something; that freedom can be intoxicating, particularly as they see others around them spending money. There’s nothing wrong with spending money, but it’s your role to help your new graduate understand the limits of their spending power as they dig out of their student loan debt.
Review all available federal student loan repayment options. Federal student loans come with numerous Income-Driven Repayment (IDR) plans that adjust monthly payments according to taxable income, employment-based forgiveness opportunities, and a host of options to ease the burden of repayment. By considering every opportunity, your child can begin to make smarter long-term financial plans.
Establish a system of rewarding “future you”. When you’re young, you think you’ll be youthful forever. You’ll never get old, sick or just plain tired of working every day. As the years roll by, however, you come to understand the error of your ways. Help your child start to fund a retirement account so their future self can reap the benefits of what are sure to be decades of hard work.
Make a strategy for tackling the private student loans. Though federal student loans provide flexibility, the same can’t be said of private student loans. Variable interest rates, the lack of options such as forbearance, forgiveness and IDR plans, and the absence of federal oversight make private student debt some of the most onerous financial obligations that student loan borrowers will face in their lives. Whether your child can pay those loans or defaults because their income isn’t enough to cover the payments, having a plan in place to deal with the fallout is critical.