Student debt is a topic no one enjoys talking about but ensuring that your child fully understands the gravity of student loans is so important. The key to broaching any difficult discussion is finding an approach that won’t cause your child to shut down, but will instead encourage them to pay attention.
Americans now owe more than $1.5 trillion in student loans according to Federal Reserve data —a whopping milestone we reached as a nation in early 2018. According to a study by Citizens Financial Group, 46% of students recall only a brief discussion with their parents about student loan debt, while the parents in the
study recall an “in-depth conversation.” That’s a pretty big disconnect.
Suffice it to say that there’s no time like the present to have an honest talk about student loan debt with your children. Below, we’re going to walk you through the basics of the financial aid process, and explain some key components of student loans.
The hope is that you can use these tidbits of information to help your child better understand the ins and outs of student loans—in a relaxed (and not scary) way.
Figuring Out What You Can Afford
Before you approach your child for a discussion about student loans, it’s a good idea to know where your finances stand, since they are almost always used to determine the amount and types of financial aid your child may qualify for. While facing your own finances can be stressful, it can be important to do so in order to help your child wrap their head around all the numbers too.
Knowing what you can contribute to your child’s education will also be useful when crunching the hard numbers (we’ll get to this later). Now let’s get into some of the student loan concepts you can discuss with your child.
The Application Process
The first step in applying for federal student aid is to complete the Free Application for Federal Student Aid (FAFSA®). The deadlines for this form vary year-to-year and by state, so visit the Federal Student Aid website for more information.
Based on financial need, the cost of attendance, and the student’s FAFSA®, schools put together a financial aid package.This package is typically comprised of one or more of the following sources: scholarships and grants, federal student loans, and work-study programs.
Scholarships and grants are essentially free money (sounds pretty great, right?) that are typically awarded based on merit (scholarships) or need (grants). However, sometimes these financial awards don’t cover the full cost of tuition, so that’s where student loans can come in.
Understanding Student Loans
There are two types of interest rates: Fixed interest rates stay the same for the entirety of the loan. So if you sign on for a 5% fixed interest rate on a student loan, for example, your loan would always have a 5% interest rate. On the other hand, variable interest rates can go up or down based on market fluctuations.
All federal student loans borrowed after July 2006 have fixed interest rates; currently, only private lenders offer student loans with variable interest rates. You can learn more about fixed vs. variable interest rates here .
Federal vs. Private Student Loans
In general, there are two types of student loans: federal and private. All federal student loans are funded by the federal government. In contrast, private student loans are funded by private lenders like banks.
So, what’s the difference? If you or your child are going to borrow money for college, it may be better to start with federal loans. Since federal loans are issued by the government, there are benefits to them, including low fixed interest rates, forbearance and deferment eligibility, and income-driven repayment plans.
Private loans have terms and conditions set by private lenders, and don’t usually offer generous or flexible repayment options like federal loans.
Subsidized vs. Unsubsidized
Direct Subsidized Loans are only available to undergraduate students and are based on financial need—your child’s school determines the amount you can borrow, which can’t exceed your need.
With Direct Subsidized Loans, the government pays the interest on them while your child is in school, during the grace period (the first six months after graduation or when dropping below part-time enrollment), and in deferment (postponing repayment).
In comparison, with Direct Unsubsidized Loans, the borrower is responsible for paying the interest the moment the funds are disbursed. However, Direct Unsubsidized Loans are available to both undergraduate and graduate students, and there is no requirement of financial need.
Borrowers are not required to pay the interest while in school, during grace periods, or deferment (although you can choose to), but the interest will accrue (accumulate) if the borrower is not repaying these loans while in school full-time. And interest can continue to compound after graduation due to grace periods or deferments.
There are also Direct PLUS Loans for parents. While these loans are taken out for the benefit of their child, the parents are fully responsible for repaying these loans; they can never be transferred to your child .
In some cases, students can also explore the possibility of enlisting a trusted friend or family member as a co-signer on a loan. Co-signer would be legally responsible for paying back the debt if the borrower couldn’t make payments.
Exploring Scholarships and Grants
It’s important to not overlook the non-loan elements of the financial aid package as they can help cut down on the amount you need to borrow. Scholarships and grants are essentially free money, so don’t hesitate to explore all possible options that your child may be eligible for.
While some schools automatically consider your student for scholarships based on merit or other qualifications, there are often scholarships and grants that require applications. Assign a bit of a research project for your soon-to-be college kid to look into all of the scholarship options they may qualify for.
Crunching the Numbers
Once the decision on what college to attend has been made, you can have a more specific follow-up conversation with your child about student loans. You’ll probably need to have several more in-depth financial conversations when filling out the FAFSA anyway.
There are no specific rights or wrongs when it comes to preparing kids for college, and preparing them for student loans is not much different. One of the most important things is that you are honest with your child about the responsibility of student loans.
That’s really why you want to walk them through all of the above information—they should know exactly what they’re signing on for when taking out student loans.
SoFi is a leader is the student loan space—offering private student loans to help pay your way through school. See your interest rate in just minutes, no strings attached.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.