We are lucky enough to likely be able to cover in-state costs for our children - at least according to the cost estimators - room, board, small spending budget, tuition. However even if we can - should we? Is there some value in the kid taking on some of that responsibility, learning about finances, and having to pay something back? Not a crippling amount - but a small portion. It would be more for a life lesson than a financial necessity for us. I go back and forth on this.
We have one in 11th grade and one in 8th grade. I am wondering what other parents in similar situations have done.
We did not have our D take out loans. That said, we had an agreement that she would cover books, incidentals, and study abroad travel costs. We also told her if she had to retake a class, sheād be responsible for the tuition for that course.
She is a very focused, serious student who has plenty of skin in the game without having to take on unnecessary debt. I may have thought differently if that wasnāt the case.
We also paid for the undergrad educations for our kids. We did ask them to take a small Direct Loan which just helped our cash flow. Their graduation gift was the payoff of these loans. We also paid the interest each year so they were subsidized by us.
The nice thing about the direct loanā¦you donāt have to accept it at the start of the academic year. You can ask for it later in the academic year if needed. You just canāt carry the loan amount for one year from one academic year to the next.
Depending on which student loans your children qualify for, the interest rates may or may not be a great deal. We chose to provide a loan ourselves. You can make it a real, not just money from the parents, by creating an official IOU that outlines the terms, expectations, etc. This strategy can work well with some kids but not as well with others.
Both of our children had part time summer jobs while in high school and full time there after. Additionally, they also took part time jobs during the school year starting in their 2nd year of college - we thought it was a good idea for them to understand their academic load before taking on employment during the school year. Both ended up finding a good balance with 12 to 15 hours per week. I do think itās good for a college student to have some skin in the game.
Wouldnāt it depend on what the college price is relative to your budget limit?
Wouldnāt a better way to have āskin in the gameā be: price limit is $X. You can exceed it by $5.5k per year, but you need to take loans for that. If your college costs less than $X, the remainder is available for graduate or professional school.
My wife and I did not take out, nor have our children taken out, loans for college because we believed ā then and now ā that getting our kids out of school debt-free would be the best gift that we could give them, as far as college goes (think of it as a form of wealth transfer to the next generation). We used 529 funds and other family monies to pay for tuition/fees, books, and room/board; but any money for social activities would be on our children. We had them work during summers to earn money for whatever discretionary spending they wanted to make; and they both worked part-time (10 hours or less each week) after their respective first years at college for pocket money at school, as well.
I think that your desire to want your children to learn financial responsibility is a good and valuable thing to do. My wife and I decided that having our children earn their own spending money for their respective college years would teach them enough about finances and budgeting at this point. Certainly, your 11th-grader can be working over the summer and part-time next year to start earning money for a college spending account.
We talked about doing that, looked at the interest rates and felt as though money would be wasted. Instead ds decided to take the money he earned and invest it to make money. This has worked out very well and he has learned a lot about investing and saving. He pays his own daily expenses but we take care of tuition, books, and rent.
There are other ways to teach financial responsibility:
set a budget for the āspending moneyā you mention. Anything over that, they kid can get a job
set a timeline to graduate: e.g. certain number of semesters
require getting a summer job or paid internship / co-op
require kid to save for more expensive desired study abroad, or spring break trip
kid to navigate off campus leases, car insurance, health insurance etc (with appropriate oversight of course)
Keep the loan as backup: financial issues, medical issues meaning extra semesters, a low paid internship that is needed for career path, bank the loan for post college start up life: apt deposit, working wardrobe, relocation costs etc
We set a budget for both daughters and insisted that they stick with it. We would not let them take on any debt at all.
Both daughters have now graduated (one very recently). Both were very glad once they graduated to have no debt. One graduated almost exactly on budget (but with two bachelorās degrees). The other graduated very much under budget and has money left for graduate school (which will probably happen in a few years).
The oldest took a first job that was a great fit for her and that helped her to get what is now an acceptance to a great graduate program, but the first job paid very badly. She could only take this particular first job because she had no debt at all. It has really worked out well for her.
Personally I do not like debt. I do like the idea of having the student very much aware that university is expensive and that they are expected to take advantage of the once-in-a-lifetime opportunity that it is.
Will also say that if either of your students go into a field in which un/low paid internships are essential (IR / poltics / policy are notorious for this), be prepared to figure out some trade offs. In order to get (what will be poorly paid) jobs after graduation, those internships are essential. If the student has to get a summer job to earn enough to pay for living expenses during term an internship becomes difficult to impossible. Have principles, not rigid rules, and apply them thoughtfully to the given situation. Your goal is for them to learn financial responsibility- engaging them in conversations about what/why/how different trade-offs can work (or not!) is at least as useful as pronouncing a set of rules.
Loans arenāt āskin in the gameā for kids because they donāt understand the implications till theyāre older. If you want them to understand the cost of college or the value of money, have them hold a part time job for 6-10hours a week while in college (and/or part time/ full time over the summer).
Iād rather have my kid able to support themselves out of college than have them take out a loan for part of their tuition that I can afford and have them stuck in debt. Having debt can limit the choices a graduate can make, and can have a negative effect on their ability to be financially stable later in life.
Having them work to pay part of their tuition is a good idea, but not having them take loans.
Taking a loan should be a last resort, not a first choice.