May 7, 2012

The number of college graduates who owe large sums of money for their college loans has been a hot topic lately.

In recent years, education loans have been widely available, and many have taken advantage of them. But some borrowers seem shocked when they start receiving the bills for their loans after graduation. It’s as though the obligation to repay wasn’t real to them until the bills showed up in the mail.

mortar board and money with diploma

A college education can be expensive, and loans are often necessary to fund the process. But, before your child decides to take out a loan for college, some money management education might be in order. Here are a few concepts to discuss:

College loans only seem like “easy money.” The process of applying for and receiving college loans is often fairly simple. Applicants fill out some paperwork, provide verification that they are enrolled in qualified institutions, and “shazam!” Money starts coming in the mail.

Often, students handle the process entirely online. They aren’t required to meet with anyone, answer probing questions or make an argument about why they should receive the funds. There isn’t much skin in the game at the outset.

The first semester’s loan is the scariest. But after that, the student asks, and the money comes. It’s far too easy – until payback time.

Payback is torture. Most college students haven’t been responsible for paying back loans up to this point in their lives. They aren’t used to writing monthly checks to cover obligations.

Parents should sit down with their college students and develop a projected budget so that the students can get a glimpse of what the money situation will be. To make it more real, have your students write down how they would like to live in the first year or two after college – what type of apartment or house, which car to drive, in what city to live.

Then help your students research typical jobs that they might qualify for with the degree they are seeking. Be conservative with the amount of money they will earn starting out. Lay out the bills that they’ll have to cover, including income taxes, rent, groceries, gas, car payments, loan repayments, clothes and so on.

It will likely be an eye-opener for them. They may find that it will be years before they can afford the car of their dreams, or have the discretionary income for the trips they’d like to take. Help them understand the pleasures and desires they may have to put off to repay the college loan.

College loans are a long-term proposition. Most college loans have a repayment period of 15 years or more. At age 18, it’s hard to picture 15 years.

Talk your students through what may be happening in their lives during that time. They may decide to marry, have children, or change jobs. They may find themselves in the unfortunate situation of not having a job.

The college loan will still be due every month. If they decide not to repay it, the impact to their credit scores will be long-term. Discuss how a bad credit score will affect their future.

If your student still decides to take on a college loan, talk about ways to minimize the amount borrowed.

Help the student develop a lean budget for the college years. Suggest summer jobs or internships to help fund some of the bills. Help the student stay focused on the responsibility that comes with a college loan.

This article was originally posted on May 7, 2012 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at