Colleges love to include federal student loans on the financial aid award letter. It helps them meet your EFC (Expected Family Contribution) without having to use any college funds. It’s relatively easy for students to accept these loans to help pay for college. All they do is accept them on the award and the school provides the paperwork—all that’s left is to sign on the dotted line.
But before you X that box and accept, talk to your kid about loans. While government loans carry low interest rates, they do have to be repaid after graduation. It’s easy to look at the loans and say, “I’ll worry about them in four years because I’ll have a good job and be able to repay them easily.” But that’s not always the case. Colleges rarely explain this to students—it’s your responsibility as a parent to help them understand what this kind of debt means in their future.
Here’s a quick snapshot. Your student borrows the max in student loans for four years, subsidized and unsubsidized Stafford loans. The aggregate loan limit is $31,000 for a dependent student for their time in college. When you see it in small amounts on the award letters, it doesn’t seem like that much. But add them up for four years and you have a substantial amount of student loan debt. Using a repayment calculator, with the current interest rate of 3.86%, their monthly payment will be $381.00 for 10 years with over $6,000 worth of interest over that period. Private student loans have even higher interest rates with stricter repayment policies.
It’s a sobering realization that most students don’t think about when they accept the loans. With jobs hard to find and students forced to take minimum wage jobs, a $381.00 payment for 10 years will be hard to swallow.