We are fortunate in that we can pay for the entire college tuition without asking DS to take out any loans. He got a merit scholarship so the amount that is left over is fairly small and we can afford to pay the whole thing. Some parents have told me that even though we can pay the entire tuition, we should still think about having DS take out a subsidized student loan. One reason was that it would teach them financial responsibility. Also, that it would give them money for other things they might need in college such as travel costs, etc. What is your opinion? I don’t want to burden DS with loans if we can pay the entire thing, but I do understand that it’s good to teach students financial responsibility and not assume that things will always be handed over to them.
I think that’s a personal choice. Personally, I think that a better way to handle that might be a job (work-study or otherwise) that they can hold during the summer or during the semester if they can find work on campus. My personal feeling is that a loan isn’t a great way to teach financial responsibility because the student doesn’t really have to think about it until several months after they leave school; for them, it’s just a number on a document that they might get a notice about once in four years.
It’s not really free money but it feels like free money since the student gets the instant gratification now of getting $2,000 up front without putting in any of the work (whereas with a job you put in the work upfront and get the money later, and you get to think about how much time and effort you put in for each dollar when you’re deciding how to spend it…)
But the loan/skin in the game approach is definitely a valid choice that many families make.
My opinion…if you don’t NEED the loans, don’t take out the loans.
We do not do student loans for undergrad. The dentkids “skin in the game” is keeping the merit scholarship’s required GPA. We are full-pay and our kids needed to earn some merit to afford the LACs they wanted. We do expect them to cover their entertainment with a summer job and/or a job during the school year.
Personally, I think you teach better financial responsibility by not taking out loans that are not needed. Work over the summer to earn spending money. Maybe even a part time job during the year. But loans that aren’t needed? No.
Not everyone qualifies for subsidized loans. If your EFC is higher than the cost after other aid is applied, you will not qualify. Therefore, you are paying 4.6% from day of disbursement. Not a good deal if you don’t need the money.
Instead of going for loans, why not ask them to cover living expenses and books. They can to this with summer earnings. They’ll have to budget their money throughout the year. Nothing sucks more than to spend your money on a book for a class you end up dropping. I wouldn’t have them take out a loan if they don’t have too.
Earning the merit scholarship and maintaining the needed GPA to renew it in following years is the student’s “skin in the game”.
This is especially true if the scholarship is large enough that being able to continue at the college would require the student to work and/or take federal direct loans if he lost the scholarship, or if losing the scholarship would mean not being able to afford to continue at the college at all.
Perhaps tell him that if he fails to renew the scholarship due to GPA being too low, he would have to make up the amount (up to $10,000 or so is probably a reasonable limit to the expectation of what a student can come up with) himself through work earnings and/or federal direct loans. Or, if the college is not affordable at all if he loses the scholarship, make sure that it is clear that he will have to find a cheaper college to transfer to if he loses the scholarship.
Our family is much like others here, skin in the game is earning and keeping their merit scholarships. They have summer jobs for “spending money” during the school year.
I doubt that you qualify for sub loans after getting the big merit, but even if you did, there’s no reason to take loans.
for your son to have “skin in the game,” then offer this: He must work during the summer for his “pocket money”. That will help teach him responsibility.
borrowing for “extra money” and really just wasteful spending teaches bad habits.
I wish my kid had taken the subsidized loans offered in undergrad because the money could have been saved for professional school when there are no subsidized loans available.
We didn’t have a crystal ball. There were subsidized loans available to grad students when my kids were in undergrad school. That changed a couple of years ago.
Even so…if we hadn’t needed loans, the kids would not have taken them.
Do you parents just go take low interest loans if you don’t have a reason to do so?
You can also take it year by year. My son went “over budget” significantly, so we had him take out loans junior and senior year. None subsidized, so we figured the farther along he was in school before loans the better.
Thanks everyone. I like the idea of “skin in the game” being the incentive to keep up the GPA for the merit award and also doing a summer job for expenses like eating out, travelling, books, etc. Also, after thinking about it, he will probably need to take out loans for grad school anyway, so there is no need to pile on the loans now when he doesn’t need to.
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I wish my kid had taken the subsidized loans offered in undergrad because the money could have been saved for professional school when there are no subsidized loans available.
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Now that grad loans are not subsidized, this is a good idea for those who don’t need the loans for undergrad. Bank the money and use it for grad school…then it won’t start accumulating interest till grad school is over.
I was going to make the same point Madison85 made. My graduating college senior who took out no undergrad loans should have taken out subsidized loans and saved the money to use for grad school. It’s great that she’s graduating undergrad debt free but now she needs to take out about 5k/yr for grad school that will be subject to interest from day one.
We have both of our kids take the subsidized loan for that purpose. If something was to change drastically and we had to take money out of the 529 for other purposes it is extra money. Now I would not have them take the u subsidized.
For those of you whose children are lucky enough to not have to take out loans, make sure that they do, then, have a credit card that they pay off monthly. A friend of ours daughter did not take out loans, nor did she have a credit card. While she had a high paying job almost immediately, she had a very difficult time after college obtaining credit because she had none. Renting an apartment was challenging at first as well. Counterintuitive, but true.
I didn’t realize that there are no subsidized loans for grad school. So, for those of you that are giving the idea to take out loans during undergrad, are you suggesting that you just save the money and apply it towards grad school? When do you pay interest on these subsidized loans?
We had our D take out a couple of small Stafford loans just to establish a credit rating in this crazy system (we will give her the money to pay them). But I am very debt averse and believe that punitive debt to “teach the student a lesson” is just a bad idea. What lesson are you teaching? Classes are hard sometimes. Students can lose merit awards, especially if they are studying difficult subjects. I just don’t think debt is an appropriate financial teaching tool. Budgeting is. I am opposed to the “skin in the game” philosophy because I believe that 18-year-olds have no clue about the consequences of debt. Parents should protect their kids from taking on debt in order to make expensive mistakes. If you don’t have the money to fully fund your child’s education, don’t throw your hands up and allow your kid to assume a potentially ruinous burden. Say no. Kids who are really college-ready don’t need “skin in the game.” They’ll do the job anyway.