Graduating without debt sets you free.
There are other ways to teach financial responsibility:
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set a budget for the ‘spending money’ you mention. Anything over that, they kid can get a job
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set a timeline to graduate: e.g. certain number of semesters
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require getting a summer job or paid internship / co-op
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require kid to save for more expensive desired study abroad, or spring break trip
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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