College Costs 101: What Many Students DON’T Know About Their Loans

Student-loan-app_26-Jan-2015I’ve stated it before, but this statistic gets me at such a deep level it is worth stating again: student loan debt in America is at an all-time high of over $1.1 trillion, which includes an average of $30,000 of debt per student, whether they graduate or not. As a parent, and as a college graduate with loans still to pay, the reality of these figures is staggering. However, in many ways, it is a reality that can easily be reversed if more parents recognize what their children don’t know and focus more specifically on communicating the profound importance of financial literacy in general and student loans specifically.

What Is Financial Literacy?

A really hot topic among educational and financial aid professionals alike these days is “financial literacy.” It is defined by Investopedia simply as “the possession of knowledge and understanding of financial matters,” the absence of which “can lead to making poor financial decisions that can have adverse effects on the financial health of an individual.”

However, there are so many details embedded in this definition, from budgeting to balancing a checkbook to the particulars of compound interest, that it’s hard to really comprehend financial literacy until you are financially literate. For many people, however, the details and the mathematics of these concepts quickly overwhelm them and they just give up. “I just don’t get that stuff” is a common excuse I’ve heard from young people and adults alike. However, not paying attention to the particulars of every single financial decision you make can have dire and far-reaching consequences.

What Many College Students DON’T Know About Their Loans

Yet, many young people, specifically high school and college students, lack financial literacy to such a degree that they find it amusing. Not only to they fail to understand what a student loan means and what it is actually based on, they don’t get how failing to repay that loan can adversely impact them for years after the fact.

Don’t believe me? Take a look at this video, produced by iGrad, a company who specializes in financial literacy education for college students, their parents, and those who work with them. The video includes real college students (and statistics at the end) which shows the profound lack of knowledge about basic questions pertaining to finance in general as well as simple facts about their student loans. This is (to me at least) almost painful, but worth watching.

The Real Deal Behind Student Loans

Unfortunately, many students seem to possess a general misunderstanding of the basic premise of student loans in the first place. So, let’s break it down:

When taking the money they “need” to go to school in the form of a loan, students often fail to realize where the numbers from each loan originate. The lender, whether it is the government or a private institution, determines how much money to give a student based on needs and costs, yes, but they also base their figure on what they determine to be the student’s likely “future” income.

This is a number which is hard to tally in the best of circumstances and certainly difficult for a young adult to fully comprehend.

What College Students Need to Know About Finance, and Why

The only way for college students, and their parents, to get through the loan process and come out the other end financially intact is to consciously work on learning and living the most important financial literacy concepts ASAP. Specifically, a lack of knowledge in five, basic financial concepts, sets the stage for young people’s lack of ability to see the bigger picture. These are:

  1. Budgeting
  2. Spending less than you earn
  3. How debt works
  4. What an emergency fund is and why it matters
  5. Why investing is important

Financial literacy starts at home. By getting your own financial house in order and involving your children in the family’s financial plan you begin to lay the foundation for smart spending and greater financial understanding in the future. Your children literally cannot afford for you to box them out on this.

What can other parents do today to better prepare their children for the realities of student loans?

The links in the post above may be affiliate links. Read the full disclosure.
  • Maan Jose

    Thank you for sharing this. I am a college student, and I do hear so many of my classmates 30000$ in debt, without a job by graduation. I grew up in a middle-class to lower-class type of family and my parents made me realize the worth of things, what I can live with and without. Its the upbringing of making children realize, that sometimes, or most of the times, its good enough to have a ball to play with instead of an ipad. Or a barbie instead of some expensive doll house. If that is drilled in children, they will grow up instinctively budgeting and seeking ways to save. I did.. now I coupon xD

    • Mouse

      How do you coupon? I can never find any good sources. Sunday paper isn’t really good and haven’t found anything online as of right now. Thank you :3

  • gilly

    Will be going thru this in another year with our son, he has worked very hard in HS to get super grades…he never asks for anything and knows that things don’t come easy …we will be trying our hardest for him to not be saddled with tremendous college debt …looking into a state college, and hopefully he will get some type of scholarship..it’s crazy some of the debt I have heard kids are paying off monthly for years to come !!!

    • Jan

      make sure he does community service and join clubs…people want well rounded not just smart kids…if you are in nj …they also have NJ stars…been there with my daughter….she had great grades and athletic but no clubs or community service…she got nothing! …good luck!

      • gilly

        Yup we have it covered so far, our district requires ( cannot move up with out completing ) community service starting in gr 6 ..he has it finished for this year his 11thyr already…is also in NHS which requires tutoring other kids…also does a CYO swim team and track each season…Thanks , keeping our fingers crossed !

        • MisterBill

          Here’s my take. Everyone does clubs and community service. Unless you do something really special or have a leadership post I don’t think it is a differentiator. My experience with my son, who applied for college 6 years ago, is that the SAT’s make the difference. It’s sad, but he got all of $3k at U of Delaware and nothing at Maryland and Pittsburgh, even though he was admitted to all of their honors programs. He was #6 in his class at a large school. He had great math scores but not as good in verbal or writing. I tried to convince him to study for the SAT’s the summer before his senior year (since he wasn’t working) and take the SAT’s again in October, since the cost to retake them was roughly the same as paying to send scores to 4 colleges (which you get free when you take the test). He refused and I am convinced he would have gotten money from places and maybe even admitted to more schools with better SAT’s. Now, he got a very good education at Delaware and has an excellent job now in finance, so I have no complaints, but I’m still convinced he would have gotten a much better financial offer with higher SAT scores.

          The good news is that he paid off his student loans shortly after graduating (I paid most of tuition, so they weren’t very high), and he is debt free. Until he goes to business school, that is.

          • IK

            May i ask what his SAT was? My daughter will be going to college this year, and i am curious what is in store for us…she has a diff situation – VERY good in verbal and writing and not too bad, but not great in math… Her SAT was 2250, she only did it once…

            • MisterBill

              It can’t be THAT bad with a 2250! I forget what he had, and that was when not everyone was requiring the 3rd part so I don’t even recall the full score. I recall that he was 10 points short of what would have been a guaranteed $10k from Pittsburgh (although he probably wasn’t going there anyway) and Delaware would likely have given him more money with a higher SAT score (at least they looked at his academic record and gave him something). My advice for your daughter if she needs a higher score would be to study for the math part and try it one more time. They only take the highest score from each piece so there’s no harm. That said, I haven’t been thru this in 6 years so I’m sure there are people out there with more current info.

              • IK

                Thank you, but she is done with sat.. She only applied to about 3 state schools (very lazy), and so far got accepted to one (the one i had my mind set on), so situation here, basically, not much choice – whatever they give her(if anything)…

                • MisterBill

                  Yeah, I forgot that she’s applying now. Too late. 2250 should be fine.

          • gilly

            We have him signed up for a SAT prep course, very competitive school district many kids get private tutors …Where I live a top college, Hofstra University does not look at SAT or ACT grades they look at their 4 yrs of HS grades. Also great school your son went to my daughters friend was ranked number 2 in HS and got a 4 yr scholarship there and is currently in med school…

            • MisterBill

              My son never took an SAT class (another problem). He was scheduled for one being given in his HS and it got cancelled because it was for the March test instead of May that most kids took. Then he refused to take the class at a different HS in the district because he didn’t like the kids who went there. He used the books but I’m sure he would have done better with a class or tutor. That’s actually something I forgot to mention. We were probably foolish for not getting a tutor since the extra money he would have gotten from the school with a higher SAT score would have more than paid for it. Go know.

  • Diana179

    this is sort of terrifying that kids in college dont know the meaning of the word “default.” how are they in college?? I suggest parents buy Dave Ramseys books on Financial Peace, The Total Money Makeover, and Smart Money, Smart kids. I have already started implementing methods in our own financial life that have helped greatly. but will now start with my 7 yr old on chores, and money, and budgeting etc. this year. My parents were not good with money and spent many years in debt and financial crisis. I learned the hard way.

  • Mouse

    This is so sad 🙁 I’m not in college but my husband is. We’re both the same age and we didn’t learn any of the financial literacy such as differences in loans, loan types, interest rates, etc.(tbh I do most of the research) Among other things like budgeting, retirement, etc from anyone. Not from our parents and not from our school. Thank goodness for the internet that we’re both pretty savvy and financially cautious but I imagine most people our age and younger don’t even think about that stuff. At least that’s what I see when I talk to my peers :/ I don’t know what brought us to want to learn about it whereas most people ignore it. I guess, growing up and seeing people struggle with money always made me cautious of how every little dollar has an effect.

  • ksol

    My kids started off at a Community College in a Transfer Degree program. The college had a payment plan, monthly payment which was great and affordable with a one time per semester 30 dollar fee. After they graduated from Community College, all those classes transferred over to there state college. One of my sons was Phi Theta Kappa, and they both got tuition waivers for being a transfer students. We did get some small scholarships. I put all my couponing money that I saved into envelopes for each of my kids, and based all my meals on the shopping ads. We rented books, priced matched everything. My two boys one already graduated and one will this year have NO student loans. I think planning is the key. But going to a community college really set the stage for them financially.