The U.S doesn’t have the greatest track record for prioritizing financial literacy, especially for children.
A financial literacy study for young adults found that young people didn’t grasp basic financial concepts like budgeting, how stocks and bonds work, interest, taxes, and more. On the 31-question test, the average score for high school students was only 48.3%, and college students didn’t fare much better at 62.2%.
These numbers, unfortunately, make sense since many states don’t require financial education in schools (though that might change soon), and parents may not know how to teach their kids these complex money topics.
And yet, even given their lack of financial knowledge, we expect these teenagers to make prudent financial choices when tens (sometimes hundreds) of thousands of dollars are at play.
College is perhaps the most significant purchase your child will make. According to Education Data, the average cost for a year of college in the United States is $35,331, including tuition, supplies, and living expenses—that’s over $141,000 for a four-year degree! Yep, college is really that expensive.
With so much money on the line, you want to help your child make the right decision to set them up for success.
How can you help your teenager financially prepare and make smart money choices about their education?
Help Them Fill Out The FAFSA
Sometimes the world of college funding can seem like Topsy Turvy day. But before you get too overwhelmed, download our free College Money Report. In under 5 minutes, you’ll learn the most important things you need to know about this process, like how much colleges think you can afford and what you can expect to pay out of pocket!
Once you snag your report, turn your attention to the FAFSA.
The Free Application for Federal Student Aid (FAFSA®) is the golden ticket to federal student aid. It is the first step in determining how federal aid factors into financing your child’s education.
It reveals opportunities for aid, work-study, grants, and access to federal student loans (subsidized or not). Federal student loans tend to have lower interest rates and more flexible repayment options, like income-driven repayment plans and loan forgiveness opportunities.
Additionally, many schools use the FAFSA as a guideline for offering school-specific and merit-based scholarships. Private lenders may also look at this information to determine if you’re eligible for their aid packages.
There’s a massive misconception that high-earning families won’t benefit from filling out the FAFSA, but that couldn’t be further from the truth. The FAFSA form is the gateway to various financial aid and scholarship opportunities. Don’t leave money on the table by skipping this step!
The FAFSA can be intimidating for your student as it asks for information about your household income, taxes, Social Security numbers, and more. Gather all of the documents they’ll need and fill it out together.
Keep in mind that your student will have to re-submit the FAFSA form for every year they would like to be considered for aid.
Start Playing With Real Numbers
You can’t go to college with Monopoly money!
While you’ve done your best to teach your child the value of money and the realities of debt, it can be challenging to put the truth of student loans into perspective. You can’t just borrow from the bank and pay it back with a good roll or two.
Taking on student debt has serious long-term consequences that they must consider. Now is a great time to be transparent about what you can reasonably expect to contribute to their education. Perhaps you have a set dollar amount you can give each year based on your investments. And anything you can’t cover, they will need to take out in loans.
Try using a student loan calculator to help them see what their monthly payment would look like after they graduate.
- How much do they anticipate needing to take out in student loans?
- The average person borrows over $30,000 for a bachelor’s degree.
- About how many loans will they have?
- You can’t just take out a loan for 30k. Many federal loans set borrowing limits for the academic year. Will they need to supplement federal loans with private ones? While you can take out more in private loans, it’s often more beneficial to tap federal loans first as they have lower interest rates and more flexible repayment options.
- What is the expected interest rate?
- Interest rates play an important role in determining how much your child will end up paying over the life of the loan. Here’s an example. Say your child takes out a $10,000 loan with a 10-year repayment term. At a 5% interest rate, their monthly payment would be roughly $106. But a 3% interest rate would result in about $96 per month. These numbers get even more significant when you zoom out to the total interest paid over the life of the loan. Essentially, higher interest rates = more expensive long-term.
After looking at the numbers, they can weigh these larger decisions, like is going to the more expensive college worth an extra $300 a month for 20 years?
Putting real numbers regarding loans upfront can help them visualize their future selves and make the best choice for their present and future.
Ask Them About Their Education Goals
Borrowing tens of thousands of dollars at 18 is a serious investment, so your child must walk into their college decision with both eyes wide open. One way to do that is to talk with them about their education goals.
Consider the following,
- What goals do they have surrounding higher education?
- What fields of study interest them?
- Do they have to attend a particular school/college/etc. to help them get where they want to go?
It’s so easy for kids to pick schools based on superficial ideas like prestige, outside perception, cool amenities (can you say waterpark at Texas Tech?), or opportunities for adventure.
But selecting a school shouldn’t be about its proximity (or lack thereof) to family, the quality of their sports teams (unless your child is vying for an athletic scholarship), and the percentage of people in Greek life.
It should be about the quality of the academic programs your child is interested in, opportunities for real-life work and job experience, and overall cost. Once your child has narrowed down a list of a few schools that interest them, have them rank the schools in the following categories.
- Academics, including program options, faculty, research opportunities
- Career prospects, like internships, professional development, career training, etc.
- Cost. What’s the total cost? Are there aid or scholarships at different schools?
- School characteristics. Would your child have a better experience at a smaller or larger school? Are there other meaningful opportunities for them, like study abroad or work-study electives?
Take some time to weigh the pros and cons of each place. Maybe you thought the small private liberal arts college was too expensive, but with aid and grants, the cost is comparable to a state school.
Do the research now so your child can be well prepared for decision time!
Make A Repayment Plan Before They Step Foot On-Campus
Most federal student loans offer a six-month grace period from graduation before your child will start having to pay back their loans.
That’s not a lot of time to secure a good job that will enable them to start chipping away at the balance, so it’s important to help them make a plan for paying back their loans before they move into their first dorm room.
You’ve done a lot of the legwork already, so think through the following.
- How much will they have to take out at their school of choice?
- When do they have to start paying the loans back?
- How can they prepare for that payment throughout school? Perhaps they can get an on-campus job that helps them pay for things during school and save some for when their loans come due.
- What repayment options are available? Federal loans offer four income-based repayment plans that cap monthly payments based on your child’s earnings. Take a look at the various choices available so they know their options going forward.
Let’s Have A Family Meeting
Financial planning is a family affair, so let’s get everyone in the same room (or Zoom screen) and work through some of the numbers.
College planning is a significant milestone in a family’s life, and there’s so much to consider regarding financing. Luckily it doesn’t have to fall solely on you, or your teenager. We’ve helped so many families build a comprehensive education plan that brings security and clarity to the process.
Remember, our free college money report is an excellent resource for families to help them visualize the college planning process. Download your copy today!
We’re all about family over here and want to help you and your family feel confident about their financial futures.
The contents of this article are for general information and educational purposes and should not be construed as specific investment, financial planning, tax, accounting, or legal advice. Please consult with a professional advisor before taking any action based on the contents of this article.
All investment and financial planning strategies involve risk of loss that you should be prepared to bear. We cannot guarantee any investment performance whatsoever, and past performance is not indicative of potential future returns.