If you have a child in college, chances are you’re very familiar with ever-increasing tuition fees, loans, and bank offers targeted at your student. It is estimated that today’s graduating college student has around $25,000 in debt. That means good news for banks, but horrible news for college grads who are trying to build up their credit, pay all their own living expenses for the first time, and keep their head above water.
Here are the top three reasons why banks want your college student to get into debt.
1) With the stress-inducing price of attending college, many students turn to loans to get them through their four or more years of school. Banks offer these loans but they make a big profit by applying huge interest rates. That interest doesn’t usually appear until the student finishes college, and this information is rarely explained in great detail to the young person, who’s usually just excited to have some relief from his or her immediate financial issues. This “out of sight, out of mind” situation is very harmful. The student keeps spending the money– they sometimes even take out additional loans– all the while not considering what’s going to hit them in the future: a huge bill they can’t possibly pay off.
2) College kids don’t always understand the ins-and-outs of loans or credit cards like someone who has been in the game for a longer time. Most college-aged kids will make blunders or slip-up with payments, which can lead to extra fees and poor credit scores. All that can lead to high interest rates on future credit cards and loans, and that translates into more easy money for the banks.
3) Assume your college student gets a job right out of college. Entry-level gigs usually offer lower pay, and many times that paycheck only covers a person’s basic expenses. Since many students want to look independent and not be seen as needing mom and dad’s help now that they’re graduated, they often end up making only the minimum payment on their cards. This drags out the debt, landing more money in bank coffers.
With all the advantages that come with putting college students in the hole early, banks have plenty of reasons to relentlessly target this group of young adults. Whether it’s by offering freebies for opening a new account, or “no-strings-attached” trial periods, they’ve figured out how to lure college kids into their traps.
The best way for you to prepare your child for these pitfalls is to talk about money– the smart ways to save it and spend it. Educate them on making responsible financial decisions. Warn them about the dangers listed above and why these events can seriously harm their financial future. Warn them against the “great offers” they’re getting on campus, and instead explore different credit card and banking options alongside them; be a part of the discussion. Let them know you’re there for them and that they shouldn’t be ashamed to seek you out for advice if they find themselves getting backed into a corner. After all, you have more experience and they can learn from your own past mistakes.
By keeping an open dialogue, you can help prevent your child from landing in debt and help them have a more solid foundation as they exit their college years.