In our last blog we introduced Jason and his friends and told the story of how they had come to their senior year in college and realized they did not know how much money they had borrowed to attend college. They also didn’t know the interest rates or even when they would have to begin repaying the loans. They appeared to lack any understanding of personal finance. Put another way, they were largely financially illiterate. At the end of this blog, you’ll find links to some resources to help you increase your financial literacy. We will have more about financial literacy in future blogs, but now we would like to give you some basic knowledge about student loans.
Federal student loans are complicated, and the language you use to describe them only adds to the difficulty. Student loans consist of two types: direct subsidized loans and direct unsubsidized loans. The amounts the student can borrow under these loans are limited and the fees and interest to be paid are often not understood by the borrower. These loans are from the federal government. Then there are “private loans” which are obtained from banks, credit unions and other private lending companies. The interest rates for federal loans are lower than the interest rates for private loans, and there are also federal programs for loan forgiveness. Yet 7.9% of the outstanding student loan debt is from private loan borrowing.
If federal loans are less expensive and have other benefits, why would you take a private loan? It’s because you need more money than the federal government allows you to borrow. Private lenders offer different loan rates and different loan obligations, requiring the lender to have a better understanding of how loans work. Private loans also almost always require a cosigner.
Cosigning a loan is serious business, and it’s important for both the borrower and the cosigner to understand the obligations cosigning a loan entails.
A cosigner, typically a parent, guardian or other family member, becomes legally responsible to pay the loan payments if the student loan borrower is unable do so. Typically, the cosigner is trying to help the borrower and does not think about the consequences of cosigning. Even if the borrower always makes the loan payments, the cosigner could be under that obligation for the entire term of the repayment, 10 years or more.
Also, a cosigner’s credit rating could be adversely affected when required to report the cosigned obligation on an application to lease an apartment or on a loan application to, for example, buy a car.
The financially literate borrower understands the obligation he or she is asking a cosigner to take on. Consider this before making the request, and you should inform the possible cosigner of what the obligation entails. In this case, being financially literate could save you an embarrassing circumstance with someone who cares about you should that person be denied a loan because of the cosigner obligation or because you become unable to make the loan payments.
For more information on cosigning a loan, go to https://www.consumer.ftc.gov/articles/0215-co-signing-loan
Improving your financial literacy is something you can do by yourself or, better yet, suggest that it be a family project. Everyone will benefit from it. There are many free resources on line. The resources listed below are ones we believe would be very helpful to consider using.
Next Gen Personal Finance https://nextgenpersonalfinance.org This is an excellent source of personal finance information and tutorials for students and parents. I suggest you start here.
University of Wisconsin financial Literacy Center https://www.uww.edu/adminaffairs/finance/financial-literacy/financial-resources This link will take you to basic, helpful information on key financial literacy topics.
Financial Literacy and Education Commission of the United States Treasury Dept. Go to https://www.mymoney.gov/ for links to information for students and teachers.
National Endowment for Financial Education https://www.nefe.org/ NEFE offers two financial education websites, CashCourse ( https://www.cashcourse.org/ ) and Smart About Money ( https://www.smartaboutmoney.org/ ). However, both of these websites will be discontinued effective July 31, 2021. CashCourse is also offered through the Northwestern University Financial Wellness office https://www.northwestern.edu/financial-wellness/money-101/cashcourse.html and may still be available after July 31.
Also, go directly to CashCourse at https://www.cashcourse.org/ CashCourse® is a free, online financial education resource designed specifically for college and university students offered by the National Endowment for Financial Education. This interactive online money management tool provides answers and resources to help you make smart choices with your money.
Khan Academy https://www.khanacademy.org/ provides a wide array of courses. Scroll to the bottom of the page and click on Life Skills. This takes you to a page on Personal Finance and another page on College Admissions.Investopedia https://www.investopedia.com/terms/p/personalfinance.asp This link will connect you to 10 pages of personal finance information.
COLLEGE CHOICE CONSULTANTS 