A blog written with parents in mind
Would you put your kids in debt to teach them a lesson?
The average student from the Class of 2015 who graduated with a loan will owe just over $35,000* and will spend 21 years repaying their loans**. That means for many students, that by the time they are done, they will have been making student loans payments for half of their lives.
Massive student debt can weigh on a graduate's ability to start a family and make big-ticket purchases like houses and cars. But can modest and manageable amounts of debt be used as a teaching tool? Some parents think so.
Our 2015 Parents, Kids & Money Survey of 1,000 parents of eight to 14 year-olds and their kids found that 61% of parents think it's important for kids to have their own student loans so that they can learn about debt and responsibility. And these parents, compared to the parents who disagreed, tend to have kids who think they are more knowledgeable about an array of financial concepts, including:
- managing personal finances (35% vs.16%)
- credit (29% vs. 10%)
- investing (26% vs. 7%)
- taxes (26% vs. 6%)
- inflation (24% vs. 4%)
- even student loan debt (28% vs. 5%)
The parents who think student debt can be used as a teaching tool also have kids who are more likely to think that their parents are doing a good job teaching them about money (52% vs. 38%).
But before parents begin to consider whether Junior should foot some of the tuition bill, both parents and kids must understand student loans and make sure that any amount of debt they agree to is manageable.
Our survey showed that 32% of parents and 61% of kids say they are not at all or not very knowledgeable about student loan debt. Although these kids are still quite young, parents should hopefully be on their way to achieving a college savings goal for their kids, and it's important to bring their kids into the conversation about saving and potentially borrowing.
We found that having conversations with kids about money could be the single most impactful way to raise money savvy kids. Kids whose parents frequently talk to them about money, compared with kids whose parents do not frequently discuss money with them, are more likely to:
- feel knowledgeable about personal finance (46% vs. 14%)
- feel knowledgeable about investing (33% vs. 8%)
- feel like they understand the value of a dollar (92% vs. 84%)
- think they will go to college (84% vs. 76%)
In addition to seeing a correlation between parents' belief that their kids should have student loans and kids' financial knowledge, we saw similar correlations with other forms of money experiences, such as credit cards, allowances, and letting kids make money mistakes.
Thirty-three percent of kids whose parents think they should have credit cards so they can learn about managing debt say they feel knowledgeable about credit, compared to only 9% of kids whose parents don't want them to have credit cards. And, 36% of kids whose parents let them make financial mistakes say they are knowledgeable about managing personal finances compared with only 16% of kids whose parents don't let them make those mistakes.
Ultimately, it's up to parents to determine what's the right level of experience to offer their kids. And while money experiences are valuable, there need to be guardrails—parents aren't doing their kids a service by letting them graduate with an overwhelming amount of debt. Instead, planning ahead and saving for college can enable parents to save for their kids' college costs and reduce the prospective debt load that kids may face.
If parents are able to give their kids the gift of a college education free of loans, there are other ways for their kids to learn about credit. Maybe they could set up a repayment plan for an expensive prom night, driver's education class, or a car purchase. Maybe it's letting them use a credit card with a modest credit limit. Regardless of what money experiences parents think kids should have, they should be pairing conversations with experiences and making sure those experiences wouldn't adversely affect their kids' long-term financial wellness.
* According to an analysis of government data by Mark Kantrowitz, publisher at Edvisors
** According to One Wisconsin Institute's 2013 survey on the Impact of Student Loan Debt on Homeownership Trends and Vehicle Purchasing