Teaching Financial Literacy To Teens: Cars And College
The two biggest expenses on many teens' radars are cars and college. Without enough cash to pay for these large expenses outright, many teens (and parents) seek "installment loans" - where a set amount of money is borrowed and repaid in fixed monthly payments (installments) for a specific period of time (typically, over several years). An installment loan differs from open-end credit (like credit cards) because the lender allows you to borrow against a preapproved credit line. Each month's payment depends on how much you've borrowed.
There are two types of installment loans: secured loans and unsecured loans. A secured installment loan is backed by collateral (something of value that the lender can take if you default on the loan). Because of the collateral, the interest rates for secured installment loans are comparatively lower than unsecured loans. A car loan is a secured installment loan: if you stop making payments, the lender can take the car from you and sell it to recover some of the money (you are still responsible for the difference between what you owe and how much the lender can get for the car). An unsecured installment loan, on the other hand, is not backed by any collateral. Because this exposes the lender to more risk, the interest rates are comparatively higher than for secured loans. A student loan is a type of unsecured installment loan.
Buying a Car
In general, you must be at least 18 years old to be approved for a car loan. If your teen is not yet 18, you (or another adult) can be a co-qualifier on the loan. You can obtain a car loan from banks, credit unions, finance companies and car dealerships. It often pays to "shop around" to find the best loan terms, including the most favorable annual percentage rate (APR), fees and finance charges.
Before your teen buys a car, it is important that he or she understand that paying for the car is only the first expense. Associated expenses - including insurance, gas and maintenance (and any tickets and resulting increase in insurance premiums) - have to be taken into consideration when deciding whether a car makes financial sense. If these expenses will be too much of a financial strain, encourage your teen to wait.
Because you will likely be a co-signor on the loan, it will be in your best interest to make sure the payments are made on time and in full each month. That being said, if your agreement was that your child would be responsible for the full payment each month, hold him or her to it, and resist the urge to bail him or her out (without destroying your credit in the process). To avoid a bail out, where you would have to come to the rescue to avoid having the car repossessed, you might consider offering your child a "payment pass" or two at the beginning of the process. For example, when your child enters into the loan, you could state that you will cover a specific number of monthly payments over the life of the loan. That way, if your teen really does get into a bind one month, you are not bailing him or her out; you are just holding up your end of the agreement to cover a loan payment. Point out that the pass should only be used if absolutely necessary, and can be applied to the final X number of payments if they have not yet been used (this would be ideal since your teen would have responsibly made all the payments up until that point).
Paying for College
There's no doubt about it - college is expensive, and costs are only rising. Aside from tuition, a college's "sticker price" also includes expenses like meals, housing, fees and books. These costs can be viewed as an investment in your child's future: people with a bachelor's degree or higher earn more and enjoy more job security than people with an associate's degree or high school diploma. Not surprisingly then, college graduates have a lifetime earnings average of $2.3 million, compared with $1.3 million for high school graduates.
One way to reduce college expenses is to take classes at a community college, where tuition is typically low and many classes are transferable to four-year institutions. "Articulation agreements" are intended to provide a simplified and guaranteed transfer process between community colleges and four-year institutions. The agreements typically outline the specific courses (and required letter grades) completed at the community college that will transfer to the partner four-year institution. Check in advance to make sure your child's class(es) will transfer.
Many communities now offer high school students the opportunity to earn a two-year college degree by the time they graduate from high school. These "Early College" and "Concurrent Enrollment" programs are free to eligible teens and are an excellent way to both challenge high achievers and save significantly on college expenses.
Regardless of the path your child takes, you may still need help paying for college. There are a number of options for teens and families:
- Financial Aid. Federal Student Aid (FSA) provides more than $150 billion each year to help more than 14 million students attend college. FSA programs include the Pell grant, student loans and college work study programs. The first step is to complete the Free Application for Federal Student Aid (FAFSA). Apply early for the best chance of receiving nonfederal student aid.
- Federal Loan Programs. If grants and scholarships are not enough to cover college expenses, you can explore federal loan programs. You must first fill out the FAFSA to apply for federal loans - which include Federal Perkins Loans and Direct Stafford Loans.
- Private loans. A private student loan is issued by a lender, such as a bank or credit union. These loans typically have higher interest rates than federal loans, require a credit check, and do not offer deferment options. For these reasons, it is generally better to exhaust federal student loan options before seeking a private loan.
Tip: Visit www.studentaid.ed.gov for information about grants, scholarships, loans, work-study jobs and to fill out the Free Application For Student Aid (FAFSA). The site has lots of helpful information, including checklists for academic and financial preparation (click on "Prepare for College") and select the appropriate age.Teaching Financial Literacy To Teens: Account Reconciliation
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