MONEY SMART GRADES 9–12: Parent/Caregiver Guide

Theme 4: Borrow

Topic Connections: This theme connects with classroom lessons on Credit, Credit Cards, Understanding Financial Ratios, College and Student Loans, and Understanding the Economy.

Topic Overview:
Life brings plenty of big expenses—college tuition, buying a home, unexpected car repairs, or medical bills. Borrowing money to cover major costs is common, but there are important things to think through before taking out a loan. One useful tool for keeping track of your debt level is your debt-to-income ratio, which compares how much you owe to how much you earn.

From the Classroom

What is credit, and how do you become creditworthy?
Credit means using someone else's money now and paying a fee (interest) to do so. People borrow money for many reasons—for example, a student loan to pay for college or a mortgage to buy a home. Being creditworthy means you can prove to lenders that you'll repay what you borrow, on time. Lenders typically judge creditworthiness using four factors: capacity (can you afford the payments?), capital (what is the value of things you own?), character (how have you paid bills in the past?), and collateral (do you have valuable property you could offer as a backup guarantee for the loan?).

How do you manage credit well, and what leads to bad credit?
Managing credit responsibly means repaying what you borrow according to the agreed terms. With credit cards, a smart strategy is to pay the full balance by the due date each month and avoid maxing out your available credit. Bad credit results from missing payments, paying late, letting a credit card balance grow larger and larger, or using one form of credit to pay off another (like charging a loan payment to a credit card). Also keep in mind: owing a large amount relative to your card's credit limit can lower your credit score, even if you're making payments.

What's the difference between credit and debit cards?
Credit and debit cards may look alike, but they work very differently. A credit card lets you borrow money that you must pay back later—plus interest, if you don't pay the full balance by the due date. A debit card, on the other hand, is issued by your bank and connected directly to your checking or savings account. When you use it, you're spending your own money, so you never pay interest. Because the money comes straight out of your account, you need enough funds available at the time of purchase.

How do you pay for college?
Besides using savings or applying for scholarships, students can apply for federal financial aid by completing the Free Application for Federal Student Aid (FAFSA). Aid options include: grants and scholarships (money you don't have to pay back), student loans (money you borrow and repay with interest), and work-study programs (jobs that let students earn money while in school).

How do financial ratios affect me?
Financial ratios give a quick picture of someone's financial habits, and lenders use them to help decide if you're a good credit risk. One common ratio, the debt-to-income ratio, compares how much debt you carry to how much income you earn. A high ratio warns lenders that a borrower might struggle to make monthly payments. Ideally, your debt-to-income ratio—not counting rent or mortgage—should be much lower than your monthly take-home pay. Some lenders calculate this ratio without including rent or mortgage costs at all.

Words to Know

• Credit: The ability to borrow money now and repay it later.
• Credit Card: A plastic card used to borrow money for purchases of goods and services.
• Credit Card Accountability Responsibility and Disclosure Act (CARD Act): A law banning unfair or abusive credit card practices and requiring companies to clearly disclose rates and fees so consumers can compare cards.
• Credit Report: A record of your credit and bill-payment history, including how often you pay on time, how much credit you have and are using, and whether any debt collectors are pursuing you.
• Credit Score: A number (roughly 300–800) that measures how creditworthy you are. The best-known version is the FICO® score, calculated from information in your credit report.
• Creditworthiness: A lender's assessment of your past and future ability and willingness to repay debt.
• Debit Card: A plastic card used to withdraw or spend money directly from your checking or savings account.
• Debt-to-Income Ratio: Your monthly debt payments divided by your monthly gross (before-tax) income. Example: if you pay $200/month on a car loan and $1,000/month on a home loan, your total monthly debt is $1,200. If your monthly gross income is $4,000, your debt-to-income ratio is 30% ($1,200 ÷ $4,000).
• Financial Ratios: Numbers used to measure and compare aspects of financial health.
• Free Application for Federal Student Aid (FAFSA): The application used to apply for federal grants, loans, and work-study programs.
• Student Loans: Money borrowed to pay for college, to be repaid later with interest.

Conversation Starters… Ask Your Child:

• When you want to borrow something from someone, how do you show them you're trustworthy?
• Where do you think money comes from? What's the difference between cash, credit, and debit?
• What do you think it would be like to live in a cashless society?
• How do you know which credit offers are legitimate? How could you spot a deceptive one?
• How much will it cost to attend the college of your choice?

What If My Teen Wants To…

Get a credit card or debit card?
You might worry about your teen overspending, especially with online shopping so easy. The Credit CARD Act of 2009 requires anyone under 21 to have a qualified co-signer or prove they can repay debt on their own before getting a credit card. This rule protects young people from piling up debt they can't handle—but it also gives you a chance to teach responsible credit use. If you co-sign, set clear expectations in writing about paying the card on time. As co-signer, you're responsible for the debt if your teen can't or won't pay, and unpaid debt can hurt your own credit report.

Debit cards are useful for teaching budgeting and choosing between needs and wants. If your teen seems ready to make their own purchasing decisions, consider a joint checking account so you can help track spending together. This opens the door to conversations about the purchases they're making, the ups and downs of managing money, how online banking works, and how to read account statements. Expect your teen to misjudge how far their money goes at first—that's normal. These lessons stick precisely because they're a little bumpy, and it's better for your teen to learn them now, at home, than later when the financial stakes are much higher.

Take out a student loan?
Fill out the FAFSA together if you haven't already—it determines how much federal and state aid your teen qualifies for. Then research different types of aid with your teen, including work-study, grants, scholarships, and loans. You can find details on federal student loan types at https://studentaid.ed.gov/sa/types/loans. Look at the minimum payments required to pay off any loans and compare that to what your teen might realistically earn after graduating.

Borrow money in general?
If your teen wants to borrow for a "want," like a new car or the latest phone, help them think through alternatives—building a budget, saving up, and working toward the goal instead. Reinforce the idea that while borrowing to invest in yourself (like paying for college) can make sense, borrowing for things we simply want often isn't the wisest choice. If your teen is planning for college and thinking about loans for tuition, encourage them to look into scholarships, grants, and work-study programs first at https://studentaid.ed.gov/ to reduce how much they need to borrow.

Family Activities

Compare Colleges: If your teen is considering college, help them research and compare their top three choices. Use a tool like College Scorecard (https://collegescorecard.ed.gov/) to compare costs, and talk about how much money would need to be saved or borrowed for each option.

Compare Credit Cards: Save a few credit card offers that arrive in the mail and go over them with your teen. Discuss the differences in interest rates, fees, penalties, and terms offered by each card issuer.

Resources

Articles:

• Providing Financial Aid: Saving for a Child's Future (FDIC) — tips for saving and investing for future costs like college. www.fdic.gov/consumers/consumer/news/cnfall12/parentsfinancing.html
• The Financial Aid Process (Federal Student Aid, U.S. Dept. of Education) — an easy-to-read infographic on applying for and receiving financial aid. www.studentaid.ed.gov/sites/default/files/financial-aid-process.png
• How Much Will College Cost in 25 Years? by Kelli B. Grant (CNBC/Detroit Free Press) — how college costs may change over the next 25 years. http://archive.freep.com/article/20140913/FEATURES01/309130060/college-cost-in-25-years
• Know Before You Owe: Credit Cards (Consumer Financial Protection Bureau) — a sample credit card agreement explaining how interest is calculated and what happens with late payments. www.consumerfinance.gov/credit-cards/knowbeforeyouowe/

Online Tools:

• FAFSA (Federal Student Aid, U.S. Dept. of Education) — complete the Free Application for Federal Student Aid. https://fafsa.ed.gov/
• Federal Student Aid (U.S. Dept. of Education) — resources for preparing for, applying to, and paying for college. https://studentaid.ed.gov/
• Compare and Pay for College (NerdWallet.com) — compare colleges and explore financial aid options. www.nerdwallet.com/nerdscholar