Article by : Carrie Schwab Pomerantz

Today’s teenagers, like generations before them, are looking forward to financial independence. But are they really prepared, intellectually, for the responsibilities of adult life? And how do boys and girls differ when it comes to thinking about their financial futures?

These were some of the issues addressed by a recent Schwab survey on teens and money. The results were a bit surprising — and instructive, for teens and, in particular, for their parents.

Mixed Findings

According to the teens polled, the next generation of American workers is very confident about its collective ability to earn a good living and to address the financial responsibilities of adulthood.

On the one hand, that’s reassuring; it would’ve been disconcerting to discover pessimism on the part of teens about their income-earning potential as adults or their ability to deal with personal finance issues when they enter the world of careers and salaries, mortgages and debt, and investing and planning for retirement.

But on the other hand, the findings also suggest that this generation may be too confident, even naively so, about their future. Teens have what seems to me an overly rosy view of their future earning potential. And I was quite surprised by some of the differences between the sexes when they consider how they’re going to fare when they enter the workforce.

I’ve always felt that parents are the most vital source of information about personal finance for their children; after all, “Money Management 101″ isn’t offered in very many schools’ curricula. But the results of this year’s survey have convinced me of three things: first, that the gender gap is (sadly) alive and well; second, that too few parents are making the effort to educate their children about topics like budgeting, using credit wisely, and investing; and finally (here’s the good news), that kids are eager to learn — and they want to learn from their parents.

Different Genders, Different Visions

My generation was brought up to believe that women could have any job we wanted, but we entered the workforce knowing that the gender gap — the much-discussed disparity between the incomes of men and women — was real. Nevertheless, I was shocked by how much of a gender gap exists in the expectations of today’s teenagers.

For instance, about 81 percent of the boys surveyed believe they’ll earn “plenty of money” when they take their place in the workforce, but for girls, the figure is significantly lower at 65 percent. And when asked to estimate their annual salary as adults, boys, on average, believe they’ll make $173,000 a year while girls expect an average of $114,200. That’s a substantial difference.

I confess that I’d hoped girls would see themselves on a more equitable footing with the boys, especially given the fact that girls appear to be the more industrious gender, according to the results of this survey. Forty-five percent of the girls report that they currently have a job or work occasionally compared to just 29 percent of the boys.

This budding work ethic will certainly serve girls well when they enter the workforce as women. But why do girls have lower expectations than boys about their earning potential?

Managing Expectations

I don’t have a great answer, and I realize that the gender gap is a huge cultural and societal issue that can’t be solely addressed by parents. But I also believe that parents need to be aware of their kids’ expectations, particularly since two-thirds of teens (both boys and girls) agree that men tend to earn more than women.

And while this may be true today, we need to remind our girls that there’s no reason to automatically assume they’ll make less money than their male counterparts (for similar jobs, hours, and responsibilities, of course). It’s just possible that expecting less could translate into accepting less or being less assertive about negotiating salary requirements or raises.

At the same time, there’s something a bit startling about these inflated income expectations; you should remind children of both sexes to be a bit more realistic about what they can hope to earn in their chosen careers. After all, according to the U.S. Census Bureau, just 5 percent of the American population earns more than $100,000, and based on Bureau of Labor Statistics data the average national wage is approximately $40,000.

Your kids could be in for some unpleasant surprises when they enter the workforce. I’m not talking about crushing their dreams, but setting more reasonable expectations will help them understand the need for prudence and planning when it comes to their financial lives.

A Lack of Preparation

I can’t speculate about the sources of kids’ optimism, but it extends beyond expectations about future income-earning potential. In fact, the survey found that nearly two-thirds (62 percent) of American teens believe they’re prepared to handle adult financial responsibilities after high school.

Here again, the teens’ confidence may be slightly misplaced. Most teens actually don’t have a firm grasp of the basics of personal and consumer finance, let alone more sophisticated topics. Just 41 percent consider themselves knowledgeable about budgeting. Only 34 percent know the mechanics of paying bills. And a mere 26 percent understand how credit card interest and fees work, which is particularly alarming given the prevalence of the credit card as an important financial tool.

As for slightly more advanced financial know-how, the level of knowledge is even scantier. Just 14 percent of the teens say they understand how income taxes work, and only 13 percent of them know what a 401(k) plan is.

A Desire to Learn

The message to me is unmistakable: Today’s kids, boys and girls, don’t have a solid grounding in financial realities. They need to know more about personal and consumer finance. The good news is that they want to know more.

Nearly 9 in 10 (89 percent), for example, say they want to learn how to make their money grow, and almost two-thirds (65 percent) believe that learning about money management is interesting. Further, more than half of them (60 percent) say that learning about money management is one of their top priorities. But they’re not getting these lessons from their parents: just 28 percent report that their parents or guardians are giving them actual experience with “budgeting, spending, and saving.”

The call to action couldn’t be more obvious: It’s up to you to educate your kids about money. Open savings accounts for them, and encourage them to save. Teach them about the need to pay off credit card bills monthly and the real dangers of credit card overuse (credit cards are cash substitutes, not income extenders). Help them plan for future purchases — as I like to call it, “the pleasures of delayed gratification.” Include them in your own financial chores, from the simple act of paying your bills to more sophisticated tasks like managing your 401(k) plan. Consider getting them involved in the financial markets, perhaps with small custodial accounts or by allowing them to “look over your shoulder” when you’re managing your money.

And, of course, encourage them to ask questions. You’ll be giving them a solid financial foundation: a core of knowledge, confidence, and wisdom that will serve them well as they continue on their journey to independence.

Studies show that only one in five student borrowers make all of their monthly payments on time in the first three years of repayment. Yes, that loan can sneak up on you after that six-month grace period. And almost everyone I’ve spoken with who has taken out a student loan fails to fully consider the bite they’re going to take in the long run.

But forget any regrets you might have. You’ve taken out those loans, and the thing to do now is come up with a doable plan to close them out and get on with your life. Here are 10 terms you need to know to become a wizard-level repayment master.

Good Standing: This has nothing to do with posture. It means being up to date with repayment. The best way to do this is to set up an automatic direct debit on the due date each month, from your bank account to the student loan company or companies. Direct debiting might even net you an interest rate discount of a quarter point to a full percentage point.

Borrowers in good standing also keep in touch with their lenders, letting them know if they move or change contact information. You should put as much of your correspondence in writing as possible and save copies of it. If you’re late with a payment, call up the lender and say, “It’s important to me to remain in good standing. Can I send you a good-faith payment (of at least $50) now?” Then ask what repayment options you might have.

Deferment: This is a period in which you don’t have to repay your loans. While enrolled in any school at least part time, you’ll automatically get an in-school deferment, plus six months’ grace period after you leave. Military service brings automatic deferment, too. Otherwise, if you’re broke and need a break, you must apply in writing to your lender. You can get a deferment for up to three years at the lender’s discretion if you can supply evidence of unemployment, low income, and/or financial responsibilities such as children. The good news is, if you get an official deferment on a subsidized (Stafford) loan, the government picks up the interest on the unpaid debt.

Forbearance: This is another, more expensive way to take a break from your loans. Again, if you’re under financial distress, you can apply in writing to suspend payments, make reduced payments, or pay only the interest for up to 12 months straight and a total of three years. The bad news is that, in forbearance, you have to pay at least the interest or it is added to the debt, meaning you’re paying interest on interest, which can add up fast. I’ve met many people in forbearance whose loan balances are growing year after year. Still, it’s a better short-term solution than just skipping payments.

IBR: Although it sounds a bit like a distasteful disease, IBR stands for income-based repayment. Like extended repayment (stretching out your payments from the standard 10 years to 25 or 30 years) or graduated repayment (payments go from lower now to higher every two years), this is a way to manage your loans long-term.

But IBR has some important differences. First, it is offered only for federal student loans (this started in July 2009). Private lenders have “income sensitive” plans, but they basically amount to longer repayment terms and more interest. Under IBR, you pay in proportion to your annual income and family size, to ensure that your loans aren’t too arduous. For most eligible borrowers, IBR payments total 10 percent or less of your total income. Plus, the loan is forgiven after 25 years — just about the only way you can ever walk away from a student loan balance. If you have dependents and are committed to a low-paying profession such as social work, IBR could be a godsend.

Consolidation: This means combining several student loans into one loan with a single monthly payment.

When you consolidate, you can choose to lower and stretch out the payments from the standard 10 years to up to 30 years, but this means paying more interest in the long run. Consolidation was a great deal a couple of years ago when interest rates were at an all-time low. Today these loans may be more difficult to get due to the student loan market tightening. The main benefit is simplifying your loan, as well as resetting the clocks on benefits such as deferment and forbearance.

Delinquent: This is not the term for kids who smoke outside the Kwik E Mart. This goes into motion when you miss a single monthly payment. You’ll start to get phone calls and letters. Penalties and fees are added to your loan, and the late payment is eventually reported to credit bureaus, which affects your credit scores. To get out of delinquency, call up your lenders and catch up on your payments as soon as possible. They may be willing to accept a payment plan — that is, reduced payments for some period of time.

Default: This is not a tennis rule. After nine months of missed payments, your loan goes into default. When it officially hits default, the full balance of the loan becomes immediately due, so it explodes with massive penalties, fees, and capitalized interest, which have effectively no limits. A $30,000 loan can become a $90,000 loan after two years in default.

Default happens to only about 5 percent of loans in the first two years after repayment, mostly to students who drop out. But if it does happen, your options are limited. Unemployment, illness — it doesn’t matter. You may be able to negotiate a payment plan, but under most circumstances you can’t discharge a defaulted student loan in bankruptcy.

Garnishee: This has nothing to do with parsley or lemon wedges. Under federal law, a guarantee agency can garnishee (divert from your bank account to theirs) up to 15 percent of wages to repay defaulted student loans, without taking you to court. While they’re at it, they can seize tax refunds, federal disaster relief payments, or Social Security and federal disability assistance. Other consequences include ruined credit, inability to be approved for a mortgage or car loan, loss of your professional license or government security clearance, and those annoying calls from collection agents. Normally, as the Supreme Court affirmed in 2005, there is no statute of limitations on collecting a defaulted student loan.

Ombudsman: Sounds like a superhero, and maybe she is. Debra Wiley, the federal student aid ombudsman, can help you resolve a complaint against a lender, as a last resort, when all other negotiation has failed. Let’s say you were denied forbearance, for example, but you have ample evidence that you are ill and unemployed. The ombudsman can’t help with private alternative student loans, only federal loans, and can’t necessarily reverse a lender’s decision, but they can communicate with lenders for you and help all sides arrive at a resolution.Rehabilitation: This is not where Paris and Lindsay have to go. This means getting out of default. You can do this by applying for and signing an agreement to restart payments on your loans. Then you have to make at least nine payments. These must be consecutive, “reasonable and affordable,” voluntary (no seized wages), on-time (within 20 days) payments. Then your rehabbed status is reported to credit bureaus, you become eligible for higher education aid once again, and you continue to repay the loan while a new lender purchases it and begins to service it. Congratulations!