Back to School: Is Your Child Ready to be Financially Responsible at College?
The beginning of your child’s college experience is exciting and challenging at the same time.
They are adjusting to a new atmosphere, new friends and a substantial lifestyle change. The excitement of this phase sometimes masks the reality of financial responsibility for your student. Yet there are ways for them to enjoy their independence (or your check) while also being financially aware.
There are five keys to achieving a successful independent lifestyle away from home. They include:
1. Achieving the “handoff” from you
2. Forming good financial habits
3. Cash flow and debt management
4. Proper insurance coverage(s)
5. Getting to the next phase
The transition from parental support to wage income is a hard one for most college students. Some students are fortunate enough to not have to work and go to school at the same time, but even a monthly allowance from parents can be a struggle for them to manage. This is due to fixed and variable expenses. These are:
- Rent
- Food
- Car
- Insurance
- Tuition and costs
Credit cards have taken the place of “Mom — SEND MONEY PLEASE” signs. And credit cards can be a way to establish good habits and proper cash management. With a credit card, a student can learn how to track expenses, while earning credit and reward points. This enables your child to get a head start in establishing good credit for future expenses (renting an apartment, buying a house or car, etc.)
Unfortunately, some students abuse credit cards and end up in serious debt – among other problems. That’s why it is important for them to be consistent when paying off expenses. You should remind them to always be conscious of what and when they buy.
Most parents will cover certain types of insurance -- car, rental, medical -- for their student. However, some students must pay for their insurance once they graduate from high school.
- For car insurance, grades can make a difference in the cost of coverage. Make sure to have good coverage for them. Although expensive, it is worth having to prevent debt carrying over after graduation.
- Rental insurance, depending upon the setting and circumstances, is generally inexpensive and should be based upon student possessions that are significant or of collective value. It may be unavailable for dormitory or fraternity/sorority living arrangements. For communal living, some other coverage arrangement is usually provided in a “bare minimum” fashion.
- In terms of medical insurance, your medical coverage generally has provisions covering your college students to age 25 under certain conditions. They should watch for full-time versus part-time student status and check the ending age as this can vary by carrier. Also, significant medical items sometimes require pre-clearance from the carrier if the student is “out of town.” Additionally, many universities provide (for a fee) medical coverage to students, but features and coverage can be severely limited. If the student works full-time, they are generally covered by their employer.
As your son or daughter prepares to graduate from college, make sure they have paid off any student loans, have no credit card debt and are signed up for their first 401(k), SEP, Roth IRA, etc.
It is important to remember that your child will probably make some mistakes, even if they have always been responsible. Here are some things for you to watch for:
- Don’t allow them to use credit cards to spend ahead of income – it becomes a vicious cycle.
- Avoid getting cash advances from cards as interest charges start immediately, even if you pay the balance in full at month’s end.
- Don’t give in to “special offers” – they are never special.
- Never pay an annual fee for a card (even if you carry a balance as you should pay it off).
- Don’t let reward points sway your son or daughter to buy something on credit and violate good cash management habits.
And always remind them to pay themselves first! This way, they will have sufficient savings for the future, making for a smooth transition into “the real world.”
Having a cash management plan in place that estimates what the cost of living outside those items you note below will be for each student over the course of a semester. Include things like entertainment, travel, toiletries, meals outside the dorm plan, fraternity/sorority dues, etc. Build a plan, agree to it with your student. Then, take the semester and divide it up monthly and fund the amount with them in control thereafter to make the ends meet. That is the crucial lesson to learn at this stage. Funding once or twice a month like a paycheck while a student is in college is good training for the working world on how to manage your expenses in between paydays.
