7 Ways To Financially Prepare Your Child To Go to College
College is a major expense for many families, but it’s also an opportunity to teach your children some important lessons about financial goals and managing money on their own. The following steps can help students learn about personal finances while they’re in college so they’ll be better prepared to make smart financial decisions after they graduate, start their first jobs and build their own financial futures.
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1. Divvy Up Expenses in Advance
Even before your child goes to college, talk about the costs and what they’ll be responsible for. Will they help pay tuition, room and board? Or will they be responsible for the extras, such as entertainment, any meals not at the dining hall, sorority or fraternity dues, club fees, textbooks, the cost to decorate their dorm room, buying a bike or parking, paying their cellphone bill or other expenses? Let them know which expenses you expect them to cover at least several months before they leave for college so that they can start saving for their share of the costs with money from a summer job or other income. It’s a great way to introduce them to saving for financial goals in a manageable way.
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“Ideally, students and their families will talk about the costs of college well before they head off to school,” said Ashley Boucher, a spokesperson for education lender Sallie Mae, which sponsors the annual How America Pays for College study. “For many, it’s part of the decision-making process when it comes to choosing the right school. That said, those discussions don’t always include the full picture of costs, like meals, supplies, transportation, cell phone bills, etc. To make sure students go into their college journey with their eyes wide open, having this discussion early (and often), will set them up for greater success.”
Families can start by outlining all anticipated costs and creating a budget that specifies who is responsible for each of the expenses.
2. Have Them Budget a Lump Sum
Rather than paying some of the costs as they arise, it can help to give your student a lump sum of money that they have to manage over the semester. They’ll learn to budget the money, become a smart shopper and may find extra sources of income. “Help your child develop their first budget,” said Laura Cuber, a certified financial planner in Schaumburg, Illinois. “If you are providing spending money for them, have them come up with a plan for using this money to cover any fixed expenses, plus the discretionary spending they want to do. College can be a good time to make them responsible for paying for certain things like their cell phone, gas or car insurance. Help them determine what expenses they’ll have monthly and what infrequent expenses they need to plan for. Even if most of their money is used for fun, they should get used to giving every dollar a job and knowing where their money goes.”
Giving them a fixed amount for certain items — such as textbooks — and letting them keep any extra money they don’t spend can help give them incentive to search for special deals, such as finding used or rental textbooks or electronic copies rather than paying full price in the bookstore.
They may not realize how much they’re spending on eating out with friends until they run out of money before the semester is over. “Plan for mistakes. We all make mistakes when we’re learning to do something new,” Cuber said. “Young adults who are just learning the skills necessary to be financially independent will sometimes stumble. Help them by giving them guard rails and teaching them the questions they should be asking.”
At the end of each semester, talk with them about what worked and what didn’t in the budget, and adjust for the following semester. They’ll need to do some research into the expenses they anticipate, and they’ll have a better idea of where their money went. They’ll also learn about making financial trade-offs, especially when it comes to entertainment expenses — if they want the money to go to a concert or buy a bike, they could cut back on some of the money spent going out with friends for a few weeks or pick up some extra work on the weekends. These key lessons will help them learn to weigh their financial options as they get older, too — without the pressure of totally having to support themselves yet.
3. Apply For Scholarships Like It’s a Job
Your kids can start to help pay for college costs even while they’re still in high school. Have them carve out time to research scholarships and complete the applications like they would with a job. The rewards can be more valuable than the hourly pay they get from working. Encourage them to talk with their high school guidance counselor about scholarships (both local and national programs), visit sites such as the College Board’s Scholarship Search and visit the student financial services websites of the colleges they’re considering to find out about scholarships specifically for their school.
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And don’t forget to apply for scholarships after the first year — the college or academic department may have additional scholarships that are only available after declaring a major or ones that are just for upperclassmen. You can find out about these scholarships through student financial services or from the academic departments.
The benefits of applying for scholarships can be more than just financial — the money can help with college bills and can give the student a sense of accomplishment after being selected. Writing the essays or participating in interviews for the scholarships also gives the student an opportunity to think about what they want to study and why, as well as articulate their goals. They may learn about community programs and professional organizations in their area of study that can also help them network, find out about internships and focus their job search after graduation.
4. Have a Plan for Cash and Credit
It can work well to get the student a bank account and debit card when they’re in high school so they can start to manage some money while they’re still at home. They can use the debit card for most expenses in college, but also talk about logistics for situations where only a credit card is accepted. Your student will likely use their debit card for most expenses, but could occasionally use your credit card through PayPal or similar app when needed.
Before they get their own credit card and start to build a credit record, talk with them first about using credit wisely. “At many college orientation events, you’ll see banks on campus offering low-limit credit cards for students,” Cuber said. “This can be a good opportunity for young adults to start establishing their credit in their own name, but many students need coaching on how credit cards work. Help your student sign up for a card and make sure they understand the mechanics of how those cards work. If your student signs up for one of these cards, make sure the minimum is low ($500 is a good place to start). Help them set up electronic payments that come out of their bank account, and make sure they know the interest rate on the card and understand the penalties for late payments, and explain how making only minimum payments can impact how much they pay over time.”
5. Help Them Get Into the Habit of Saving
A lot of the financial lessons in college revolve around spending, but it can also be a good opportunity to start building a savings habit, too. You can talk with your college student about short-term, medium-term and long-term financial goals and the different kinds of accounts to reach them. In addition to their bank account with a debit card for regular expenses, they can have a savings account at a bank (or online bank) where they can set aside money for medium-term goals, such as studying abroad or buying a car in a few years.
When they start to earn some money from working — even just a summer or work-study job — they can contribute to a Roth IRA, which will help them build tax-free savings for retirement (and they can withdraw their contributions without penalties or taxes at any time). In 2021, they can contribute up to $6,000 to a Roth IRA or the amount of money they earned from working during the year, whichever is less. They don’t have to contribute their own money — you can match their contributions or give them money to supplement their savings, up to the limit. While you’re working together to create a budget for the semester, also talk about how much to contribute to the different types of savings.
“This will give them experience with investing, and can help start a solid foundation for their post-college savings habits,” Cuber said. Even though they can withdraw contributions from the Roth IRA without penalty at any time, talk with them about how much the money can grow over the years if they keep it in the account until after age 59 ½, when they can withdraw the earnings without taxes or penalties. “It’s good to treat it as an untouchable account that is meant to be for the distant future,” Cuber continued. “You don’t want to develop a habit of raiding your retirement account when spending [is] a little high. Instead, retirement accounts and personal savings accounts should be treated as totally separate.”
Even if they start by making small contributions when they’re young, the money can grow significantly by the time they retire — a concept that will also help them learn to prioritize saving some money in a 401(k) after they get their first job after graduation.
6. Involve Them in the Student Loan Process
If you’re taking out student loans to help pay for college, talk with your student about what this means from the beginning — even when you’re filling out financial aid forms when they’re in high school and choosing a college. “If your student will be responsible for paying back student loans, involve them in every step of the way and make sure they understand the way their loans work,” Cuber advised. “Have them review the FAFSA form with you when you submit it. Make sure they understand what the basic terms of the loan are, including when interest starts accruing, when repayment must begin and whether they have income-based repayment options. Help them develop a sample post-college budget at a couple of different income levels that shows how the student loans will impact their cash flow. At 18, most students don’t have a solid grasp on how student loans work or how they can impact their financial future, so it’s important your child understands as much as possible.”
Make sure your child isn’t blindsided with large student loan payments after college — and involve them in the financial decision-making while they’re in school. “Very few families expect the parent will be solely responsible for repaying student borrowed loans — 97% of families from the How America Pays for College report expect the student to be involved in paying back student loans, and 70% expect help with parent loans, Boucher said. “But these are conversations parents and students need to have ahead of time so there will be no surprises.”
7. Teach Them About Charitable Giving as a Family
It’s easy to overlook the concept of helping others while you and your family are in the midst of paying college bills. However, it is also a great time to start teaching your children about charitable giving. Some families get together when the kids are home from college for the holidays and decide as a group which charities to support each year. They may give their kids the assignment to learn about the needs in the community where they go to college and research charities in that area. The student may be volunteering their time while at college to help the organization, and can give a report to the family to explain why they should also support the charity financially. It’s a great way for the family to stay connected, for the older generation to learn from the student’s passions and for the student to learn about researching charities’ finances and explaining why they should help.
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Last updated: Sept. 23, 2021