With my oldest daughter now graduated from high school, the summer has been busy with various celebrations, planning for freshman orientation and preparing long lists of supplies necessary for life in a college dorm room.
It has also presented an opportunity to talk with her about the family finances and set expectations for life beyond high school. Here are some key topics I’ve discussed with my daughter, and which may be useful in your own conversations with college-bound children:
State your expectations around college funding. If you have saved enough money to cover four years of college tuition, then communicate this fact (along with your expectation that your child complete his or her degree in four years or the fifth year is their responsibility to pay for). Whether or not your incoming freshman has already decided on a career path, the first years in college offer an opportunity to take the required core classes as well as explore areas of interest.
Ways for students to take control of their freshman year, and ensure the best chance of graduating on time, include taking their education seriously, focusing on grades, planning out their classes and doing the exploratory research needed to determine their major early on. Setting clear expectations with clear financial consequences can encourage your child to keep on track.
Create a Spending Plan
Make a plan for funding living expenses at college and set your income expectations. Will your child have to work in the summer or during the school year to pay a portion of their living expenses? Identify various spending categories, such as food, books, personal care, entertainment or clothing. Discuss the difference between wants and needs as you set the budget, and clearly explain that needs must be paid first. Tracking tools, such as an app called Mint, make it easy to set a budget, track expenses and monitor account balances. Your child can even receive alerts via email or text message to help keep them on top of their spending and account balances.
If you will be funding some or all of your child’s living expenses, determine the mechanics of the process and whether you plan to transfer money each semester or monthly. It is important to consider the type of spender you’re sending to college and their personal level of responsibility. Budgeting is a great life-long skill to have, but it takes practice to develop. It may be helpful to assess the budget after the first month to reign-in spending or refine the initial plan.
Credit Can Be Good
Opening a credit card with a small lending limit is a great way for a college student to build and establish a good credit history. This will be even more helpful once your child graduates and needs to make some larger purchases, such as cars or homes. State your expectations on appropriate uses for the credit card, as well as limitations.
Above all, stress the importance of paying the bill on time (to avoid interest) and being responsible for one’s own credit. Many students do not have the income or credit history to qualify on their own for a suitable credit card. In this case, you will likely need to co-sign with them. Be mindful that your credit is also on the line as a co-signer, and it is important to track that the bill is paid in a timely manner.
Keep an Eye on Your Child’s Identity
Each of the three major credit reporting agencies (Experian, Transunion and Equifax) offers the opportunity to pull a free credit report annually. Consider staggering your free credit reports by requesting one from a different agency every four months, or paying to receive more frequent updates. Annualcreditreport.com offers easy access to this information, either online or by sending in a short form and having the reports mailed to you. Children have increasingly become targets for identity theft. By checking in on your child’s credit report, you can help avoid this possibility while also keeping an eye on any other credit he or she might try to establish.
Plan for the unexpected
Now that your child is 18, they’ll need to sign a durable power of attorney, a health care directive and HIPPA authorization (which for many states is included as part of the health care directive). Without these documents, you will not have the authority to make health-care or financial decisions for your child, even though you are still financially responsible for them and they are covered under your health insurance. These documents can also be helpful in less severe situations, such as when your child needs assistance with a financial transaction from long-distance or if they choose to study abroad. Once these forms are completed, it is good to have them in an electronic format so they can be accessed easily and forwarded if needed.
The next few months of college preparation will provide multiple opportunities to incorporate financial discussions with your child, all while shopping for dorm room items, acquiring the necessary technology and getting everything in place for their first extended experience with financial independence. It presents a great chance to establish, or reaffirm, lines of communication about money matters, a topic that can be a source of stress and discord. However, working together with your child to clearly understand the financial implications of their college decisions can create an important foundation for long-term success.
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