By Karin Grablin
As a parent, preparing your student to be successful in college financially is like walking a fine line between supplying enough support and skills for your child to get by without becoming so involved that he/she can’t fully develop as an independent adult. For most students, starting college is a first step toward financial independence, which means it’s the best time to start taking some basic financial planning steps to help ensure future success in life. Here’s what to brief your student on before they head off to school—and what they should also learn on their own.
1. Develop a budget
Have a good financial strategy in place before the student sets foot on campus. Let them buy the family groceries for a month or plan the family vacation so they can learn what things cost. Have them track their own expenses for 30-60 days. Review this with them and hash out the likely additional costs they’ll have at college by category (meals, supplies, transportation, entertainment, etc.). Coach your student on how to live below their means in each category by taking advantage of student discounts, sharing expenses with roommates and practicing restraint from impulse buying (e.g. do you really need that Starbuck’s coffee every day?)
Once on campus, starting Day 1, have them start tracking what they spend by category and review this with them periodically at school breaks. Consider using online tools to track spending habits and help set accurate goals. Many banks offer free spending-tracking software, and have tools to enable set-up of recurring payments, lowering the risk of bills being paid late. Websites like Mint.com or Quicken also offer expense tracking help.
2. Open a separate bank account for the student
Have the student open up a separate bank account in their own name several months before college starts so they can get the hang of managing and balancing a checkbook. For parents supplying students with spending money while at school, send it on a monthly basis according to the budget established in Step 1. Giving a student a “lump sum” to work with for a whole semester is potentially hazardous and does not enforce good budget management skills.
3. Establish credit
One factor that goes into a credit score is the length of credit history, so it’s good to have established credit before the student graduates from college. However, unless students have really significant part-time income, it can be difficult to get a credit card on their own. Parents should consider adding their student to their existing credit card account as an authorized user with a low-limit card, but make sure the issuer will report authorized users as separate borrowers to the credit bureaus (it’s a simple way to build a credit history).
Using this system, the parent should get a copy of the credit card statement to monitor the student’s spending activity, but have the student pay his/her own bill directly, pay it off every month – and on time. Missing a single credit card payment can hurt a credit score and increase fees/interest charged on the card. Besides, paying in full & on time is the only way to truly stay within a budget (from Step #1) and to avoid building up expensive debt. This is a crucial lesson for all students as they begin the next stage of their adult lives.
4. Get estate documents & HIPPA forms in place
Parents assume that because they are paying for college or their child is still living under their roof, they have the right to make legal decisions for their children, but once they turn 18, the law classifies them as adults, with the legal right to privacy and to govern their own lives. As a result, parents are no longer entitled to see their child’s medical & financial records or make decisions on their behalf. That’s why it’s important for young adults to have estate documents in place that appoint trusted individuals to make medical and financial decisions for them in the event they are unable to do so.
While few 18-year-olds need a will because they don’t own much property, all should appoint a trusted friend or relative (as agent) to make medical decisions for them in the event they are unable to. The student’s doctors and agent should receive a copy of the form, which can be drafted by an estate-planning attorney or downloaded from the Internet. It’s also important for them to sign a HIPPA release (aka: the Health Insurance Portability and Accountability Act of 1996, which protects patient privacy). This gives medical practitioners permission to share information with those named on the form.
Last but not least, the student should designate a general financial power of attorney in writing. With such a document, if necessary, parents could pay their child’s bills, speak to his/her landlord, or replace a lost credit card whether the student is incapacitated or just away at college. This document should be updated every couple of years or banks may not accept it.
5. Consider part-time work
It seems counterintuitive, but often, having a part-time job (10 hours a week or so) can help improve a student’s productivity, organization, and time management skills, in addition to enabling a student to help contribute financially to the cost of his/her education. There is research that shows that students who work a reasonable amount of time do better academically for these reasons. If your student does maintain a job, suggest the earnings be used for spending money, so he/she can choose to put it toward laundry, meals off campus, or extracurricular activities. By choosing where to spend what they earn, students more actively make a connection between money earned and money spent, reinforcing what they learn about managing a budget, for “real life” after college.
6. Start saving money
Students should have an “emergency fund” established for unexpected expenses. Encourage them to get in the regular habit of saving even a small amount of their budget each month for such emergencies. Established early, this habit will serve them well throughout their adult years as they start saving for retirement.
While parents should consider all of these steps to help get their college student set up well financially as they head off to college, one of the best things they can do is to give them a bit of freedom to work through these issues on their own. Try to allow kids to “struggle” a bit financially if they mismanage their money, because the consequences now are so much easier to deal with than when they’re adults out on their own. This lesson might be as valuable as the college education itself.