Summer is coming to a close and many parents are sending their children off to college. Whether your child is attending school out of state or staying home, there are unique financial challenges related to college.
Managing Day-to-Day Finances
Many of my clients establish a special bank account(s) for their children in high school so they get used to using a debit card responsibly as well as reconciling transactions every month. Younger generations grew up in the digital age, so they are used to online banking, electronic bill pay and using plastic to pay for goods and services. Even so, you’ll want to impress the importance of:
- Monitoring their accounts regularly. Most banks have mobile apps so they can easily keep track via smartphones. According to an article on Mashable, Millennials are three times as likely as Baby Boomers to use their mobile phones to access their accounts and 30% less likely to visit a bank branch.
- Keeping receipts for account reconciliation. Reviewing balances doesn’t necessarily mean that transaction discrepancies and overcharges go undetected. Reconciling an account to the bank statement is a good habit to establish now.
- Establishing a workable spending plan. College can be full of unexpected expenses… including pizza runs for late-night study sessions. If you’re providing financial support for day-to-day living expenses and essentials, set the ground rules and stick to them. It’s one thing to pay for a smartphone, it’s another to pay for unexpected data overages.
- Handling employment. To offset costs and to build marketable skills, many college students have part-time jobs. With jobs come paystubs, tax withholdings, and tax filings. Talk about how important documents should be handled including shredding personal and confidential information.
- Saving for emergencies and future. Let’s face it, the unexpected happens. Getting into the habit of saving will prove invaluable when a car needs repair or you’ve lost an iPhone. For those who are future-minded, setting up accounts to save for future purchases can benefit from compounding interest.
Using 529 College Funds
If your child has the benefit of college funds set aside via a 529 account, paying for college is a qualified expense. Funds used for things not related to education can be subject to federal tax penalties. To make sure you avoid any missteps when withdrawing money from a 529 plan, I suggest you talk with your investment or tax professional. For more information, here are two articles that may be helpful: Three Mistakes to Avoid When Withdrawing From a 529 Plan from Forbes and Four Common Questions about Spending 529 College Savings Funds by US News & World Report.
Wise Use of Credit
According to a Washington Post article, 30% of Millennials said they maxed out a credit card! Other common issues with managing credit include:
- Not understanding how interest works.
- Not knowing that late payments hurt credit scores\
- Not checking credit reports
- Not asking for a better deal (e.g., interest rates, annual fees)
Talk with your college-bound child about credit, when to use it and how to manage it. Establishing credit and handling it wisely can set a strong foundation that will benefit them after graduation and as they enter the workforce.
According to the U.S. News & World Report, 70% of students graduated with student loans. The average graduate holds over $35,000 in student debt and 40 million Americans have student loans. Now labeled a crisis, student debt now tops $1.2 trillion.
A college degree has become even more necessary to compete in today’s workforce. For some families, college loans may be the only option to pay tuition and related education expenses. Get educated before you sign financial papers. Ask yourself:
- How will you pay it back? Depending upon the degree and career path, calculate the impact of the loan to earning potential. Some professions require advanced degrees and you’ll need to finance more than just four years of undergraduate study.
- Do you understand the college loan terminology? Get familiar with terms like subsidized and unsubsidized direct loans. It impacts how interest is calculated and compounded.
- Can you offset expenses with lower-cost alternatives? Attending a local junior college can offer significant savings without sacrificing a quality education. Rather than spending university prices for general education courses, two-year colleges offer the same curriculum for less. Many local colleges are also known as feeder colleges, where they prepare students for nearby universities.
Budget Advice for Any Age
For those who are transitioning from college into a career, this guide for new grads offers advice from goal setting, to updating a wardrobe, to young professional management styles. Remember that good budgeting sense can start at any age. The early the better!
What are other ways to manage the financial impact of your college-bound child?