When your child goes to college, it is a litmus test to see how well you’ve prepared them for Real Life (no pressure). For most kids, college is the first time they’re on their own, solely responsible for meeting the demands of their daily schedule. Will they be able to keep up with big requirements like classes or even small ones like laundry? And what about money? For the first time, you won’t have daily control over their spending and saving habits. Hopefully you’ve spent the previous eighteen years instilling good study habits in your child, teaching them to separate their darks from their whites - and preparing them for relative financial freedom.
As with all financial behavior, your child’s success at transitioning into independently managing their finances depends on how well you’ve prepared them. Research by the University of Arizona shows that many kids don't have great financial skills, specifically money management for college students and how well adoloscents adapt to a new life without their parents by their side. There’s even a joke that, just like the “Freshman 15” weight gain, there’s a “Financial 15” (as in $15,000 of debt) as well. If not curbed early, poor financial habits in college can have short and long-term repercussions. For example, as of 2013, the average college student graduated with $3,000 in credit card debt alone (Fidelity).
The best thing you can do for your child is to build a great foundation of financial skills, starting with an allowance when they’re young and moving into things like checking accounts and credit cards in high school (check out my new book to build on your own roadmap for your child) . If you haven’t done this and your child is getting ready to head off to college, all is not lost – but you have to start your financial lessons at the very beginning. Don’t just throw a credit card and mutual fund at your kid and expect everything to go smoothly. If you have already laid this groundwork, well done! Now you get to see the results of all your hard work.
No matter your child’s level of financial proficiency, it is paramount that you have a discussion with them about financial expectations before they go off to school. What you decide about a college spending allowance, part-time job, or who’s covering what bill will depend on your preferences and circumstances. The key is to make sure you have those expectations in place before day one of freshman year.
Make a list of all the expenses your child will have, from tuition to cell phone bills. Who will be responsible for what items? It’s okay if you’re going to cover everything, but make sure you have amounts mapped out for categories like “Entertainment.” You don’t want a hefty credit card bill of movies and restaurant expenses at the end of the month. Even something like “Groceries” (if your child doesn’t have an eating plan with the school) should be discussed. What is a normal amount to spend on food in a week? How about a month?
Relate each expense to an overlying category. This will help you discuss questions like, “Should I live in the dorm or off-campus?” or, “Can I bring my car to school?” in a holistic and practical way. If your child wants to live off-campus (and you agree with the decision in principle) make sure you discuss expenses like utilities or commuting to school. If your child wants to bring their car to school, make sure you talk about the cost of gas, insurance, parking passes, and so on. The idea is that every big decision has costs that might seem “hidden” to someone that has never been solely responsible for their financial wellbeing before. Hopefully your child has previously encountered these concepts, but common examples of “hidden” cost surprises for college kids are: bank fees, utilities, laundry, insurance, and taxes.
There are other places your child can get in trouble that you should address, like credit cards. Your child might start to find credit card offers showing up unsolicited at their new mailing address. Make sure they know this isn’t free money. It’s probably not a bad idea, at least for the first few years of school, that you keep joint accounts with them so that you still retain a little oversight of their spending. Graduating college with a ruined credit score would be a shame, and it is preventable.
Apart from expectations and pitfalls, this is also an excellent opportunity to teach your child a lesson about finding ways to save money. Textbooks are the classic example. While horribly expensive at the on-campus bookstore, textbooks are much cheaper online (check out sites like Amazon or Chegg) or as rentals. If you are paying for their textbooks and feeling extra generous, you can even let your child keep the delta in cost or redirect the “saved” money into a different part of their budget as an incentive to find deals. Another good tip is to find out all the amenities and programs that their college offers, like gyms or Resident Advisor positions, that come with tuition or offset living expenses.
Finally, student loans are a financial reality for most students (as of 2012, 71% of students graduating from four-year colleges had student loans – on average, $29,400). If your child will have student loans, the best thing you can do is get them on a repayment plan now. Just like saving for retirement, many students view repaying loans as a goal of the very distant future. This is not a good outlook. Even if your child won’t start repaying the loans in the immediate future, make sure they have a plan for when and how the money will be repaid. This will inform their choice of career and perhaps even studies.
College is definitely a time for learning, fun, and figuring out who you are. However, it is not a paid vacation. Don’t let your child slip on their financial habits. Make sure you treat college as an opportunity for your child to improve and continue learning how to manage their money. Not doing so can have big repercussions once they graduate. A recent University of Arizona study of graduates two years out of college showed that, despite high levels of employment, only 32% of graduates were financially self-sufficient. That’s a scary number. Do yourself and your child a favor and get them on the right path going into school so you can set them up for a successful transition from graduation into adulthood and financial independence.