How-to Talk to Your College Student about Money
Your years of encouragement and supervision have paid off, and your teenager will be heading off to college this fall. But if you’re like most parents, your pride and relief are mingled with new worries. You want your child to thrive (or at least survive) academically. You hope you’ve made a lasting impression when it comes to teaching time management skills and making “responsible life choices.” But is it possible that you overlooked one of the most important lessons of all: how to manage money?
Now that your student will be living on his or her own for the first time, he or she will be facing a lot of potential financial pitfalls—and Donna Skeels Cygan says you should make time to talk about them.
“Often, college students don’t realize that their current financial habits and decisions will impact their lives for years to come—and looking back, many wish they’d done things differently while they were in school,” says Cygan, author of The Joy of Financial Security: The art and science of becoming happier, managing your money wisely, and creating a secure financial future (Sage Future Press, 2013, ISBN: 978-0-989-77844-2, $24.95, www.joyoffinancialsecurity.com). “That’s why it’s so important for parents to sit down with their kids before freshman move-in day and have a serious conversation about good financial habits.
Below are a handful of ways you should include your college student in your financial discussion.
Involve your student in the financial aid process. Make sure your student is knowledgeable about any financial aid he may be receiving, whether it’s in the form of merit-based scholarships, need-based aid, grants, work-study, or something else. (This is especially important if you, on whose income and assets the aid may be based, filled out the forms!) It’s important for your student to know what he’s entitled to, what his aid does and doesn’t cover, and whether terms and conditions will change from year to year.
“Having a direct conversation with the college’s financial aid office might also benefit your student,” Cygan points out. “With my youngest daughter’s aid package, we were able to negotiate an additional ‘discount’ on tuition. I learned that financial aid employees often have a certain amount of flexibility in allocating aid, so it’s worth getting to know them! Also, be aware that your child may qualify for additional types of aid later in college that he didn’t initially. As the semesters pass, remind him to stay abreast of any updates. For instance, once he declares a major, his department may offer scholarships to its students.
“And one more piece of advice on the topic of paying for school: If your family decides to take out college loans, make sure some of the loan balance will be repaid by your child,” she adds. “Knowing that his education isn’t a freebie will make it more meaningful to him—and may also sharpen his motivation to graduate in four years!”
Help your child work out a monthly budget. In college your child will be responsible for managing her monthly budget, which might include paying for food, transportation, entertainment, laundry, clothing, and more. If she’s like many students, this will be her first experience at managing a budget, and she’ll quickly find that expensive outfits, frequent pizza deliveries, and daily $4 lattes aren’t sustainable.
Talk about how to resist financial peer pressure. Your child is likely to meet students who don’t put much thought into their spending habits. One acquaintance may have “Daddy’s credit card,” for example, while someone else may be using his own credit card with little thought toward the consequences. And if all of your student’s friends are eating out at restaurants, indulging in shopping sprees, and going to see a new movie each weekend, he might be tempted to do the same.
Beware of plastic! During your child’s first year on campus, she’ll probably have the opportunity to sign up for a credit card. Encourage her to think long and hard (and talk to you!) before doing so. In some cases credit cards can be a lifesaver because they allow you to pay for basic necessities during emergencies, but much more often, they lead you down a slippery slope and into a black hole. If your teen doesn’t have the cash for something and doesn’t absolutely, positively need it, tell her to say no and start saving.
Encourage your student to start a savings program. Whether you’ll be providing your student with an allowance or he’ll have a part-time job (or a combination of both), Cygan recommends saving some of that money if your student’s budget allows. Immediately after he receives his allowance or paycheck each month (let’s say that adds up to $200), encourage him to put a predetermined percentage (say, 15 percent) into his savings account. In this example, that’s $30 a month, which will add up!
“Yes, I’ll admit that saving money out of an already-small budget will feel unreasonable or even impossible for most teens,” she says. “It may help to remind your student that he is starting a lifelong savings habit that will serve him well over his entire life. Once he finishes college and has a full-time job, he can increase his savings percentage to 20 percent, and leave it there throughout his working life. This is the concept of ‘pay yourself first,’ and it will set your child on the path toward financial security.”
Specifically, talk to them about opening a Roth IRA. If your student is working during college (or perhaps only during the summer), Cygan strongly recommends that she put some of her savings into a Roth IRA. She can invest up to $5,500 per year, but she must have earned income of at least $5,500 to contribute the full amount. (If her earnings are only $2,000 from a summer job, for example, she can contribute any amount up to $2,000.)
And if it seems too early to begin contributing to a fund that’s typically used in retirement, think again! If your child contributes $5,000 to her Roth IRA for 10 years, her contributions will total $50,000. However, if the account grows 8 percent per year, its total value at the end of that 10-year period will be over $75,000. The point is, the earlier your student starts contributing, the more her money will work for her. This is the power of compounding.
“Parents, think of this money management discussion as your parental contribution to freshman orientation,” Cygan concludes. “The budgeting, spending, and saving habits your student forms in the coming months and years are likely to stick around long after graduation. By providing sound guidance, you’re making an investment in your child’s long-term security and happiness.”