When it comes to teaching a child about money, the old adage is true—an ounce of prevention is worth a pound of cure.
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In 2010, the average grad of a four-year public college had $22,000 in student loan debt and $28,000 for private four-year colleges and universities, according to the College Board.
Before a child starts college, parents should discuss who’s going to pay tuition. “If the parent has decided that the child doesn’t have to contribute, you need to have that discussion and explain why,” says Scott Halliwell, certified financial planner at USAA. This will help engage students understand the cost of a college degree and parental performance and financial expectations.
Since most colleges don’t offer personal finance classes, experts recommend parents have regular conversations about managing a budget and unleashing more financial freedom each year to prepare a child for the real world.
Discuss the big picture and student loans. To help keep tuition costs low, experts recommend considering a two-year college before transferring to a big-name school. “Picking the school can teach children great financial lessons,” says Halliwell. “It’s not the case of the more you spend the better your chances of getting a job.”
Once a school choice is made, parents and students need to create a budget that includes tuition and living expenses for each year in school. Chartered financial analyst Robert Stammers, director of Investor Education for the CFA Institute, says families need to calculate who will pay what and if loans are necessary.
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Parents and kids need to work to take the smallest amount out in loans as possible. “The purpose of college is to get a good paying job so they can be in a good financial situation,” says Clare Levison, certified public accountant and member of the AICPA’s National CPA Financial Literacy Commission. “Accumulating large amounts of student debt defeats that purpose.”
Create a budget for daily expenses. When establishing a budget, Levison suggests parents stress the difference between wants and needs.
For parents planning to provide extra funds to students, experts suggest sending it biweekly or monthly, like a paycheck. “Start giving children a certain amount each month and help them budget it,” says Stammers. They’ll have a dollar amount to manage to every month. They’ll learn to live within their means and not paycheck-to-paycheck after graduation.
“Put the monthly budget in mint.com,” says San Diego-based certified public accountant Leonard Wright. Reviewing the budget on a regular basis will help you know if your child is financially on track.
Consider having a child work. Working in college can help lower student loan debt—even if it’s part time, says Wright. “If you’re working, you’re not spending money.” Earning $400 per month, for example, can equate to having $20,000 less in debt since you don’t have to borrow that money.” Maintaining a work and academic schedule can help students become more organized, efficient and manage their time better.
Your child can set some money aside for his or her future. “It’s never too early to start encouraging kids to save,” says Levison. “It’s a good habit to get into, even if it’s a small amount from each paycheck.”
Use financial products to help children balance a budget. Parents should expect to micromanage their child’s finances in the beginning with the goal of financial independence at graduation, says Halliwell.
For parents, debit and prepaid cards can be good training wheels as opposed to credit cards, suggests Carlos Menendez, group executive for Global Debit at MasterCard. “They have natural limits and controls for living within your means.” Statements provide a breakdown of spending so parents and children can review spending habits and identify any unnecessary expenditures.
Experts suggest regularly reviewing statements online, as well as receiving text and email alerts for account activity on any financial products and services to stop any out-of-control spending that could lead to debt.
Picking the Right Payment Method
Parents should encourage their child to check bank accounts daily to help track spending, says Levison. “College students check Facebook multiple times a day, now they have to get in the habit of checking their online banking every day.”
There are risks with debit cards, like you can overdraw your account, says Levison. She doesn’t recommend using overdraft protection because of potential high fees. When a card’s declined, “a $2 cup of coffee can end up costing $30 with overdraft fees,” says Levison.
Prepaid Cards. To help with budgeting, students can use a prepaid card for each part of their budget, says Menendez. Parents can still review offspring’s spending with prepaid cards which also force restraint and eliminate the possibility of overspending.
Credit Cards. Experts recommend that parents decide whether to give their child a credit card. Since credit cards have the most flexibility, ease into credit cards unless your child is fiscally responsible, says certified public accountant Ernest Almonte. Parents are required to co-sign credit cards for children under 21 unless the child has proof of income, according to the Credit CARD Act.
“There’s an advantage to co-signing a credit card—they can see what their child’s spending money on but the parent’s still on the hook,” says Halliwell.
“As a parent, when you’re still responsible, you’re a lot more cautious,” says Almonte. “If you’re on the hook, give a low credit limit.” When your child is in college, at some point starting their sophomore year, they should have a low limit credit card to begin establishing credit—this will teach discipline for paying a loan on time.
Since a child can get in financial trouble with too much credit, Almonte suggests creating an emergency fund and depositing the credit card limit into a separate account, like $500 if the credit card has a $500 limit. When a child can’t pay their credit card, parents should use this fund as a teaching moment and talk about what would have happened without a reserve, he says.