Incoming college freshmen might be stocked up on school supplies, dorm furnishings and the latest tech gadgets, but they also need to be equipped with the right financial guidance before heading off to school.
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According to a recent survey of 40,000 first year college students conducted by education technology company EverFi, students are already showing risky monetary behaviors as freshmen.
Of the population of students who had a credit card, 23.7% have more than $1,000 in credit card debt, 35% report typically only making minimum payments and 7.5% admit paying a bill late at least once in the past year.
Discussing financial responsibilities and negative consequences of poor financial habits can help prevent students becoming buried in debt and establish budget skills that will continue into adulthood.
“By the time they’re out and on their own, if they don’t have these skills down, they’re really behind the curve and at a disadvantage,” says Robert Stammers, director of Investor Education at CFA Institute. “It’s so important for parents to take the time to use [college] to really start enforcing these types of financial management rules and use it as a learning experience.”
To avoid panic mid-semester, here’s the four financial topics experts say families should discuss before students leave for campus.
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Topic No. 1: Determine Financial Obligations
Creating a budget and determining which party is responsible for what costs can help stave off overspending and late payments.
If parents are financially supporting their child, making a “needs vs. want” list can help students better understand how to live within their means, says Steven Smith CEO of Finicity, maker of money management program Mvelopes.
“Approved purchases could include food, necessary transportation expenses, and a specific amount for clothing,” he says. Be sure to set limits on what is considered appropriate spending for each category.
If students plan to work while in school, it’s important to discuss expectations for how much the student will be working as well as how much they will contribute towards college costs, says Scott Halliwell, certified financial planner at USAA.
“It’s great for [students] in terms of managing their finances so they get the understanding of, I made this money myself and it’s not just my parents giving it to me--it really helps with some real life balancing skills,” he says.
Topic No. 2: Discuss Expectations of Credit Card Use
Responsible credit card use is one of the biggest issues for college students, according to experts.
With the CARD Act of 2009 in place, students will likely have to co-sign on a credit card account with a parent or become an authorized user of their parent’s card.
Halliwell cautions parents from putting their credit score at risk by co-signing for their child without establishing when it’s acceptable to swipe for a purchase.
“That doesn’t mean that you shouldn’t [co-sign] but if you’re going to do it, you need to make sure you and your child understand what responsibility that is and what’s at risk if they don’t take care of it,” he says.
Implicating a “for emergency use only” policy can keep temptation to a minimum and prevent students from racking up discretionary spending debt, recommends Stammers.
Topic No. 3: Set Student Loan Limits
Having a discussion about student loan debt at the beginning of college can help prevent over borrowing and panic when it’s time for students to start the repayment process.
Smith suggests creating a spending plan outlining what the loan funds should and should not be used for, and how much students can expect to pay per month after graduating using a loan repayment calculator.
“Helping them understand how long it will take to repay it and how much of their post-graduation monthly budget will be tied up in the student loan repayment will hopefully help them be fiscally responsible while in college,” he says.
Bringing up the issue of student loan debt from the start can also shape students’ experience while in school, says Jonathan Clements, director of Financial Education at Citi Personal Wealth Management.
“You may want to focus yourself on earning additional money so you don’t end up with quite so much in loans, you should be really focused on trying to graduate within the four years so you don’t end up with an unnecessarily large amount of loans and you may want to factor that into your decision about your major,” he says.
Topic No. 4: Have an Emergency Back Up Plan
Everyone makes financial mistakes, and parents should set parameters on when they will be willing to step in and help if a student gets in financial constraints.
“If parents are smart, they will tell their college bound teenagers to call at the first sign of the financial trouble because if the trouble has only just begun, it may be a lot easier to resolve than if it’s left to drag on for months and months,” says Clements.
While it’s ultimately parents’ decision about how they choose to handle the situation, allowing students to learn from their mistakes and how to fix them first-hand is an invaluable lesson, says Stammers.
“The reality is that you’re going to get the calls anyway, and you’re not going to let your children starve or run out of money,” he says. “But as they get that experience of not managing their money well, you’ll find that you get the calls less and less because you put that responsibility on them.”