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College is the time for kids to move away from home, prepare for their future career path, and experience their first real taste of independence, but for many students, mom and dad are footing all the bills.
Rising tuition costs and a weak labor market has many students turning to their parents to help cover their activities and textbooks costs as well as their everyday living expenses, but experts say this could create financial dependency that could last well after graduation.
According to TD Ameritrade's Investor Index Survey in July 2011, 39 % of Gen X and 41% of Gen Y have received some kind of financial assistance from their parents post-college, including money for food, rent, and cell phone bills.
Kimberly Foss, personal finance expert and founder of Empyrion Wealth Management, explains that some parents continue to be “parachute parents” and financially rescue their kids even though their kids are old enough to be in control and responsible of their finances.
“They’ve got to feel the pain in order to be able to get themselves on the right track,” she says. “If they never understand that, they’re going to be 40 years old and living with you.”
In order to condition students to be monetarily independent post-graduation, here’s what personal finance and credit experts recommend for parents to constructively wean their kids off their money.
Talk about student loans
Gerri Detweiler, personal finance expert for Credit.com, recommends that families have a discussion before borrowing for school so that students understand that they will be responsible for their loan repayments once the grace period ends. Students can calculate how much they will need to budget for repayment here.
“Once your child takes out student loans, he or she is stuck with them--if your child can't pay them, you may find yourself helping out a lot longer than you expected to,” she says.
Set a firm budget
College students relying on their parents’ financial support should be held to a budget system that outlines how much they have to spend and what they can spend it on, says Scott Scredon, director of public relations for CredAbility.
“It teaches them to budget properly and also lets them know the parent can provide a limited amount of support,” he says. “Once they've been in college for a couple of semesters and can budget their time, they can consider getting a part-time job to supplement their income and use that money for entertainment.”
Set them on the saving track now
Foss explains that parents who help their children with living costs can get them on track to save a little each month by building it into their budget—if they have a set amount per month to set aside (paired with a conversation about compound interest, they can start the habit of saving now.
“Take the lesson that we teach people in real life which is a 50, 30,20 program: setting aside 50% for needs, 30% for wants, and 20% of your budget for savings,” Foss says.
Let them get on their feet post-graduation
It can be tough for grads to adjust to a post-college lifestyle with new expenses. If parents have the means to do so, they can slowly wean kids off financial assistance one expenditure at a time to ease them into it, explains Scredon, who helped his two children pay for their car insurance while they were in school.
“As they graduated and got jobs, they took over car insurance payments a few months after they began to work and I applied the same strategy for cell phones,” he says. “In both cases, they were able to gradually build these costs into their budgets.”
Establishing their own credit
Due to the enactment of the CARD Act in 2009, it is now more difficult for college students to have access to their own line of credit, as students under the age of 21 will need to prove they make enough to pay off any incurred debt, co-sign a credit contract with a parent or family member, or become an authorized user under a parent’s credit.
Detweiler suggests that grads may want to sign up for a secured card or prepaid card to start out with, but be aware that a prepaid card may have associated fees.
“A secured card will help your child establish credit if the bills are paid on time--a prepaid card will not,” she says.
Although some parents may feel uneasy about weaning their kids off entirely from financial support, it is essential that parents don’t compromise their own retirement plans to fund their child’s college lifestyle, says Detweiler.
“Many parents want the best for their children, including the best education and the best experience when they are at school,” she says. “The problem is that if parents don't take care of themselves, they won't be able to help their kids out later and may even become a financial burden on them.”