Smart parents teach financial skills
As the parent of a college student, which of these two recent grads do you hope your child will resemble?
The first, Tamanika Ferguson, earned $80,000 in scholarships to California State University and graduateddebt-free last spring. The second, who asks to be referred to only as “Jane,” graduated around the same time. But Jane took out over $45,000 in student loans and built up $50,000 in credit card debt by the time she got through school. She currently pays about $1,500 a month in debt payments, with over $400 of that in credit card finance charges alone.
Communication is key
Naturally, you’d love to see your kids graduate in a situation like Tamanika’s. But in an age of skyrocketing tuition and record student debt, Jane’s predicament may sound far more plausible. Fortunately, there are many ways you can prepare your kids to beat the odds and graduate financially strong. According to some experts, it all starts with good communication.
Jane took out over $45,000 in student loans and built up $50,000 in credit card debt by the time she got through school. She currently pays about $1,500 a month in debt payments, with over $400 of that in credit card finance charges alone.
“We find that too many families treat money as almost a taboo topic,” says James Boyle, president of College Parents for America. “Our number one suggestion to parents is to have an open dialogue with their child about all matters related to money.”
That discussion often reveals a surprising lack of financial savvy among otherwise worldly young people. “Some students don’t grasp some pretty basic things, like the difference between a loan and a grant,” Boyle says. “And a vast majority don’t understand the various types of loans available, the payback terms and financial consequences of interest rates.”
A family affair
According to Marcia Weston of the National Association of Student Financial Aid Administrators, one way to address this problem is by making your own finances a family affair. “Parents need to be role models,” she says. “They need to do the family’s budgeting along with their kids, so the kids see how it’s done.”
Besides familiarizing them with financial concepts, this involvement shows students the real-life consequences their college spending could have on their families. As Boyle says, “There should be a frank and open dialogue about the impact of college expenses on the family budget, and the impact of any loans on the student’s future. And that’s a good time to talk about what the parents’ and student’s contributions will be.”
Surprisingly, Boyle says, many parents never tell their children exactly how much they’re willing to spend on their education. But by being open about your intentions (and limitations) from the start, you can help your kids prepare to cover any remaining costs. Through a combination of budgeting, scholarships, part-time work and school selection, some students are able to manage the expense themselves.
Avoid the credit card pitfall
Take Tamanika Ferguson: “I had to maintain a budget, and I started off at a community college, which was cheaper,” she explains. “And there’s been many a time when I’ve spent weekends – when I could’ve been out partying – at home filling out scholarship paperwork.”
But even with scholarships and budget discipline, most students will need to borrow money eventually – and that’s when parental guidance becomes most crucial. Besides helping them evaluate and apply for different loans, you should prepare them for one of the prime temptations of campus life: credit cards. Credit card debt has become such a problem that some parents advise students to avoid the plastic entirely.
But Jim Boyle recommends a different approach. “You should say, ‘Credit cards will be part of your life, but it’s important to get off to a good start,’” he says. “Explain what a credit history means, and the consequences, in terms of interest, of only making minimum payments.”
Learn to say no
As a precautionary measure, you may even want to open a joint debit or credit card account with your kids. “It’s a piece of plastic with training wheels,” Boyle says. “Students can use it for essential spending, but there is a limit on what they can spend, and the parent will receive the bill and know what they’re buying.”
But what if, in spite of careful planning and supervision, you receive a plaintive mid-semester phone call from a cash-strapped kid? “When a student calls and says, ‘I need money,’ it’s important to find out why,” Weston says.
“There are always things that happen that are out of their control. But when it’s a case of overspending, parents should not bail them out. It’s hard to say no, but we set limits because we want them to become self-sufficient. In the long run it’s better for students to know that not only do they have limits, their parents have limits too.”