College Bound Financial Advice

Millions of families are packing up to send their kids to college. Before starting the journey, I am hopeful that they are spending as much time on course selection as on preparing students financially for the transition. To help, here are some broad categories to cover.

Track Money: If money habits are formed early, then this is the foundation from which every other habit derives. Start with inflows (money from work-study, a part-time or summer job, or from the family) and then the dreaded expense side of the equation. Apps abound (Mint, YNAB, PocketGuard, Goodbudget), but a simple spreadsheet can also do the job. If parents are helping with college costs, there needs to be a serious discussion about what is (books, food) and is not included (beer, concerts).

Choose a Bank: Peer to peer money transfers are convenient, but college students also need to establish a banking relationship with a bank, a credit union, or an online institution. Many parents prefer that college kids remain at their own bank and link accounts, in order to keep an eye on what’s going on and to transfer money to the account seamlessly. As the process unfolds, don’t forget to provide graduates with a lesson in compound interest; insidious fees, like minimum balance and overdraft protection; and electronic bill paying.

Have the (Credit Card) TALK: Way back when, before the 2008-2009 Great Financial Crisis and Great Recession, college students were bombarded with credit card offers. The companies would set up shop on campus, give away shirts, frisbees and lure blithely unaware students into signing up for a credit card, which sometimes wreaked havoc early on in the student’s financial life.

Thankfully, those days are over. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”) established stricter rules surrounding the issuance of credit cards to minors and students by limiting marketing activities and raising the age bar for credit. While people can apply for a credit card as early as age 18, they must have independent income to do so. Without that independent income, anyone under age 21 must have a co-signer on the account.

You might think the easiest way to avoid credit card problems is to use debit cards, but they do not help establish that all-important credit history, which will become the backbone of your child’s future ability to borrow money at preferred rates. Instead, consider a secured credit card, which requires a refundable cash deposit, (usually equal to or less than the card’s credit limit). The complaint about secured cards is the low credit limit ($300-$500), which can increase over time.

Alternatively, parents can add students as authorized users on their own accounts, which allows kids to spend and build a credit history, with the help of your good credit. One note of caution: while an authorized user arrangement allows parents to keep tabs on activity, if junior goes wild, the primary account holder will be on the hook for the charges.

Explain Repayment and Credit Scores: It’s hard for anyone to take in the magnitude of a big number like $1 trillion of outstanding credit card debt. But one way to make the point about how important it is to pay down debt is to connect the idea to something that will impact your student’s life. “When you don’t repay debt in a timely fashion, not only do you have to pay more in interest, you may make it harder on yourself to rent an apartment, buy a car and eventually purchase your first home.”

Any discussion about debt should include the importance of establishing and maintaining good credit. Students should review their free credit report at annualcreditreport.com and know that the number one factor in the score is paying bills on time. The best way for students to manage their payments is to establish automatic payments through their bank.

Student Loan Repayment Strategy: Although loans do not require repayment until after graduation, it is never too early to help student loan borrowers understand the mechanics of how loans work. They should create a list of each loan, the interest rate associated with it, and the dates when repayments are due to start. Importantly, parents should openly and honestly discuss whether or not they are financially secure enough in their own financial lives to assist in post-graduate debt repayment.

Start Saving: Have your kids establish an automatic savings program so that at least 10 percent of earnings is directed into a savings account. If they have earned income, they should open a Roth IRA account to instill the concept of retirement savings. Explain that a Roth IRA allows the money earned to grow tax-free for life.