College is a time of learning and exploration—and traditionally, living on very little money. That makes it all the more important for college students to preserve the resources they do have. Unfortunately, it can be easy for college students to get into deep financial trouble before they realize it, and it may take years to dig their way out. Those are years during which they should be laying the foundation for financial success in the future, not battling debt they accumulated during college.
We all want to give our kids the brightest future possible, and that might include a degree from a prestigious university. Your child might have her heart set on an elite private college, but she may not be able to imagine the crushing burden of student loan debt that might accompany her degree.
In 2019, Americans carry a collective $1.52 trillion in student loan debt. That’s more than the total of American credit card or auto loan debt, and second only to mortgages. On a more personal level, the average student loan debt per person is $31,172, and most graduates with student loan debt will take anywhere from 10-30 years to pay it off.
If an illness or job loss means that expenses go up and income goes down in the future, bankruptcy is an option—but it won’t erase student loan debt, unlike most other types of debt. Begin your student’s lessons in financial literacy by being honest with them about what your family can comfortably afford and exploring more affordable options like public universities and community college. Sometimes the big name school simply isn’t worth the price tag.
If your child does take out student loans, remind them it’s not free money. Money from loans should be used only on necessary expenses like tuition, room and board, books, and fees. If they have more than they need, consider paying it back sooner rather than later to avoid interest charges.
It’s much more common for college students to have credit cards today than it was a generation ago. Especially when students attend college far from home, having a credit card can be a security blanket in case of an emergency like a car breakdown. Having a credit card makes it more convenient to pay for books and transportation home on breaks.
Having a credit card also divorces the act of spending money from the feeling that money has been spent. It’s all too easy to charge $10 on a fast food meal here, $15 on a t-shirt there, but those charges add up fast.
If they can’t afford to pay off their credit card in full every month, they may be charging too much. At a minimum, they should be able to pay more than the minimum required payment—and they should absolutely be making every payment on time.
Using a credit card can be a good way to build your child’s credit history, but set strict limits with them about what types of things they should charge. If they can’t afford to pay off their credit card in full every month, they may be charging too much. At a minimum, they should be able to pay more than the minimum required payment—and they should absolutely be making every payment on time. Even one late payment, even only hours late, can result in needless interest, fees, and damage to their credit score.
Most college students aren’t thinking about their credit score. Many may not even be aware that they have one. Yet the actions they take, or don’t take, during college, could have a profound impact on their credit score—long before they ever need it.
Explain to your student that they will need a good credit score to rent an apartment or get a loan for a house or car, but that the importance of their credit score is even deeper. Many employers run a credit check on prospective employees to evaluate their responsibility. Applicants with a lot of debt or a poor credit score may be seen as risky.
Unfortunately, it’s all too easy to wreck a credit score: one late credit card payment, or overlooking a fifteen dollar medical bill, does more damage than you would think. What’s more that damage sticks around for seven years. It’s much easier to keep a good credit score than to repair a bad one.
You wouldn’t set out on a road trip to a place you’d never been without programming GPS or consulting a map. If you want your child to reach a place of financial security and independence, a budget is their road map.
Unless they know what they have to spend, and reconcile that with what they need to spend money on, they are driving around in the dark with their headlights off, and can easily run off the road. It’s too easy to spend money in dribs and drabs on “little” things that aren’t really necessary. Budgeting, and tracking the money that comes in and flows out, can be tedious. But it’s the best way to avoid overspending and accumulating unnecessary debt.
Of course, if you’re unfamiliar with budgeting, as most college students are, even the prospect of creating a budget is daunting. Here’s a step-by-step guide to creating a budget.
Talking to your child about starting college on a solid financial footing may not mean much to them right now; they’d probably rather be out with friends or shopping for their dorm room (or almost anything else). But like so many other things parents do, they will come to appreciate it later—and you will have greater peace of mind about their future financial security.
To learn more about helping your children prepare financially for college, we invite you to contact our law office.
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