Sun, 24 Aug 2014
Parents can help their college-age children monitor spending habits, avoid identity theft, and learn from their money mistakes.
Adam Zoll: For Morningstar, I'm Adam Zoll. Sending your child off to college for the first time can be an exciting time, but how can you make sure that he or she will make wise financial choices once they are there. Here with some ideas is Tim Steffen. He is director of financial planning for Baird's Private Wealth Management Group. Tim, thanks for being with us today.
Tim Steffen: Thanks, Adam.
Zoll: Right now, families are maybe scurrying to get last-minute clothes purchases, school supplies, and thinking about how they are going to move their student into college. But there are some important financial discussions they need to be having. What should they be talking about?
Steffen: This is probably their student's first chance to be out and about on [his or her] own and [the student is] going to be making a lot of decisions for the first time that maybe they haven't had to think about before. Everything from "Are they going to work during school? What kind of income might they have? What are they going to spend it on?" [There are] budgeting decisions, mandatory expenses versus the fun-to-have things versus the unexpected expenses. There is a general discussion about all of those things that needs to be had right off the bat.
Zoll: Do you recommend that parents play an active role in helping with their student's budgeting decisions and spending decisions or should they back off and just sort of help them feel their way through it?
Steffen: It's a fine line because you want to let them use this experience to grow and gain some life experiences; but on the other hand, they've never done it before, so they may not know exactly where to start. So, I think the parents do need to be involved, especially if they are the ones footing the bill. If you are the one paying the expenses, you have every right and really the responsibility to know where that money is being spent. So, you want to give them a chance to learn and experience things on their own, but the parents do need to be involved.
Zoll: Let's talk for a moment about the role of student loans. So many students are relying on student loans to stay in school. Is there not a relationship between the student's spending and the amount that they will have to borrow to go to school and is that something that parents should try to reinforce?
Steffen: There certainly can be. Some student loans are structured to just be a tuition-based loan. So, whatever the tuition is, that's what the loan is going to be. Others may be more open-ended, where the student has a cash amount and they decide how they are going to use it. So, loans can be a little bit different. Depending on how the loan is structured--yes, absolutely, the child is going to be more careful about how they are spending some of that money.
And you may have more of the informal-type loans, where mom and dad loan money to the student. Not a formal student loan, but [there is an] expectation that the student, at some point, is going to pay mom and dad back for that. [In this case,] absolutely, students will want to be careful about where they're spending that money.
Zoll: Along the way, I imagine that keeping clear lines of communication open is important. Should the parents take a certain role in monitoring the student's spending habits?
Steffen: Absolutely. Again, if the parents are the ones making the loan--just like any bank would do--they're going to want to know what the proceeds are going to be used for. The thing that parents have to remind themselves of is that these are kids and this is the first time they've ever dealt with some of these issues. There is a pretty good chance that, somewhere along the line, something is going to go wrong on them. And the parents have to be prepared for that and use that as a teaching moment for the child, but then do what they can to help them out. You don't want to let a kid get themselves in over their head and set themselves off on a bad start to what is their financial future as well.
Zoll: Let's talk for a moment about the subject of credit cards. Many students get to college and they're bombarded with credit card offers, right and left. They probably can't tell one from another--they get so many of them. Do you think it's a good idea for incoming freshman, for example, to take out credit cards?
Steffen: Again, yes and no. What they don't want to do is fill out every application that comes their way because that does have an impact on their credit rating. The more times somebody hits your credit history that does have an impact on your rating. So, they want to be careful about that.
Does it make sense for a child to have one [credit card]? Perhaps, but maybe with a low limit on it--one that the parents are certainly monitoring via online access or copies of statements, whatever it might be. I would say that the idea of letting kids establish a credit history in college may be overstated a little bit. I think kids can do a little bit maybe to help their credit history during college, but they can do a lot more to damage it. So, I think the upside is lower and the downside is much larger.
Zoll: By the same token, should parents be co-signing on their student's credit cards?
Steffen: That's a dangerous path to go down because whatever the kid does, the parent is going to then be on the hook for as well. You can give your child authorization to use your card, but just be prepared to have to revoke that quickly if something does go bad on you.
Zoll: What are some other financial red flags that parents should have on their radar screen to tip them off when something may not be going as it should?
Steffen: Keep in mind that your child is going to be in an all-new environment with maybe new people around them, people that they don't know. And they are trying to keep up with the new crowd of friends.
They are going to be meeting people who come from different economic backgrounds that maybe your child wants to hang around with but can't keep up with financially. So, if they are trying to "keep up with the Joneses" in college, that can become a problem. Or if they are the ones who are trying to bring their other friends along and become the one who is paying for everybody else, you have to be careful about that as well. It can go the other way on you. And, of course, there is the big issue of identity theft. There is a lot of opportunity for that in college. You are going to be around a lot of people that you don't know. So, you have to be very careful about what you are sharing and how you are securing information--whether it's your computer, your drawers, your desk in your room, or wherever you might have some sensitive information. Keep it secure, because you don't know exactly who you are dealing with right away.
Zoll: Tim, that's great advice for parents and for students as they look to enroll in college this fall. Thanks for being with us today.
Steffen: Thanks for the time.
Zoll: For Morningstar, I'm Adam Zoll. Thanks for joining us.