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By Adam Zoll | 07-22-2014 01:00 PM

Saving College-Bound Kids From Financial Pitfalls

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.

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