It’s back to school time, and parents everywhere are trying to figure out how to best prepare their kids as they go off to college. Starting your kids on the right track can help them make good choices about spending, saving, and borrowing. Smart choices right now can help young adults avoid unnecessary financial stress in the future.
Here are some tips to consider when preparing your kid to go off to college.
Tips for Preparing Your Kids for College
Tip #1: Talk to your kids about financial basics, like creating and sticking to a monthly budget.
Having this discussion will help your student make better choices about spending and saving money. You can break it down into four steps.
The first step is to build a basic budget. Start with income – or money coming in from things like part-time jobs – and then subtract expenses. When adding up expenses, consider both variable (utility bill, gas, groceries) and fixed expenses (rent, student loan payments).
The second step is to create a savings plan. Once you know what’s left after expenses are deducted, set a monthly savings goal. It can be a specific dollar amount (e.g. $100) or a percentage (e.g. 30%).
The third step is to set spending money. Once mandatory expenses and savings contributions are blocked out, the rest can be allocated to the “fun stuff” – like eating out, going to the movies, etc.
The last step is to make regular adjustments. Naturally, expenses and spending will fluctuate over time. It is important to make these budget adjustments to stay actively aware of spending and saving behavior.
For more info, check out The College Student’s Guide to Budgeting.
Tip #2: Discuss how your family is paying for school, including who is responsible for paying back any student loans.
It can be an emotional conversation, but it’s important for students to understand how the bills for school are being paid, particularly if they’ll need to pay back student loans.
Federal Direct Unsubsidized and Direct Subsidized Loans (also known as Stafford loans) are the most common types of federal loans made to undergraduate and graduate students. These loans are made in the student’s name, and the student is solely responsible for the debt. Federal Direct PLUS loans for parents (also known as Parent PLUS) are made to parents, not students. The parent takes sole responsibility for these types of loans.
Private student loans require a credit and income review to determine an individual’s anticipated ability to repay the loan. Since many students have limited credit history and income, private student loans made to students typically require a cosigner. A cosigner is often a parent or other family member who has established credit and income. The cosigner agrees to take equal responsibility to repay the loan if the student borrower is unable. Some private lenders also offer parent loans, which are made to a parent or guardian who is helping a student pay for school; the student is not typically responsible to repay a parent loan.
While families sometimes make informal agreements about who will make the loan payments, it’s important that everyone involved understands who is legally responsible for each loan. Any missed or late payments could impact the credit of the person (or persons) who carry that responsibility.
Tip #3: If you (or your child) does borrow for school, understand how the loan works and look for ways to control the cost.
One good tip to reduce the cost of the loan is to start making payments during school, even if it’s only a small amount.
Paying $25 or more each month toward student loans during school helps to reduce the amount of accrued interest, which also reduces the total amount owed in the long run.
This doesn’t seem overwhelming and can easily be worked into a simple budget, right? Many students aren’t doing it though – probably because no one ever told them why they should. To see the impact various repayment options have on the total cost of a loan, check out the College Ave Student Loans calculator.