Another school year is winding down and many young adults are getting ready to cross that bridge into the next chapter of their lives: college. It is an exciting and scary time for college-bound kids and their parents. There is a lot of planning that goes into making college a successful experience, especially when it comes to paying for it. Today, I’m going to walk you through 5 steps to help both you and your child prepare for college, which begins years before they even receive their acceptance letter.
1. Determine Where College Savings Fits Within Your Priorities
Many parents want to provide some financial assistance to their kids and help offset the costs of college. At the same time, I also assume you have other goals, such as retirement, buying a home, travel and so on. Be sure you review all of your goals and understand where college savings fits in.
Only you know how college savings compares to your other goals and what sacrifices you are willing or not willing to make. Do what is right for your family and aligns with your values. What is most important is that your choices don’t sacrifice your financial stability now or in the future. There are options available to help cover the costs of college that are not available to help you fund your retirement or assist you if you overextend yourself now.
Good financial planning can also provide clarity around your priorities and help you stay on track to reach all your savings goals.
2. Talk about College Frequently
College should be a topic you discuss regularly with your children, even when they are young and college seems many, many years away. You want to lay the groundwork now about college, so your kids understand that it is a privilege, not a right. My girls know there is a link between their school performance now and Mom and Dad paying for college later. I will happily invest in their future provided they demonstrate a desire to attend college and do well in school.
While it is true that a college degree or even being a hard worker doesn’t guarantee success, I also know very few people in life who succeeded without trying. Start setting expectations early and talk to your kids frequently to make sure college is the best choice for them and their future.
3. Create a Parental Financial Aid Package
Most parents spend years saving money to help pay for their child(ren)’s college education and just sign checks when the bills come due. This is a mistake. You are making a significant investment in your children and have every right to set clear parameters around your financial assistance.
You and your spouse should prepare your parental financial aid package privately and be in full agreement when you present it to your child. Do not wait until they are applying for colleges to share it with them either. There should be no surprises as to what you will and will not cover.
I would start breaking it down for them when they enter high school, so they understand the requirements to even be eligible for your financial assistance and what they must do to maintain that support once they are in college. By setting very specific expectations with them, your kids better understand this huge financial gift you are giving them and treat it with the respect it deserves.
4. Be Prepared to Make Difficult Decisions
This is a hard one. We want to give our kids lots of latitude and make their own choices. But we also need to remember that they are still kids who don’t have the life experience to always fully understand the ramifications behind their decisions, especially when it comes to student debt. You may need to make some hard and unpopular decisions but do not shy away from making them.
By preparing and sharing your parental financial aid package, your child should already be aware of some baseline expectations. However, many kids still need some additional financial support beyond what you can provide. Most will fearlessly sign on the dotted line and later come to regret some of their decisions around their student loans. Help avoid this all too common scenario by helping them make educated decisions.
Understand the Return On Investment
Again, by creating a parental financial aid package, your kids should know what colleges fit your parameters, i.e. public or private and in-state or out-state colleges, etc. The price tag of a college is probably the last consideration for most kids, so you need to help it become a key consideration by calculating the Return On Investment or ROI.
Most don’t do this and it’s one reason why I believe there is so much student debt today. Remember, receiving financial aid is very different than getting a mortgage. Two students with very different future earning potential can receive the same amount of money from the same college. Do the math because no one else will do it for you. Is the amount of student debt too high against future earning potential? Cost should not be the sole consideration when choosing a college but it must be considered.
Take Only What You Need
In most instances, they may receive money above the cost of tuition and board. This may seem like a good benefit as it gives kids some breathing room and spending money. The problem is that it is not “free” money. Most will spend that money on the extras, from Spring Break to beer tabs to clothes and gadgets to pet iguanas. 5, 10, 15 or 20 years later, when they are still paying off their student loans, most regret using student loan money versus earning money to pay for those things.
Kids will need spending money, but they should avoid using student loan money as much as possible for those types of expenses. You also don’t want them to turn to credit cards either as that is just a different kind of debt. Instead, they should consider part-time jobs while in school and potentially bumping it to full-time during summer. Kids won’t innately know to do this, so you’ll have to help them understand.
5. Create a Plan to Tackle Student Debt
Many kids will need additional assistance beyond Mom and Dad to attend college. Don’t beat yourself up over this. Instead, focus on making sure they have a plan to use that money responsibly while in school and are prepared to tackle their debt aggressively after graduation. Remember, most kids happily spend that money while in college. Once they start making monthly payments, along with the new expenses of truly being on their own, does the weight of their debt truly become real because hypothetically living with debt is easy but reality is often much harder.
Sit down with your kids and create a budget for while they are in school and later for after graduation. This will give them a clear snapshot of their expenses (non-discretionary money) and what discretionary money they have available. Talk about their short-term and long-term goals too. They certainly have dreams they want to achieve and by creating a plan, they can make value-based decisions on how to spend their money as they pay down their student debt.
A New Chapter Begins
College is an exciting time. I have many cherished memories from my time in college as I’m sure you do too. I want my girls to have a wonderful experience, which also means making smart choices before, during and after college. Otherwise, those memories may lose a bit of shine when weighed down by debt and regret. This can be avoided by having regular conversations with your kids about college and playing an active role as they make choices to start the next chapter of their lives.