Heading to college marks a significant milestone toward adulthood and independence — and part of becoming an adult is learning the importance of financial well-being. Finances can be an overwhelming topic and may be put on the back burner behind the multitude of other important items on a student’s plate. However, this often overlooked aspect of college preparation can have a monumental impact on a student’s success well beyond their school years. Here are a few simple but impactful tips parents should encourage their child to keep at the forefront before heading off to campus.
1. Apply for scholarships and financial aid
There are many scholarships available that can help reduce the out-of-pocket cost of tuition. They may not be large enough to cover all of your student’s costs, but a few small scholarships can really add up. Financial aid can help with a portion of the costs as well. Even if you think your family won’t qualify for financial aid due to high income or asset balances, you should still have your student complete the FAFSA (Free Application for Federal Student Aid) and apply for scholarships. The FAFSA is easy to complete and may be necessary at some schools to receive a merit-based scholarship. The college’s or university’s financial aid office will help a student understand where to start and what may or may not be required to receive scholarship money.
2. Learn basic banking and budgeting skills
Embarking on this next phase of life may be your student’s first opportunity to work on and adhere to a budget. They may have rent, utilities, groceries, and entertainment expenses that they’ll have to balance. Banking and budgeting apps can make this exercise easy to manage, but a good budget still requires active ongoing oversight and proactive planning. Encourage your child to map out their expected expenses and how they plan to pay for them so they can avoid having “too much month left at the end of the money.”
3. Start building a credit history
To help your student get loans in the future, they’ll need to start building a credit history — this means proving they can reliably pay back borrowed money, like money put on a credit card. Paying off their credit card bill every month will help them build a credit history, but failing to pay it back in a timely manner will do just the opposite. That’s why accessing credit responsibly is particularly important and why students should only take on what they know they can afford to pay off. Accumulating too much revolving debt early on (such as credit card debt) should be avoided at all costs — not only will it hurt their credit score and limit their ability to borrow money in the future, but it can also take years to dig themselves out of debt.
A good way to safely build a credit history could be to apply for a secured credit card at the local bank. Secured cards only allow holders to charge up to a set amount that’s backed by cash in a linked bank account so they can’t spend more than they can pay back. It functions like a debit card but still adds to a holder’s credit history with less risk than a traditional credit card.
4. Get a part-time job or volunteer
If your student is lucky enough not to have to work through school, there are a few great reasons why they should consider picking up a part-time job anyway. Working even just a few hours a week will provide a small source of income to help strengthen their budget while learning valuable lessons for life after college. Even if they don’t have a job or internship while in school or during the summer, they could consider volunteering for an organization that supports a cause they’re passionate about. Studies come first, but working and volunteering are productive pursuits that strengthen discipline and help them learn the important life skill of prioritizing time. When pursuing a job after college in their desired field, having work and volunteer experience can be a helpful resume builder and lends to real-life examples that they can draw upon in interviews. They’ll also start forming professional relationships that could become critical connections when looking for job opportunities after college.
5. Pay for tuition the right way
If you or another family member is helping your student with tuition, there is a benefit to paying the school directly. Any tuition payment made directly to an educational institution won’t count against the annual exclusion gifting limits established by the IRS. For 2024, an individual can gift another individual a total of $18,000 per year without having to file a gift tax return. Any gift above that would require you to file a gift tax return, which could reduce the amount that can ultimately pass free of estate tax. If you are gifting to or financially supporting your student, you’re providing yourself more flexibility by paying tuition directly to the institution and avoiding the worries of additional tax filings and future estate taxes.
6. Use education savings plans (529 plans)
A 529 plan can be a good way to save for college in a tax-advantageous way. Contributions and earnings grow tax-deferred, and when withdrawn for qualified expenses like tuition, qualified room and board, books and supplies, computers, student loans, and meal plans (with limits), are completely tax- and penalty-free. If you’ve put assets into a 529 plan but end up not needing them for your student’s education, current law gives the opportunity for tax-free and penalty-free rollovers from a 529 plan to the beneficiary’s Roth IRA. It’s important to consult with a financial advisor or 529 plan specialist to understand the specific rules of the Roth rollovers before taking any action. Another option is transferring “leftover” balances to another qualifying beneficiary, like a sibling or a cousin. Both approaches allow continued beneficial tax treatment for the dollars originally contributed.
7. Allow your student to ask for help
When it comes to finances, finding a balance of supporting your student but also allowing them to make decisions is crucial. Letting them lead and being there when they have a question or want your opinion allows some independence and opportunity to learn and grow. This can often help reduce some tension when discussing the topic of college.
8. Get legal documents in order
Something you might not have considered yet is that your student has or will be turning 18, which means they are legally an adult. It’s important to have legal documents in place and signed so that someone (parent, grandparent, aunt, uncle, friend) can spring into action to assist your student with healthcare and financial decisions in an emergency and can legally act on their behalf. These critical documents may include but aren’t limited to a healthcare power of attorney, financial power of attorney, HIPAA authorization, and a living will. Connecting with an attorney is the first step in getting things in order.
9. Discuss the value of education
Start a conversation with your student about money and the cost and value of their education. Many parents think it’s important for the student to have some ownership in these decisions and create an agreed-upon sharing of financial responsibility for their college experience. This could be out of necessity given the higher costs of college, or out of principle, even if their parents could financially support the entire endeavor. Other parents desire to pay the full price of college; however, expectation setting is particularly important in this scenario.
Keys to a bright future: Communication and preparation
There’s no one-size-fits-all approach when preparing yourself and your child for college, but it’s crucial to prioritize financial considerations and discussions. Reflecting on your own experiences that worked out well and sharing the mistakes you could have avoided is knowledge that will push them toward accomplishing their personal financial goals now and in the future.
