Financially Launching Kids to College
It’s graduation season. Kids are salivating at the chance to get out of their parent’s direct choke-con. Parents are simultaneously tearful at losing their babies to a scene from Old School or Animal House and elated to finally stop having to nag a mini-adult to do the most basic of adulting (everyone else feels this way, right?). Before we launch them to college, perhaps we should do a low-speed pass over key financial topics to set them (and us) up for success?
Eat the Frog: Hard Conversations
Let’s start with the hard conversations. As parents, we know we must loosen up the reins with some expectations as the kiddos head out, but the first 18 years probably didn’t get our children a blackbelt in personal finance. These first topics may be some of the hardest to discuss, so let’s get them out of the way first before moving on to the lower hanging fruit.
- How we’re paying for college. We don’t do our kids any favors protecting them from reality. If we expect them to perform well in college to justify the expense, we’re preloading a resentment if they don’t understand the expectation. Explain to Junior how the family is planning to pay for each of the major expenses including: tuition, room, board, travel, fees, books, and incidentals. (Hint: you probably should have a spreadsheet going.)
- Loans. If student loans are part of the equation, everyone needs to be clear-eyed about the following:
- Loan amounts
- Type of loans (government or private)
- When payments begin
- How interest is treated (subsidized during enrollment, or accruing from day one)
- Expected repayment timeline. 10 years is the norm, but income-driven plans can go to 25 years.
- Who is actually on the hook? Parents, student, or both?
- Approximate income that will be needed to pay for loan on new graduate’s salary.
(Hint: you need a spreadsheet and probably a written agreement with your student.)
- Getting off the payroll. A key attribute of wealthy families is that they don’t drain financial resources providing “financial outpatient support” to adult children. If you plan to fund IRAs, 401(k)s, and Vacays instead of a 22-year-old boomerang on your basement couch, make this part of the mass brief! We send them to college to finish growing them into independent adults. If that’s truly your goal, your student probably needs to hear the message early and often. If we’re ambiguous about whether or not we mean grown and flown, Junior might exploit the gaps and seams in our resolve.
- Sharing the Wealth. The G.I. Bill can be worth more than $300K depending on the institution(s) you deploy it to. Few families have that kind of money in 529 accounts or other savings to ensure that each child can “spend” the same amount on college. The parents served in uniform and saved the college dollars. That may have been the easy part compared to:
- Determining how you’ll allocate resources across your all your kids’ college bills
- Explaining your decisions without appearing to favor one or more kids over others
There’s no time like the present for developing a united front as parents and building your messaging plan to help the kiddos cope with your decisions. You never know—finding out that money doesn’t actually grow on trees could be just the epiphany a child needs to put more skin in the game!
Tough but Manageable Talks
Whew! We’re past the toughest conversations, but we still have several difficult chats ahead of us.
- Excess G.I. Bill Housing funds. The G.I. Bill housing allowance is supposed to be paid to the student. (I’m unaware that the VA deploys agents to your bank to see whose names are on what accounts for this.) The reality is that the housing allowance often exceeds expenses and there’s leftover money. Some kids might consider this cash to be their windfall. Beer and pizza Redbull and Cheetos do not purchase themselves after all! Most parents probably view any excess G.I. Bill housing dollars as part of the overall family war chest for academic pursuits. Parents need to both set expectations and put guardrails in place to make sure those dollars stay on their flight plan!
- Excess 529 funds. Whatever the reasons—scholarships or a professional sport season… your family could end up with leftover 529 funds. If parents own the accounts, choices include:
- Rollover 529 funds to the kiddos’ Roth IRAs (subject to forthcoming IRS rules)
- Deploy 529 funds to other family members
- Hold 529 funds for grandchildren
- Remove 529 funds equivalent to the scholarship, paying tax on the gain, and deploy for the family’s highest, best use
- Remove 529 funds and pay tax on the gain and 10% penalty on the gain for non-educational use (eeek!)
If there’s any chance Junior thinks of the 529 account as his piggy bank that he earned for getting scholarships… you’ve got a tough conversation ahead.
- Incentivizing behaviors. Depending on where you need to go with this, it might be one of the tougher conversations. If you’d like to incentivize behaviors, you’ll need a plan and messaging strategy. Consider:
- “If you graduate early, we’ll buy you a car…”
- “If your grades fall below ‘X.Y’, you’ll be coming home for junior college for a bit…”
- “If you earn scholarships, we’ll divert some amount of 529 money to your beer and pizza paying for extra tutoring fund…”
Whatever you’re looking to incentivize or disincentivize, there’s a chance your student might respond to dollars. It’s rumored that one steely-eyed killer told his son, “You pay for freshman year. If you survive that, I’ve got the rest.” Talk about skin in the game!
- Break time. Do you expect your student to refresh the beer and pizza tea and crumpets fund with her own labor? What about during the holiday and summer breaks? Or do you want her to recharge and catch up on sleep and wellness? As above, an unbriefed expectation is a pre-loaded resentment. Negotiating how you expect breaks to go is a better pre-brief than debrief.
Low Hanging Fruit: Easy Conversations
Not all conversations need to become a fountain of cortisol. Just the same, your new college student needs your help with these topics too!
- Credit cards. First, let’s stop calling them credit cards. Let’s call them “convenience cards.” They should not be used as a potential path to even a short-term loan. They’re great for keeping a thin wallet, some fraud and purchase protection, earning travel/cash-back perks, and building an initial credit score. They’re lousy as an emergency fund, excuse for not budgeting, and over-spending avoidance.
Your student might want to get a starter card, perhaps even a secured card, to start building a credit score. You might also consider adding your child as an authorized user on your card, especially if your bank will report activity on your child to the credit bureaus. You do need a plan because the banks have a plan: turn your child into a life-long provider of income to the bank, data for advertisers, and slave to the credit score rat race.
Plans you might consider:
- Authorized user for freshman year in order to closely monitor behavior and make sure Junior complies with your guidelines.
- Secured card starting in sophomore year, but with parental review of statements to keep things from getting out of hand.
- Regular card after proving proficiency with earning, saving, spending, and monthly cashflow ops.
A decent credit score does help with renting an apartment, earning lower insurance rates, and other aspects of adulting. However, just like with smart phones, we can’t expect our kids to have our level of maturity and restraint (we have those, right?) with these tools without guidance along the way.
- Access to military installations. If your kiddo will attend college near an installation, make sure he knows where to go and what resources are available. In addition to low-cost shopping, installations may provide medical care too.
- On campus vs. renting off campus. Many kids will seek the freedom of living off campus. It’s important to prep them for topics like:
- Applications and credit checks
- Cost difference from on campus room and board
- Handling bills and shared costs with roommates
- Spending money. Apparently, beer and pizza coffee and nutritious salads haven’t jinked out of inflation so, Junior is going to need a bit more than couch cushion money to get through the year. Talk about:
- Who provides spending money?
- If working, how many hours to keep balance and prioritize school work.
- Work expectations during breaks
- If travel opportunities pop up, who pays
- Budgeting / spending monitoring tools and tactics
- What if money runs out
- Healthcare. The college will probably have a policy about maintaining family coverage or buying insurance through the school. Since you’re reading this, your kiddo will probably just use Tricare during college. S/he still needs to know:
- Where to get care
- How to handle co-pays
- Whether and how to sign a HIPAA release
- When parent insurance runs out
- How to plan for flying solo with health insurance after college
- Cars. Many schools don’t allow underclassmen to have a car on campus. At some point, having a car at school might be necessary. College car planning should include:
- Who pays for gas and insurance
- How to keep up with ongoing maintenance
- How to handle a contingency (breakdown/theft)
- When do you expect your child to fully takeover car responsibilities and costs
- Theft and breakage. We typically load kiddos up with all manner of kit for starting freshman year. Not all their dormmates will be respectful of their goods. Preemptive maneuvers include:
- How to protect computers and valuables
- How to protect key documents/financial data
- What to do if a computer/phone is lost, broken, or stolen
- Who pays to repair or replace items
- Estate documents. The JAG office will prepare (for free) a Will, Living Will, Advanced Directive, and Power of Attorney for your newly-minted adult, even if you’re retired. While your child may not have a lot of possessions yet, you still don’t want to bring courts into the mix in a crisis. What’s more, your child probably won’t be inclined to get estate documents until s/he has a spouse and or kids. Getting a starter set in place after 18 laps around the sun is a great way to demonstrate sound financial planning behavior for your kids.
- Fraud and scam awareness and avoidance. Junior may have ignored email in favor of intellectually enhancing apps like Snop Chat, Instapic, or PikPoc until now, but they can’t hide from email forever. If they don’t already have multiple email accounts, they will soon. It’s time help them get savvy about:
- Text and email phishing scams
- Protecting personal information (despite their urge to share everything…)
- Verifying that a caller / emailer / texter is who they say they are
- Minimizing use of fluff apps that require personal or financial data
- Roth IRAs. If Junior has earned income during college, s/he can still contribute to a Roth IRA, probably without paying any income tax on those dollars ever! Remember, it doesn’t have to be Junior’s dollars. You can gift up to $17K per year per parent to Junior, so s/he can keep earnings and put your money into the Roth. $6,500 is the contribution limit for 2023, so let’s get that compounding party started!
Cleared to Rejoin
Parenting is a lifelong sport. As our kids go to college, we can still speak into their lives and they deserve our help to establish a sound financial future. Some conversations are tougher, but they need to be had. If you pick one of these topics per week between now and move-in day, your child will be much better prepared to navigate college as a financially savvy adult. Remember, these kids are going to fund your Social Security and Medicare so, let’s get them prepared to max-perform their money!
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