If the day your child first stepped into the high school hallway seems like yesterday, and if your head is reeling a bit at the thought of your teenager now headed for college, you're not alone.
But before your student leaves for campus, it's time to have those sometimes tricky conversations. It's time to talk about college finances.
While money talks can be difficult at any age, this is probably not the first, and certainly not the last one, you'll have with your child. In fact, according to the sixth annual Discover Student Loans survey released in 2017, about one-third of parents have had more than six conversations about paying for college with their child.
As you prepare to dig in, here are three important topics to discuss, with pointers for what you may want to cover.
1. Breaking Down the Costs of College
For parents and children alike, college finances can be overwhelming if you look at the total cost. Instead, break down the expenses to figure out the cost by year, semester or quarter, which can make it easier to comprehend the numbers. Try to include everything from tuition, fees and estimated costs for room and board, to money for books, food, travel and fun. Using a spreadsheet to compile all the numbers lets you quickly see how different living arrangements, spending one less semester at school or other choices may affect your total cost.
Although 74 percent of parents in the survey said they would help their child pay for college, many students will still need to pitch in. So, you'll also want to add up scholarships and grants your child has won as well as family contributions (including yours) to your child's education fund. The difference between this sum and the expenses laid out above is the gap that you and your child will need to fill to pay for college.
With this data as a starting point, consider asking your child these questions:
- What resources can you use to help pay for your education expenses? Income from working and taking out student loans are popular options.
- What could you do to lower your overall costs? At this point, you could plug in the numbers for living on campus versus off campus, with or without roommates or other tradeoffs and see how the costs change.
- What steps can you take to ensure you'll graduate in four years? See the impact of adding another year's worth of expenses, and then look for helpful resources. College counselors can help students determine which classes they need to take and when to stay on track.
- Which majors are you interested in? Look up different jobs that the majors can lead to and the income potential of each.
The cost of college should be an ongoing dialogue as financial aid, and your child's goals or interests, may change over time. Make a plan to reopen the conversation at least once a year, or more frequently after significant changes, such as the decision to switch majors or study abroad.
2. Taking Out Student Loans
You'll be among the majority if your family plans to use student loans to pay for school. According to the annual survey, parents report that almost half of students plan to take out student loans and 55 percent of parents are somewhat or very likely to help their children pay back those loans.
When discussing loans as they relate to college finances, the primary point you want to make is that it's best only to borrow only what you need. This may require your child to consider their needs versus wants — a healthy financial habit at any point in life.
Try to cover:
- Looking for scholarships and grants first. Free money is always the best way to pay for school.
- The pros and cons of working part-time during school and lining up summer jobs. For instance, the extra income from working can help defray some of their expenses, but having a job can also take away valuable study time.
- The differences between federal and private student loans, since many families use a combination of both to pay for college. The type of loan your child takes out can affect their interest rate, repayment plan options and opportunities for loan forgiveness in the future.
- How taking out student loans — and, in particular, borrowing more than your child needs — can impact your their life after graduation. It's important to be responsible when taking out student loans. They can be a great tool to help your child achieve their dream of going to college, but they need to consider how much they're borrowing, how the debt will impact their life after college and if it's for the right reasons.
- Discuss how making in-school payments can help reduce the overall cost of students loans. Even just $25 or $50 a month can save hundreds to thousands in the long run.
Starting the conversation about student loans early can be especially important because college students often don't have a lot of experience with debt. You could use your own experiences with student loans or other debts to emphasize your points.
3. Responsibly Using a Credit Card
Credit cards are another hot item to discuss as children leave the nest. You may add your child as an authorized user on your credit card account to use for emergencies, or your child may be enticed to open a credit card once they're on their own. Having a financially sound plan for using credit could help keep your child out of money trouble. Here are two main points you can stress:
- A good rule of thumb is to treat a credit card as a debit card. In other words, only use the card to make purchases when you have enough money to pay the bill in full every month.
- You may read or hear about the importance of building a credit score. It is important, but you don't need to carry a balance to have a good score.
In 2016, Equifax, a national consumer credit bureau, commissioned a blind study of 600 college students. It found that more than 70 percent of the students pay their bill in full each month. Not only is this good financial behavior, but you can also tell your child that paying in full is the norm among their peers.
Keep the Conversation Going
Paying for college is one of the largest investments a young person makes. While there are significant benefits of a college degree in the long run, many students don't have a strong financial education or real-world context to help them make decisions about such a large amount of money. As a parent, you can lead important conversations about financial literacy, such as how to prepare and pay for college, and make a point of revisiting topics as circumstances change.