by FPA member Rick Ropelewski, CFP®
Last Updated: May 20, 2013
If you are a parent with children on their way to college in the near-term, it is not all gloom and doom. Step away from the checkbook! Hopefully you have been saving diligently for years, but if you are like millions of other families, there is much to consider. You can make some good financial decisions now, and help your child become equipped to make some good ones later.
According to Gregg Cohen, President of Campus Bound, nearly half of students receive cost relief based on either the family’s financial profile or based on merit. These grants and scholarships can make an expensive private college the same or even less than the cost of your home state university or college. While some of the data is imperfect or based on averages, Gregg points out there are now ways to compare early career earnings and loan burdens on sites such as collegerealitycheck.com. When making that final decision on where to attend, be careful about stretching for that school that doesn’t seem too much more expensive without understanding the potential return.
If your child will be taking out loans – or they’re still considering a more expensive school that would require loans – show them what payments would be. Let’s say they borrow the maximum unsubsidized Direct Stafford loan of $27,000 at the current rate of 6.8%. If they choose to pay back over 15 years, it will cost them about $240/month and they’ll pay over $16,000 in interest by the time they’re done. You shouldn’t try to scare them completely away from loans or that dream school. In many ways it can be good for your son or daughter to have some financial skin in the game. Just help them understand the true cost over time, and how that payment could put some stress on the cash flow of an entry-level salary. Again, consider comparing a school or program’s typical starting salary with the debt you’re undertaking to get that degree.
Now can also be a good time to have them start building up credit history. If they won’t be working while at school, you may have to co-sign for a student credit card, or add them as an authorized user on your card. But be careful, since you will also be financially responsible for anything they do. Check with your card company to see if they can provide a separate card with a lower limit for an authorized user attached to your account. And don’t overlook a secured card as another good place to start. You prepay the amount to which you want your child to have access. They receive the credit card with that spending limit. Because you have to make that deposit, these cards can be easier to get. There are drawbacks, however; not all banks offer them and some require an application and annual fee for the convenience. Some go so far as to charge a fee for an insurance policy. A good credit score is immensely important because, just as they will eventually have to balance a check book, they will also have to apply for a loan on their own and without any credit history that will be difficult to do.
It’s easy to get caught up in the sticker shock of a college price tag. And it is important to give some serious consideration to exactly what you get for those big checks you write or loans you take. But don’t miss out on the opportunity to teach your child some valuable financial lessons. I hope they will remember those lessons for as long as they recall their first frat party.
Rick Ropelewski, CFP® is a Wealth Manager at U.S. Wealth Management in Braintree, MA. Rick graduated from the U.S. Air Force Academy with a BS in Management and has an MBA from New York University.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor. U.S. Financial Advisors and U.S. Wealth Management are separate entities from LPL Financial.