Sending Your Kid to College? 8 Essential Financial Tips to Know

Preparing Your Child for Financial Independence

As the summer approaches, many young adults will be heading off to college, marking a significant step towards financial independence. While this transition can be exciting, it also comes with its share of challenges. Parents have an important role to play in helping their children navigate this new phase of life without necessarily providing large sums of money.

Financial advisors emphasize that it's never too late to start discussing money matters with your child. These conversations can help them develop better financial habits and avoid costly mistakes in the future. According to Jacki Kolkman, managing advisor at Dallas-based Balefire, “Kids are going to make mistakes as they are learning, and the financial consequences get bigger someday.”

Here are some last-minute tips from financial professionals to help parents prepare their children for college:

Review 529 Policies

Parents who plan to use a 529 plan to cover college expenses should review the current asset allocation. If not already invested in a target-date fund, consider shifting to more conservative investments. Additionally, familiarize yourself with what qualifies as a distribution from a 529 plan and the process for taking distributions. For example, off-campus housing costs may qualify up to a certain amount. It’s also important to claim these expenses in the same calendar year they occur.

Obtain Legal Documents

Once a child turns 18, doctors typically won’t communicate with parents about their medical care. To ensure parents can make decisions if needed, the child should sign a medical power of attorney and a HIPAA authorization. These documents allow parents to access medical records or speak with healthcare providers. A financial power of attorney is also useful, especially if the child is studying abroad or far from home.

Check Insurance Providers

If students drive, parents should review their car insurance policy to understand how the child will be covered while away at school. Discounts may be available for drivers attending college. Also, consider the implications of driving a car in another state. Insurance generally follows the car, not the driver, so it’s essential to check coverage. Adding an umbrella policy might be necessary if the child will be driving during college.

For students living off-campus, renters insurance is recommended. This provides protection against unexpected events such as fire or water damage.

Help Your Young Adult Get Banked

A checking account with a debit card is a good way for students to manage their funds. It helps them develop responsible bill-paying habits. Parents can set up automated payments for small bills like cellphone plans or streaming services. A savings account linked to the checking account can also be beneficial. Joint ownership of accounts may be useful, but it’s important to respect the child’s boundaries.

Create a Budget Together

Parents should help their children create a simple, reasonable budget based on their income and anticipated expenses. Dividing expenses into categories such as food, clothes, transportation, and entertainment can make budgeting easier. Students should track their spending and adjust the budget as needed. Tools like spreadsheets or budgeting apps like YNAB, Goodbudget, or PocketGuard can be helpful. Accountability is key to ensuring the budget is followed.

Set the Stage for Responsible Credit

Introducing a credit card can help students build good credit habits. Options include student credit cards with lower limits or secured cards requiring a deposit. Becoming an authorized user on a parent’s credit card is another option, provided the parent has good credit and monitors the child’s spending. However, this isn’t ideal for hands-off parents.

Protect Accounts from Breaches

Students should set up two-factor authentication on their financial accounts and check their credit reports annually for any errors or fraud. A credit freeze can prevent identity theft by blocking unauthorized credit applications. This is free and easy to initiate through the major credit bureaus.

Encourage Retirement Savings

College is a great time to start saving for retirement. Even part-time jobs may offer a 401(k) with a Roth option. A Roth IRA is also a good choice, as contributions are made with after-tax dollars, allowing for tax-free growth. Parents can also consider funding the child’s Roth IRA up to their earnings or the annual limit, which can be a smart estate planning strategy.