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Money ABCs for students
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June 16, 1999: 8:01 a.m. ET
Talking finances before kids leave for college can ease growing pains
By Staff Writer Nicole Jacoby
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NEW YORK (CNNfn) - The tuition's been paid. The bags are packed. But before you say a tearful good-bye to your college-bound teenager, you'll have to take a deep breath and deliver The Talk.
No, not that talk-- although this conversation is just as likely to leave your children squirming in their seats and rolling their eyes.
The topic is money -- and broaching the subject before your son or daughter sets foot on campus could prevent financial trip-ups down the line.
"The lessons students need to learn are very similar to the issues faced by adults," said Jacqueline King, Director of Federal Policy Analysis at the American Council on Education. "The difference is college students are experiencing them for the first time."
Teaching the basics
Because these tasks are an integral part of adult life, parents may take many day-to-day financial skills for granted.
Consequently, parents should run through the all the basics with their children, even if they sometimes seem obvious -- including how credit cards work, how to write a check, late fees and the importance of paying bills on time.
"You teach them how to do laundry. You should at least teach them how to balance a checkbook," King said.
In addition, students should also have their loan burden explained to them. Is the student expected to repay his or her own debt upon graduation or will the parents kick in a contribution?
"Most students don't even know how much they owe," said Scott Swail, Associate Director for Policy Analysis at the College Board.
Understanding how debt may potentially fit into the their big financial picture could make students more responsible in their spending habits.
Making a budget
The single most important step parents should take before their child departs for college is establishing a realistic spending plan, say some experts.
"College is the first time many kids have real control of their money," said King. "It's very hard to keep good track of your expenses when you're living alone for the first time."
When devising a budget, parents should assess how much of costs will be covered by financial aid and how much the child will contribute from savings, earnings and loans.
It's important that the budget includes both fixed expenses, such as tuition and books and variable items, such as rent, clothing and transportation.
Most student life offices or college guidance counselors should be able give parents a general assessment of how much pocket money is appropriate for the given region and campus. (Click here for Quicken's college planner)
If you are unsure about how much personal expenses will total, have your child write down his or her expenditures for the first three or four weeks to give you an idea of what is realistic.
Whether you decide to dole out spending money in one chunk for the entire semester or in increments throughout the year (i.e. a monthly or weekly allowance), make sure your child understands that there is a finite amount of cash available to them.
"There needs to be a clear understanding that the child can't keep coming back and asking for more," King said.
To avoid any misunderstanding or conflict, be up front about what those funds are allocated for. You may or may not want to include the costs of books and transportation in their allowance, for example.
You will also want to spell out what qualifies as an "emergency" expense. If a car is not a necessity, for example, but your child insists on having one, you may choose to make the child financially responsible for repairs on the vehicle.
However, some financial experts say, bear in mind that the first few months of college can be a transition time for your child, both financially and emotionally.
"The needs of an 18-year-old in a college setting is something parents don't have a lot of direct experience with," said Phil Johnson, a Clifton Park, N.Y.-based certified financial planner. "Parents have to be a little elastic in all of this. There may be some very elementary kinds of things you haven't planned for."
The credit trap
One of the biggest potential stumbling blocks college students face financially is credit cards.
A study released by the Consumer Federation of America just last week found that about 70 percent of students at four-year colleges have at least one credit card, and revolving debt on these cards averages more than $2,000. About one-fifth of students surveyed carried debts above $10,000.
The study also found that credit card debt can have tragic consequences, resulting in severe emotional stress and suicide.
However, credit cards are not inherently bad, says King.
"I don't think it's bad for college students to have credit cards. They are a fact of life and it's naïve to think they won't (have the cards)," King said.
Credit cards are convenient, may be useful in an emergency situation and can help youngsters establish a positive credit history.
On the flip side, students' credit ratings can be devastated well into adulthood by late payments and excessive debt first brought on in college.
Before sending your child off to campus, sit down with him or her and explain how credit cards work, including fines for late payments, interest rates, and how they can effect their long term financial standing. Warn them about introductory "teaser" rates, which skyrocket after 3 or 6 months of use, and about fees for cash advances and credit card checks.
Many credit card companies market aggressively on college campuses, offering free Frisbees, T-shirts and other freebies to lure students in, so you may want to shop around for the best credit card deal before your child leaves for campus.
If you cosign a credit card for your child, you can request that duplicate copies of billing statements be sent to you, so you can keep track of your child's usage. But bear in mind that your child won't be building a credit history if the card is in your name as well.
If you give your child a credit card just for emergencies, be clear about the limits.
"Make rules about what they can and can't use it for," said Swail. "…Or else you might be amazed when you get the bill for a new Bose stereo."
One alternative to a credit card is a debit card, which deducts funds from checking or savings accounts instantly. With these cards, students won't be tempted to spend money they don't have.
Starting 'em young
Teaching your kids about money long before they leave home may the best way to prepare them for financial independence.
Setting them up with an allowance as soon as elementary school will leave them with a sense of how budgets work. Getting them involved in your own finances can be advantageous as well.
Robert Tull, a Norfolk, Va.-based certified planner, has his 12-year-old son help him input data into their personal finance software program on their home computer.
"It helps him understand that credit cards are great, but they need to be paid each month," said Tull.
Tull also requires that his son put away a portion of the money he earns from mowing lawns to give him a sense of how savings work.
By making money a less taboo topic, parents can set their kids on the path to financial responsibility.
"There's nothing wrong with being totally up front. This is a serious and important conversation about life and responsibility. It's about helping them learn," Swail said. "It's a great opportunity for parents." 
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