Smart parents teach financial skills

As the parent of a college student, which of these two scenarios do you hope your child will resemble?

The first, a recent college graduate, earned $80,000 in scholarships and graduated debt-free last spring. The second, a recent college graduate, but one who took out over $45,000 in student loans and built up $50,000 in credit card debt by the time they got through school. They currently pay about $1,500 a month in debt payments, with over $400 of that in credit card finance charges alone.

Communication is key

Naturally, you’d love to see your children graduate in a situation similar to the first scenario. But in an age of rising tuition and record student debt, the second scenario may sound far more plausible. Fortunately, there are many ways you can prepare your kids to beat the odds and graduate financially strong. According to some experts, it all starts with good communication.

“We find that too many families treat money as almost a taboo topic,” says James Boyle, president of College Parents for America. “Our number one suggestion to parents is to have an open dialogue with their child about all matters related to money.”

Having open communication about finance may be the best thing for your child. That discussion often reveals a surprising lack of financial savvy among otherwise worldly young people. A vast majority don’t understand the difference between a grant and a loan, and the various types of loans available.

A family affair

According to Marcia Weston of the National Association of Student Financial Aid Administrators, one way to address this problem is by making your own finances a family affair. “Parents need to be role models,” she says. “They need to do the family’s budgeting along with their kids, so the kids see how it’s done.”

Besides familiarizing them with financial concepts, this involvement shows students the real-life consequences their college spending could have on their families. As Boyle says, “There should be a frank and open dialogue about the impact of college expenses on the family budget, and the impact of any loans on the student’s future. And that’s a good time to talk about what the parents’ and student’s contributions will be.”

Surprisingly, Boyle says, many parents never tell their children exactly how much they’re willing to spend on their education. But by being open about your intentions (and limitations) from the start, you can help your kids prepare to cover any remaining costs. Through a combination of budgeting, scholarships, part-time work and school selection, some students are able to manage the expense themselves.

Learn to say no

As a precautionary measure, you may be interested in opening a joint debit or credit card account with your kids. This allows for students to use it for essential spending but teaches them how to budget.

But what if, in spite of careful planning and supervision, you receive a plaintive mid-semester phone call from a cash-strapped kid? When a student calls and says, ‘I need money,’ it’s important to find out why.

There will always be things that happen that are out of their control. But when it’s a case of overspending, parents should not bail them out. It’s hard to say no, but setting limits will help them to become self-sufficient. In the long run, it’s better for students to know that not only do they have limits, their parents have limits too.