Gen Ed 101: Financial Literacy for College Students
Last week, we dropped Melanie off at her new home for the next four years: James Madison University in Harrisonburg, Virginia. She has had a whirlwind of a week, meeting tons of new people, learning how to co-exist in a suite with 5 other girls (and share a bathroom with 11 girls!), and navigate a whole new city. She called yesterday, exhausted and excited all at the same time. There is just so much to see and do and learn in college—and then there are the classes…😊
One major learning curve for any college kid is managing money on their own with limited parental supervision. Here are several things that may be worth discussing with your child heading to college:
Understanding Needs Versus Wants
Hopefully, you can have this conversation with your child many times at your house before they leave…but it’s worth re-emphasizing as your college student heads back to school.
When it comes to needs versus wants, it’s really important for teens to understand the difference. Needs are the basics that they must have to survive and thrive, like food, clothes, a place to live, and education—for most college students, these are covered by the college (and their parents)—their dorm room, cafeteria, classes.
Wants, however, are things that make life enjoyable but aren’t necessary, like the latest smartphone, trendy clothes, or going out with friends. While it’s okay to have wants, being clear about the line between wants and needs is crucial. While Melanie may WANT to eat at Panera every day, it isn’t NEEDED since she has unlimited dining hall punches. She also WANTS to join a local gym, but she has free access to the college recreational facilities.
So, just being sure your student can differentiate between the two, and balance both can help them make smart choices about money and resources, setting them up for a more secure and fulfilling life in the future.
Setting a Budget for College Students
This is the best time in life to try (and possibly…or certainly?…fail at) budgeting. Most of the major needs are covered (see above point), so failing to keep a budget may just result in unpleasantness, not catastrophic consequences. Helping your teen assess how much money is available to them for things not covered by the college, financial aid, or parental support is critical. If they worked a summer job and have a large bank balance, it is hard for them to calculate how much to spend per week without running out of money.
Once a monthly or weekly spending limit is set, we recommend breaking that amount down into more fixed items. For example, we figured out that Melanie can spend about $50 per week on things that she wants. Her initial reaction was that was a ridiculously generous sum…until she went out and had a $13 smoothie with a friend and a $15 Chick-fil-A dinner and half of her weekly money was gone! 😊
By breaking it into experiences, it may help your student meter their behavior better. So, instead of setting out to spend $50 per week, perhaps the goal is to only get coffee once a week (for $10 or less), two dinners out (under $30 for both), and one snack run to the grocery store every other week (for a total of $20 between the two weeks).
Savings and Checking
It’s hard to keep a big sum of money in a checking account and not spend it. So, we’d recommend that a student keep a bulk of their money for the semester/year in a savings account and just set up an automatic transfer of their “allowance” on a weekly or bi-weekly basis to their checking account.
Loans to Friends/Roommates
This topic was a tough one to discuss because we never want to squash a student’s natural generosity, but it would be wise to warn your student about loaning money to their peers or roommates.
Lending money to a roommate as a college student can be a bad idea for several reasons. First, it can strain the relationship, especially if the roommate struggles to repay. Financial discussions often lead to tension and misunderstandings, which can create an uncomfortable living environment. Additionally, college students may already be financially stressed, and lending money might put your student in a tight spot.
Instead of lending, encourage your student to help their roommate find resources or build a budget and be an accountability partner.
Credit Cards for College Students
It can be common for parents to co-sign on a credit card for their student to help them build credit in college. However, this can backfire quickly and leave the parent on the hook for a big credit balance or face damaging their own credit score!
A student credit card can be a valuable resource, but with some ground rules such as being very clear about the allowable expenses to charge (i.e. books, gas, emergencies). Clear consequences for unauthorized charges (student repays? Card is closed?), and a conversation about what a true emergency is (see needs vs. wants 😉) are also critical.
One final recommendation for college students, but this is more for their parents’ peace of mind. Please consider having a base estate planning package done for your child. Once they have turned 18, parents have no authority to talk to doctors about health issues or to the school about any grade or disciplinary issues.
Important Legal Documents for College Students
We are not attorneys at Meridian, and so this is not legal advice, but the three documents that attorneys generally recommend for college students are:
HIPAA Waiver
The Health Insurance Portability and Accountability Act of 1996 protects personally identifiable health information about an individual, such as their physical and mental health, treatment received, payments for care made, etc. Hospitals and health care providers cannot legally disclose this information to others without the permission and consent of the patient. By signing a HIPAA waiver, a college-aged young adult can ensure their parents are not kept in the dark about their health condition in case of a medical or health emergency.
Advanced Medical Directive
An advanced medical directive acts as your power of attorney for health care decisions if you are incapacitated and unable to make your own health care decisions. Among other things, your agent is authorized to consent to or withdraw treatment, employ and discharge health care providers, and admit or discharge you from the hospital. This document also typically includes a “living will,” which directs how and when you want life support withdrawn if you have a terminal illness with no reasonable chance of recovery.
Financial Power of Attorney
This document allows your agent or “attorney-in-fact” to access your financial assets and manage them on your behalf. For a college-aged individual, this will probably only be checking or savings accounts at their bank and perhaps their vehicle. However, this document also generally covers other types of assets as well such as land and real property, business interests, retirement accounts, investments, valuable tangible personal property, etc. With a validly executed financial power of attorney, the parents of the college-aged young adult will be able to manage the finances, file taxes, and control the personal property of their adult child in an emergency.
Source: https://www.dbllawyers.com/estate-planning-for-college-students/
Best of luck to all the college students—and especially to the Class of 2028 as they figure out how to be financially independent adults!!