This fall, several of your clients’ children may head off to (or back to) some kind of higher-education institution, ostensibly to get an education that will boost the kids’ earning potential.
But many families aren’t properly prepared for the financial aspect of this new chapter in their lives, and don’t even know what to do before they send their teenager off.
Here are some tips you can pass along that will protect them in the present and enhance their children’s financial futures:
1. Get Conservative
With the likelihood that any accumulated college savings are going to be used in a very short period of time, the clients may want to remove some risk from investments that are earmarked to pay higher-education expenses.
There shouldn’t be any tax ramifications to changing the allocations in 529 college savings accounts.
But funds held in non-sheltered accounts in the student’s (or parent’s) name should be handled prudently, as any realized capital gains could not only cause a tax bill, but also reduce need-based financial aid awarded by the school.
2. Open a HELOC
If the parents are homeowners and have established some equity in the home, they should establish a home equity line of credit (HELOC).
It may cost a few hundred dollars to set up, and a small annual fee to keep open. But it can serve as a quick and easy low-cost source of funds if family income, assets and other borrowing options aren’t enough to cover tuition and living expenses.
3. Alert the Auto Insurer
If the student is taking a vehicle to college, the parents should see if their coverage needs to change when the car and the kid aren’t at the parents’ residence.
The family may also save on premiums if the student isn’t in the house and won’t be driving a covered vehicle.
This is also a good time for the parents to ask if the child’s latest grades qualify for a “good-student discount” on premiums from the insurer.
4. Check Health Insurance
Depending on the family’s situation, their current coverage may not be suitable for the student and/or may only cover treatment from some or none of the area providers in a school’s distant location.
Clients should contact their current health insurance provider, or visit the Healthcare.gov webpage at tinyurl.com/stuhealth.
5. See a Lawyer
In the event of a medical emergency suffered by the student, depending on the relevant state law, parents without the proper documentation may not be able to find out how their child is doing, much less make decisions about the child’s treatment.
The parents should establish in advance HIPAA (Health Insurance Portability and Accountability Act) authorization, along with medical and durable powers of attorney regarding their child, once he or she reaches age 18.
If the student is attending a school in a different state, documents should be established for both that state and the family’s home state.
6. Develop a Spending Plan
A kid’s college years are usually the first time he or she has a chance to make daily discretionary purchases—for better or worse.
Parents can use this opportunity by first sitting down with their child and setting up a schedule of what money will be coming in, when it will be coming, and where it should go.
Wise parents may want to trust that their children will make the right decisions, but verify that by monitoring the kid's account online. They could also tie the child’s checking account to a service like Mint.com.
7. Freeze the Credit Reports
Clients can protect themselves and their children from many forms of identity theft by freezing their credit reports. The clients can visit the websites of Experian, TransUnion and Equifax (the three major credit bureaus), or go to tinyurl.com/freezecred.
The credit-report freeze can also prevent college students from opening a credit card or borrowing money without the parents’ permission.
8. A Credit Card for the Kid?
On the other hand, some parents may want their college student to have a credit card, whether it’s to use in an emergency, build up a credit history, or to develop a habit of making purchases while paying the balance off quickly.
The child can try to get a card on his or her own, but without much in the way of earnings, it’s unlikely that he would get approved for a card with decent terms.
Instead, the parents can add their child as an authorized user of a card they currently have, or establish a new one so that they can keep the kid’s charges separate from their own.
Not all bureaus use the information from authorized users to boost the non-owner’s credit score. If that’s a concern, the parents may want to cosign a credit card application for their child, and then make any payments that the kid can’t cover.
Parents and the student should also discuss what are suitable reasons for the child to use the card and how much can be spent each month.
9. Get a Job, Maybe
The benefits of working and earning while going to college go beyond just the income. Kids can (hopefully) develop time-management skills, gain valuable experience, and develop references that can be used when applying for more career-based jobs in the future.
But hours spent working can delay or derail a student’s academic progress, and the extra earnings can reduce need-based financial aid awarded by the school.
It may be better for the family to borrow what the student would have otherwise earned and have the kid spend more time in the classroom and the library.
10. Get a Degree ASAP
Of course, more time devoted to actual education should lead to better grades, more credits taken every semester, extra credits earned in summer and interim classes, and graduation sooner rather than later.
This would not only save the potential tuition and living expenses of a fifth (or sixth, or seventh) year of college, but also get the kid into a self-supporting career, and off of the parents’ list of liabilities.