by Jack Waymire
College will likely mark the largest financial hurdle of your child’s upbringing. Even if you’ve been saving for years and have managed to build up a considerable 529 or other college savings plan, you may not be as prepared as you think for the financial aspects of sending your son or daughter off to college. Don’t let higher education catch you or your finances off guard. Here are five financial tips for parents to use to set themselves and their kids up for financial success in college and beyond:
#1 Complete a FAFSA
If you haven’t already filed a Free Application for Federal Student Aid (FAFSA) for any children heading off to college, now is the time to do so. Even if you don’t think you will qualify for federal aid, it behooves you to apply because the FAFSA can open the door to more than just the opportunity for federal support. For instance, a FAFSA may be a prerequisite to applying for other forms of financial aid which are not based on household income. Some private colleges will even consider families with annual incomes of over $200,000 for need-based financial aid, but only after they’ve been denied federal aid. Likewise, certain scholarships and grants won’t consider an applicant who hasn’t first maximized all possible federal aid. Since the FAFSA is free and can be completed online, it never hurts to apply.
#2 Consider going conservative
Saving for college is like saving for retirement, only D-Day comes at age 18 instead of 65 and the payout years are considerably shorter. Since it is very likely your college savings will be used within the next four to seven years, consider shifting to more conservative allocations within these accounts.
As long as the adjustments you make occur within a 529 or other tax-sheltered account, there should be no tax ramifications to reallocating. If you have college savings in non-tax sheltered accounts, however, you should take more care. In addition to a heavy potential tax bill, realizing too high of capital gains could reduce your student’s chances of any need-based aid.
If you are worried that your savings won’t be enough to cover your student’s educational costs, you might establish a home equity line of credit (HELOC). A HELOC may come at a small cost to open and maintain, but it will provide quick access to low-cost funds later.
#3 Give your insurance provider a ring
Before sending your kid off to college, give your health and auto insurance providers a call. You may need to adjust your insurance coverage for a kid living at school. For example, some family health plans only provide coverage at certain providers who may not be accessible from your kid’s school. The good news is your student has options. You can visit HealthCare.gov for a discussion of the health insurance options available to college students.
Your auto insurance may need to be similarly adjusted. If your student won’t be driving while at school, you might be able to get a reduction on your premium for having one less driver at large on the road. If your student will be taking a car to college, you’ll want to verify that your current plan will cover a driver living at school.
While on the phone with your auto insurance provider, you may as well ask if your kid qualifies for any discounts, such as the “good student discount” for good grades. As with FAFSA, it never hurts to ask.
#4 Hope for the best, plan for the worst
Speaking of insurance, now is the time to ensure you have all your legal ducks in a row in case of a medical emergency.
The thought of your son or daughter having a medical emergency away from home is probably not something you want to dwell on. That said, it is something all parents should put thought into before buying their kid her 18th birthday cake.
In the U.S., an act called the Health Insurance Portability and Accountability Act (HIPAA) turns children into medical “legal strangers” when they come of age. This means that you will have no right to your kid’s medical information after he or she reaches the age of majority. In even plainer English: Say your son is in a car accident while at school. If he is considered a legal adult (which is age 18 in most states), the hospital will refuse to give you any information about your son’s medical condition – unless he has signed a HIPAA authorization form.
So before letting your kid out of the house on his 18th birthday, have him sign a HIPAA. And while he is practicing his signature, add medical and durable powers of attorney forms to that pile. If your child will be attending an out-of-state college, you should complete forms for both your home state and your kid’s school state.
#5 Have The Talk
No, not that talk; The Financial Talk.
College is the beginning of a whole new level of freedom for kids, not the least of which is financial freedom. This transition will probably mark the first time your child will have full (or nearly full) discretion over her daily financial decisions. What better time to have a financial responsibility conversation with them?
You can work together with your student to establish a budget for while she is away. Now that she is an adult, you may want to open a joint account with her so you can keep track of the spending going on at school. Of course, you can tell her the joint nature of the account is so you can transfer funds to her more easily.
Before starting The Talk, decide if you will give your college student a credit card to use at school. The upside to giving her a credit card is that it will allow her to flex her financial responsibility muscles by learning to pay off her balance each month. It will also enable her to start building up a credit history. The downside is it is a credit card and your kid is still technically a teenager.
If you choose not to go the credit card route, it may be prudent to freeze your child’s credit reports. Doing so restricts access to the report, thus making it harder for identity thieves to open accounts in your student’s name. Incidentally, it will have the added benefit of preventing any over-eager college students from opening credit cards without consulting you. To learn more about freezing your credit report, visit the Federal Trade Commission’s website.
Sending your child off to college is always a bit nerve-wracking. Once you’ve done your financial due diligence, the transition should be less stressful, though. As you follow the tips above, keep in mind that the best thing you can do when preparing financially to send your son or daughter to college is to include your child in your decision making and planning. Use this opportunity to instill financial lessons your child can carry with him into college and beyond. He’ll thank you later.
Other posts from Jack Waymire
When it comes to finding the best financial advisor, I always recommend choosing a fiduciary financial advisor. But...
There is no doubt selecting the right financial advisor is one of the most important decisions you will...
When we face critical decisions, many of us turn to professionals (financial advisors, CPAs, attorneys) who have specialized...