Financial Planning | August 2, 2017
Is your child headed to college this fall? Then no doubt you’ve been to Bed Bath & Beyond to fulfill the dorm room checklist that came courtesy of residence life. In the grand scheme of things, financial literacy is much more important than mini fridges and shower caddies.
What follows are three key financial issues for you and your children to talk about before they head off to college.
“Turning age 18 often brings solicitations from credit card companies,” said Gerald A. Polcari, JD, LL.M and GW & Wade Principal. “Offers for your college-bound child start mystically appearing in your mailbox, sometimes daily. When this happens, I encourage parents to sit down with their children and have a candid conversation regarding credit cards and the financial responsibility that comes along with them. Overall, I recommend that college students delay possessing their own personal credit card as long as possible.”
Polcari gives two key reasons for encouraging the delay. Specifically, because credit cards:
However, credit cards do have value when a child is in college, particularly if there is an emergency. For Polcari’s own college-age children, he initially added them as an additional member on his personal credit card account. He and his children agreed upon appropriate uses, meanwhile he was able to monitor their behavior while also educating them about their choices.
Finally, Polcari suggests that parents consider what their child’s life will look like financially upon graduation. In many cases, they’ll have college debt, compounding it with credit card debt could really set your child back financially.
In fact, according to Student Loan Hero1, the average monthly student loan payment for borrowers aged 20 to 30 years is $351. “Imagine adding a monthly credit card payment on top of this,” said Polcari.
Delay Building Credit Using Credit Cards
“Oftentimes college students obtain a credit card simply to build credit,” said Polcari. “Initially, this may seem like a reasonable idea. However, keep in mind that banks and other financial institutions understand that college students won’t have any credit when they graduate and accommodate your child’s situation. Therefore, there is no need to rush into credit card usage.”
Most importantly, Polcari reminds parents that once your child creates a steady pattern of paying back their credit cards, their card’s spending limits increase dramatically, placing young adults at an even greater risk of putting themselves deeper and deeper into debt.
Credit Card vs. Debit Card
If you do support your child having their own credit card, then choose a credit card over a debit card. Credit cards have more fraud protection than debit cards. What’s more, if your debit card is stolen, then the entire account can be drained of its cash, said Polcari.
According to Investopedia2, credit cards offer much greater protection in most cases (compared to debit cards) for those whose cards are lost or stolen. As long as the customer reports the loss or theft in a timely manner, his/her maximum liability for purchases made after the card disappeared is $50.
The financial news portal adds that because of the Fair Credit Billing Act3, credit card users can dispute unauthorized purchases or purchases of goods that are damaged or lost during shipping. But if the item was bought with a debit card, it cannot be reversed unless the merchant is willing to do so.
“Of course, you shouldn’t dismiss one of the key pros of choosing a debit card over a credit card,” said Polcari. “With a debit card, your child is drawing upon money they have, versus with a credit card, they’re borrowing money they don’t have.”
Watch Out for Credit Card Skimmers
According to the Better Business Bureau®4, credit card skimmers are popping up everywhere and are becoming more difficult to detect.
Credit card skimming is credit card theft where crooks use a small device to steal credit card information in an otherwise legitimate credit or debit card transaction. When the card is run through a skimmer, the device captures and stores all the details on the card's magnetic strip. Thieves use the stolen data to make fraudulent charges either online or with a counterfeit credit card. In the case of ATM and debit cards, thieves will withdraw cash from the linked checking account.
Credit/debit card skimmers are placed over the card swipe mechanism on ATMs, self-checkout lanes at stores, and gas pumps. With ATMs, the crooks may place a small, undetectable camera nearby to record patrons entering their PIN. Victims of credit card skimming are often unaware of the theft until they receive a billing statement or overdraft notices in the mail, according to the Better Business Bureau.
Resource: U.S. Department of the Treasury consumer advisory post, Avoiding Card Skimming at ATMS and Other Money Machines5.
At a minimum, Polcari recommends that high schoolers and college-age children work summer jobs. A small job at college is also appropriate.
“It’s extremely difficult to teach kids the value of money unless they’ve had to earn it themselves,” said Polcari. “Many parents think they’re doing their children a favor by paying 100 percent of their college expenses. However, you’re really doing them a disservice. If your child doesn’t work, they won’t be able to truly understand what it takes to create money and what it costs in terms of effort for when it comes time to purchase items they want.”
When one of Polcari’s daughters was in high school, she was on her feet all day while working at a diner as a waitress.
“When my daughter came home with her first paycheck, the $100 gross pay she made actually ended up being roughly $79 in take-home pay,” said Polcari. “She was floored, yet she also began to understand why purchasing designer jeans at the mall for a $100 didn’t make much sense, since she could go to Marshalls and find something similar for far less. It wasn’t until she started working that she really began to understand what it takes to make money and how long it lasts.”
Employment Creates Other Benefits for Young Adults, Including:
Polcari recommends sending your child off to college with a weekly budget, one that parents and their college-age child create together. He also encourages parents to make their children responsible for their own personal expenses, including:
“I also believe that kids should be responsible for their college books,” said Polcari. “They need to have some skin in the game if they’re to grow up to be financially responsible adults.”
To help your child with budgeting, check out PCWorld’s roundup of budgeting apps6 for tracking savings and spending.
Beyond building financial literacy, the following is particularly important when your child heads off to college.
Health Care & College-Age Adults
Once your child turns age 18, they’re an adult and you can no longer gain access to their health care information without your child’s permission. This restriction is part of The HIPAA Privacy Rule7. The rule was created to establish national standards to protect individuals’ medical records and other personal health information8.
Polcari has had his own personal experience with this issue. When his daughter went off to college in Denver (he lives in Massachusetts), she experienced severe stomach pains. He told her to go to the campus infirmary. The latter thought she had appendicitis, and sent her to the city hospital. When Polcari called the hospital to ask how his daughter was, no one would answer his questions.
To safeguard against this happening to you and your child, have your child complete the following three documents:
The biggest gift we can give our children is information to help them live an independent and healthy life, as well as support them and teach them along the way. The key to raising financially responsible young adults is to start the conversations regarding employment, saving, budgeting and spending as early as you can in their life.
At GW & Wade, we help individuals and families understand where all the financial traps are, and coordinate lifelong financial plans that account for life’s milestones.
If you have questions regarding any member of your family’s financial future, please do not hesitate to contact us.
The information provided above is general in nature and is not intended to represent specific investment or professional advice. Any results cited do not necessarily represent the experience of other GW & Wade clients. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship.
Clients of the firm who have specific questions should contact their GW & Wade Counselor. All other inquiries, including a potential advisory relationship with GW & Wade, should be directed to:
Laurie Gerber, Client Development
GW & Wade, LLC
GW & Wade Principal & Counselor