If you've got a freshman heading off to college, you're probably scrambling to teach him or her how to cook macaroni and cheese and do laundry without turning everything pink. But there are other important lessons you can share that will have a much longer-lasting effect on their financial future.
Take credit: College students often get deluged with credit card offers. Although opening and using an account responsibly is a good way to build a solid credit history, inexperienced card users sometimes are tempted to buy things they can't really afford - or worse, to rely on their card for recurring expenses like rent and tuition.
Do your child a favor and have frequent, candid discussions about using credit responsibly and the pitfalls of overindulging. Key points to tell them:
- Try to use your card only when confident you can pay off the balance each month. Paying just the minimum due can add years - and significant interest - to your repayment.
- Don't be tempted by free giveaways or low teaser rates, which often rise dramatically after a few months.
- Look for a card with no annual fee and a lengthy grace period before finance changes begin. A good place to comparison shop is www.bankrate.com.
- Investigate other fees, such as those for cash advances, late payments, balance transfers and exceeding your limit.
- Carrying too many cards can damage your credit score, as can high balances. Try never to owe more than 25 percent of your credit limit on any card.
Another important consideration is the long-term financial consequence - for you and your children - of paying for college. Often, students will owe $20,000 or much more in loans by the time they graduate and many parents postpone saving for their own retirement to finance college. Consider these points:
- Have your children first attend community college then transfer to a college or university, especially if they haven't yet decided their major.
- Complete the Free Application for Federal Student Aid (FAFSA) form each year to see if your kids qualify for any grants, scholarships or other aid (found at www.fafsa.ed.gov.)
- Federally sponsored loans, such as Perkins, Stafford and PLUS (Parent Loan for Undergraduate Students) loans offer the most favorable interest rates and repayment terms but usually don't cover the full cost.
- Private student and parent loans aren't government guaranteed or subsidized and typically carry higher interest rates than federal loans, but they allow you to borrow more. Fees, interest rates and repayment terms vary widely, so be careful when comparing different loans. A good place to start researching is www.finaid.org.
- Students must begin paying off loans once they graduate. Although most federal loans offer a grace period, many private loans do not, so check the paperwork carefully.
- It's virtually impossible to avoid repaying student loans, even through bankruptcy, so make sure your kids don't take on more debt than they'll be able to repay. The U.S. Department of Labor provides helpful salary data on various professions (www.bls.gov/oes/home.htm.)
- Consider consulting a financial professional for your family's particular situation.
Check out What's My Score, a financial literacy program sponsored by Visa Inc., which aims to raise young adults' awareness of the importance of understanding and improving their credit scores (www.whatsmyscore.org).
College is a big step toward independence. Just make sure your kids have all the tools they need to ensure a strong financial future.