8 tips for preparing your child for the financial realities of college

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We all know that college is expensive. These days private school will run you an average of $30,094 per year, according to the College Board, while public school costs $8,893 for in-state students and $22,203 for out-of-staters.

We’re also aware that the effects of these exorbitant costs can last for years. Outstanding student loan debt is now well over $1 trillion, and large balances are preventing many Millennials from moving on with their lives – buying homes, starting families, etc.

As a result, it’s important for parents to be proactive in preparing their progeny for the financial realities of higher education. The question, obviously, is how. Hopefully the following tips will help you reach a suitable answer to that very important question.

1. Compound Interest is Your Best Friend

The best gift you can give your child is a well-funded college savings plan early in life. The more money you can contribute early, the more interest will be able to work for you. For example, if you deposit $5,000 into a 529 plan that will offer an average of 4% interest over the next 18 years and then make $100 contributions each month after your child’s birth, you’ll have roughly $41,000 when your child turns 18. Getting the grandparents to supplement your contributions will enable you to supercharge your education fund growth as well.

2. Consider a Move

State schools are not created equal and establishing residency is not easy. It’s therefore extremely important that you take the cost of in-state tuition as well as the quality of state schools into account when deciding where to live. California is one great option, with five institutions in the top 11 of US News’ Best Public School list. The District of Columbia is another strategic choice, given that residents are able to obtain in-state status at any public university in the country.

3. Make Your Child An Authorized User

Credit card companies don’t generally have a minimum age for authorized users, so it’s definitely worthwhile to set your child up early. You don’t have to give them a card to actually use, but putting their name on your account will give them a head-start in credit building. This will pay dividends not only when it comes time to get a student credit card, but also in terms of insurance premiums, buying a car, renting an apartment, etc.

4. Turn Saving into a Bonding Experience

You can teach your child about the benefits of saving by making the process interactive. For example, you could encourage them to save their allowance over time to buy a relatively big-ticket item they’ve had their eye on for a while. Or, you could include your kids in the process of saving for a vacation, for example.

5. Stress the Importance of Saying No

So much of both personal finance and parenting is about weighing costs and benefits and ultimately saying no to many things. Teaching your kids that they can’t have every toy or buy into every fad will be lessons that last a lifetime.

6. Start with a Prepaid Card

When it comes time to start your child’s financial literacy lessons in earnest, it’s best to use a prepaid card. Prepaid cards are great for this purpose for a number of reasons. For starters, you can’t rack up a bunch of charges you can’t pay for, unlike with a credit card. You also can’t bounce checks or overdraw your account, making it more difficult to get a checking account down the road. Furthermore, prepaid cards offer online account maintenance, enabling you to review your child’s spending habits with them and, in turn, provide valuable lessons. They also have enough different fees to test your child’s financial conscientiousness.

7. Progress Through Cash to a Checking Account

After your child gets the hang of prepaid card use, the next best step is progressing to an all-cash allowance and requiring that they begin to foot the bill for some of their own discretionary expenses. This will test their ability to budget as well as their capability in keeping track of paper money.

After they master cash, it will be time to open a checking account in their name and make contributions at longer intervals while tasking them with paying for even more of their expenses. By doing so, you can challenge your child’s budgeting skills even more as well as see if they’re able to avoid bounced checks and account overdrafts.

8. Introduce Credit Before They Leave the Nest:

You don’t want to wait until move-in day to hand over emergency plastic. That’s a recipe for having your child treat the dorm to a pizza party. Rather, it’s best to apply for a student credit card as soon as your child is issued their university email address (needed for application). You can then use the interim to make sure your child isn’t over-swiping or underpaying.

Odysseas Papadimitriou is the CEO of the personal finance websites CardHub and WalletHub. He previously worked as a senior director at Capital One.

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