How Much Should You Support Your Kids in College?
Four tips on how you can help your children financially – over the long term.
While there is no can’t-miss method to building wealth – short of winning the lottery – there are certain financial behaviors that have been shown to work. Yes, you should build an emergency fund. No, you shouldn’t pay just the minimum on your monthly credit card bills. Yes, you should create an estate plan.
But when it comes to financially supporting your college-aged kids, the advice is a little less black-and-white. How much – or if – you decide to help will depend on your own attitudes toward wealth and working, the maturity of your child and the progress you’ve made on your other financial priorities, including retirement. Here are four strategies to consider as you strive to raise financially responsible young adults.
Tip 1: Start From the Top
Before committing to helping your student financially, the two of you should create a budget and map out all of his or her sources of income as well as expenses. By laying it all out in black and white, you can get a real sense of how much college life costs today (which might be significantly more than when you were in school) and level-set your child’s expectations on spending. As a bonus, creating a budget together gives you an opportunity to make sure your college student is fully prepared to make the most of this once-in-a-lifetime experience.
Baird recommends: Make sure you’re exploring all sources of college aid, and that starts with filing your Free Application for Federal Student Aid and checking out the net price calculator on the college’s website. By reviewing your child’s budget in detail, you’re also able to choose which expenses you’re willing to contribute to, like books, phone bills or transportation.
Tip 2: Weigh the Pros and Cons
There are lots of ways for students to support themselves in college, each with distinct advantages and disadvantages. A part-time job while at school can teach useful lessons about time management, responsibility and the value of money, but you don’t want those lessons to come at the expense of academic achievement. Student loans might also be an option, though many students (and their parents) are uneasy with the prospect of graduating with a heavy debt burden. Saving for these expenses ahead of time (such as the summer before school starts) can provide some financial relief and give you an opportunity to create your own “employer match” for however much your child puts away.
Baird recommends: How you approach this conversation is as much a reflection of your values as your finances. For some parents, having their kids graduate without student debt is a top priority, while for others, college provides a relatively low-risk environment to teach your children how to live within their means. Whatever your view, make sure you make your expectations clear long before the semester begins so your child has time to plan accordingly.
Tip 3: Make Your Support Meaningful
If you do decide to offer your child financial support, you have more options than merely sending a check every month. From creating a joint checking account that you can monitor from home to putting conditions on your gift (like attaining at least a 3.0 GPA), there are ways to give that encourage positive behaviors. Even lending (at a low interest rate) instead of giving can be a useful lesson on deferred gratification and how the real world works.
Baird recommends: Science may offer some support for putting limits on how much you give: A 2013 article from the American Sociological Review found the more parents contributed to their children’s education, the lower their grades were. While this study focused primarily on education funding, it certainly suggests that parents can give too much financially – to their kids’ detriment. The key is to offer support without enabling poor behavior or creating bad habits.
Tip 4: Don’t Forget About Your Own Financial Well-Being
Before you can figure out how much support you can give your child, you need to take stock of your own financial situation. How much have you saved for your own retirement? How much debt do you have? Do you have other financial priorities you’re also saving toward? Do your retirement accounts offer tax benefits for education withdrawals?
Baird recommends: Reallocating funds you’ve saved for retirement is risky – after all, students tend to have options (even deferring college if need be), and jeopardizing your retirement introduces the possibility of you becoming a future burden on your kids. Plus any money you take out of your retirement account is money that doesn’t benefit from compounding over time.
Ultimately there is no one right answer to this issue – your decision has to factor in what’s best for you and your kids over the long term. Whatever you choose, it’s important you make your expectations and limits clear as early as possible. The Popovich Financial Group can help you sort through your options and identify an approach that makes the most sense for you and your family.
©Robert W. Baird & Co. Member SIPC. MC-48882.