Deacon Hayes joins us today, and we’re talking about how you can help your student handle credit, even before they hold their first credit card in their hand.
Deacon writes the Well Kept Wallet blog, and while he’s been a financial planner, he was first a newlywed with $52,000 in debt (not including the mortgage) – a debt he erased in about 18 months. He felt the need to help families struggling with debt and tight finances rather than the wealthy clients he had been seeing, so he created the blog to answer questions, offer tips and plans to lead people out of debt.
We’ll talk about:
- How to get your kids introduced to handling a credit card, even well before they start college
- How parents themselves can address and erase debt to position themselves for college funding
- Knowing how much parents should take on in college debt, and how to say no if that number falls short of the college’s price tag.
- What tips and strategies families with tight budgets can use to control spending
- Preparing for unplanned expenses
- Deacon’s 3 Quick Tips for starting college smart
I’ll also outline a basic plan for when to start late-stage college planning in the “Brad Recommends” segment
How Can Parents Teach Responsible Use of Credit?
Kids can get their own credit cards when they’re 18, and they’re used EVERYwhere including McDonald’s. While that can create worry for parents, a little preplanning can alleviate the concern – at least somewhat.
Debit cards are available to kids as early as 13 years old. Deacon likes this form of plastic, as it gives a finite limit that parents can easily control. Place a small amount on the card to help your child understand how to work within boundaries.
From there, kids under 18 can be authorized users on their parents’ credit cards. While this is a step toward using actual credit, this won’t help build a strong credit rating.
When your student receives his or her own credit card, Deacon recommends attaching recurring payments to the card, like their cell phone bill or Netflix account. This can help them establish credit, and while we’re at it, setting up auto payments for their credit card bills is also a good idea to keep their spending in check. (Not to mention avoiding late fees.)
Tackling Credit Card Debt
Deacon’s story has him placing $52,000 in debt behind him in 18 months, and his approach is to teach people how he did it, understanding that “debt free in 18 months” may not fit exactly for everyone, but appropriate goal setting and mapping out a plan to execute the strategy in a set amount of time does.
For parents looking “down the barrel” of college, debt can get in the way.
If you already have significant debt (it’s easy to rack up $50-$100,000 among auto loans and other plastic), you need to organize it before you consider taking on your student’s loans.
The conundrum is that most students can’t afford to take on the entire weight of tuition, so they will need your help to take on the majority of it. So, if parents can’t take on more debt, you’ll have to examine your choices for college, together.
What Amount of Debt Should Students Take On?
It’s possible to pay for college and graduate debt free – fellow podcaster Celeste Horton’s site provides listeners with ways to “Earn a Degree Debt Free;” however Deacon says students should also do a little math.
What is your income potential AFTER you graduate balanced with the expected cost of the education at your chosen college? If you’re a philosophy major, and you’re goal is to teach at a college with a salary of about $40,000, a total bill of $120,000 after four years can be overwhelming.
However, if you’re going to graduate and become a lawyer, that $120,000 shrinks somewhat when you compare the much higher income that attorneys command.
If you’re not sure of the answer, check out salary.com for expected wages for your chosen field.
When the Answer is No
Your kid has fallen in love with a school that’s simply too expensive for your financial ability to pay for it. Now what?
It’s an emotional decision, but Deacon says to be clear on the difference between want and need. Finances simply need to dictate the decision, and parents need to be strong and say no to a school that exceeds their budget.
After all, students take on about $5,000 of the total college bill, leaving the bulk of the costs on the parents.
And if you can meet the expenses, you have to be able to trust in your student when you cosign the loan. I even would suggest to create a contract to limit what the student will spend after graduation. When the loan payments need to be made, they shouldn’t be out buying a new car or other major purchases.
Strategies for Families on Tight Budgets
Deacon recommends filling out a financial game plan form in his classes, which is basically a budget and net worth statement put together.
- This allows you to see where you’re spending too much and where you need to save.
- It also allows you to review, line by line, where you can save on monthly bills
- Employ a cash envelope system for variable expenses like groceries or entertainment. Set an amount for each envelope, and when the envelope is empty, or low, you’re forced to make decisions on how to spend the money. This also sets a fixed cost on these variable budget items.
- Do the same for expenses with each child, and conversely have them create their own envelopes to help them budget for themselves.
Preparing for Unplanned Expenses
- Save three to six month’s income for emergencies if you have little debt outside of your mortgage.
- Save at least $1,000 if you are trying to overcome significant debt
As much as it’s important to reduce debt, there’s a flip side of the ledger: income. Deacon says here it’s important to pay attention to your passion. It could be a marketable skill, and even a new more lucrative career.
Whatever side you improve, it’s important to recognize that college IS expensive. The good news is that I don’t think it can continue on its trajectory to becoming unaffordable for most.
And Deacon points out that in his home state of Arizona, affordability can be had in the most unlikely places. Grand Canyon University is a private college, but it’s publicly traded, which means it operates as business. It’s also cheaper than in-state schools, with strong programs that have been widely recognized for their sponsorships.
Deacon’s 3 Quick Tips
- Don’t feel you have to need to have a degree picked out from day 1
- Parents: understand your finances
- Parents AND students: Understand your debt
BRAD RECOMMENDS: Knowing When to Start Your Late-Stage College Planning
First of all, it’s important to define ‘late stage’ as the point where you’re ready to make college visits, apply for financial aid and need-based aid, completing the application and testing needed for college admission.
- For most families, the best time to get started is in Junior year of high school, usually by Christmas
- For those with complex finances, like a business, recent divorce, inheritance situation, etc., the clock starts ticking a little earlier (late sophomore year or early in Junior year)
- Parents of high-achieving academic students should also start planning college visits for selective schools sometime in sophomore year, as they generally involve a road trip.
In general, no one ever complains that they got started planning too early, so don’t hesitate to jump into the process if you feel you are ready to get started.
LINKS AND RESOURCES
Read Deacon’s Well Kept Wallet blog
Deacon’s on Facebook and Twitter, too!
Visit Celest Horton’s website and blog, How To Pay for College HQ
How much will you earn after you graduate? Find out on salary.com
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