Do you ever wonder what advice you would give your child when they are ready take on the world and leave home? I think about this question a lot, and I am constantly worried about all the life lessons my son will experience without me by his side. Can you remember when you were 18? As a mom, this scares the crap out of me. When I was 18, I really didn't grasp the concept of credit, never balanced a check book, and I certainly was not ready for the financial world. As parents, we all hope our children leave the house with the financial knowledge they need to make responsible decisions. I am no exception, so here are some things I will make sure to tell my son when he is ready to leave home.
Get a J-O-B
This seems a little blunt. But the best advice I can give to a young person leaving the house and heading off to college is to get a job if you can, even if it is part-time. I say this because many times kids leave the house with this misguided thought that they can live off of financial aid. They are right. This is doable. However, I urge caution. Financial aid is often in the form of student loan. It is money that will need to be paid back eventually with interest. Most times, kids stepping out into the world for the first time really don’t think that far down the road. They are about to start school, living on their own, and have all this new-found freedom. Let me tell you a story about my experience with this.
When I was 18 years old I started my educational and financial journey at Spokane Falls Community College. I got a job as soon as I moved from Chewelah to Spokane, however it didn’t pay much. I knew I would have to get financial aid to get me through school, even Community College. I applied for financial aid my first year at college and received my first financial aid check.
My tuition was very small, maybe a few thousand dollars back then, however the check I received from financial aid was about $4,000. Not thinking about the future, I used the extra money from financial aid to help me get established in my first apartment. This continued throughout my college career, and at the end of 4 years, I racked up a debt of almost $28,000. Even though I worked full-time during the day and went to night school, I still graduated with a hefty bill. If I could go back in time, I wish I could have had this conversation with myself. When I graduated college and received my fist bill in the mail to start repaying my student loans it was a kick in the a**. Not only did I not know what type of school loans I took out, but I wasn’t even aware of the interest rates. My point here is, get a job, and use your income from that job to cover as much as you can for your education.
Know What You Are You Taking
As brought up earlier, the financial aid check comes in the mail; your child cashes it, and they don't even know what they are cashing. Where did the money come from? It is important for you to understand who is making the loan and the terms and conditions of the loan. There are two types of financial aid. There are federal loans and private loans. I will not go into much detail on the two, but I will list the main differences.
- Federal Loans come from the government. Federal loans usually have lower fixed interest rates and have more options for repayment plans when it comes time to start paying back the money. These loans won’t have to be paid back until you graduate or change your status to less than half time. There are two different types of Federal Loans for you to be aware of.
- Direct Subsidized Loans are student loans that the U.S. Department of Education will pay interest on for you while you are in school at least half time, for the first 6 months after you graduate and during any deferment period. Deferment just means you have chosen to postpone your loan payments. The amount you get is determined on your financial need.
- Direct Unsubsidized Loans are a little different. The main difference I want to point out is that with this type of loan, all interest accrues and is capitalized. What does that mean? Unlike the Subsidized Loan where you don’t have to worry about interest adding to the amount you owe, Unsubsidized Loans adds interest to the principal amount of your loan from the moment you cash that check. This is for all periods of your college education.
- Private Loans are a little harsher. They might want you to start paying the loan back while you are still in school. They also don’t have fixed interest rates like the Federal Loans. They might have variable interest rates that might change during the loan period. That’s a little scary! No one pays your interest on these loans besides you. Another difference is that interest paid on these loans are not tax-deductible. On Federal Loans, you can reduce the amount of your income subject to tax by up to $2,500 on Form 1040. There also might be fees and other hidden cost in the contract that are only found in the very small print on the bottom of the contract. The amount you get is based on your credit score and other factors.
You can find a huge amount of information about student loans on https://studentaid.ed.gov/.
Consider a Roommate
There is mixed emotions on this topic. Some parents would rather their kids not have roommates. This comes from either hearing horror stories or having bad experience themselves. My thought on this topic is very simple. If you can find a person who you trust, get along with, and enjoy their company, this can be a huge money saver. The more money you are saving on rent is more money you can put towards tuition, which means less money you have to borrow. Here are some roommate tips:
- Know the ground rules: When you have a roommate, life can get easier if you both are on the same page. Sit down and make a list of things you must stick to. (Example: no one comes over on Thursday nights)
- Don’t use things that aren't yours without the other person’s permission: This is a must. You might be best friends with your roommate and they might tell you it is ok for you to borrow their things, but trust me, this always finds a way to create a wedge.
- Hangout: Don’t forget your roommate is a person too and not just a means to an end. Take an interest in their lives and be involved. Trust me; this makes dinner conversations a lot easier!
Start Saving Early
From college expenses to new life bills, your kids are probably thinking I don’t have anything to save. You know that $25 check grandma sent you in the mail? Instead of spending it on a few days of Starbucks coffee, put it in the bank. That extra Christmas bonus you got at work, make it go to work for you. Your kid’s mouth will hit the floor once you open their eyes to compound interest. It really is an amazing thing. I won’t get into too much of the financial background of it, but I will give you an example.
- Your child puts $1,000 into a college savings account that earns an annual interest rate of 7%. If he adds $200 to that account every year and it is compounding annually for the next 20 years, that account would be worth $12,642.72. They would have deposited a total of $5,000 but made $7,642.72 in interest. Pretty amazing stuff! Keep in mind, this calculation does not take into account inflation or taxes for the real compound value, but you get my point.
Here is a compounding calculator for you to play with.
See if your financial adviser offers free budgeting classes or seminars. This will be a great environment for your child to experience. Before they leave home, I highly recommend looking for free classes on financial literacy that your child can attend. Some financial advisers offer them, and most non-profit organizations offer free classes. Here is one option if you are looking for something around Spokane, Washington.
What will you talk your child about when they leave home?