Sending a child off to college is a milestone that most parents might feel mixed emotions about, including excitement for their future and anxiety over the unknown. Amid the many considerations that arise during this time, financial preparations can often be overlooked. Nevertheless, these are necessary to ensure that students can manage their expenses, prevent excessive debt and have a successful college experience.
1. Preparing the document every 18-year-old should have.
One of the most important financial decisions parents and their adult children going to college should consider is a financial power of attorney (POA), which authorizes an agent to act on the student’s behalf in financial matters. Like most adults, students should have a POA — and an attorney available to discuss their needs and state requirements — to ensure that their finances can be taken care of in various situations.
Additionally, parents and students should consider a health care POA, which allows an individual to appoint another person to make medical decisions on their behalf if they become incapacitated or unable to communicate. This is not a financial document, but it should be viewed as just as important as a financial POA.
A POA grants a trusted individual the legal authority to make decisions and take actions if the student is unable to do so themselves. Since college students may be living away from home, having a POA ensures that someone can manage their affairs promptly and effectively in the event of timely financial matters or legal issues. It offers peace of mind to both the student and their parents when they are not physically present.
A financial POA can be drafted with broadly or narrowly defined terms of their choosing. The two types are:
A durable power of attorney takes effect immediately upon execution and remains valid even when the holder becomes incapacitated. It’s important to have a POA that’s durable because it may avoid the expensive and time-consuming process of waiting for a guardian to be court-appointed. A durable POA can be revoked or amended at any time as long as the holder is competent.
A “springing” power of attorney can take effect upon a determination of the holder’s incapacity by one or more physicians. This can be trickier and more time-consuming than a durable POA. For a college student away from home, a durable POA is often the better and more flexible option.
2. Getting access to information and setting financial expectations for students.
While the Family Educational Rights and Privacy Act of 1974 (FERPA) states that post-secondary institutions may provide info to a parent, the student must grant access. Colleges determine what the students can allow parents to see, financial information and/or academic records. When a child is selecting an institution, parents should research what information will be made readily available to them and what their child must sign to allow them access.
From there, parents can openly communicate with their child and set clear expectations based on finances, grades and performance. Financial best practices that parents can set for college students include creating a budget to track income and expenses and setting an allowance. This can include an allowance timeline, expectations around the amount of money they will receive and how it should be spent, and how their educational responsibilities directly impact their allowance (i.e., meeting specific grade requirements).
For many students, they have relied on their parents to handle the big-ticket items (college expenses, transportation and housing, etc.). They most likely do not have a credit score, as students aren’t allowed to have a credit card in their name without a verified income until they’re 21 years old. Gone are the days of credit card companies signing college students up on their first day of school. This is certainly a good thing, as students won’t have the opportunity to rack up credit card debt without any actual income.
But it also means that many students are leaving college with little to no credit history. This affects them after graduation, particularly if they’re looking to rent. There are options available to help students learn responsible lending habits and to build credit, such as secured credit cards (with a deposit that matches the limit), cards that require a co-signer or adding a student as an authorized user on a parent’s card. These allow a student to learn responsible lending and build credit.
3. Ensuring some financial education.
Each tip comes down to one thing: financial literacy. There’s no better time to ensure that children have a basic understanding of financial topics than when they’re going off to college. Many students may begin being exposed to topics that may impact their financial health, especially when inflation is an issue. In fact, in a WalletHub survey, 79% of college students said their financial literacy improved due to inflation.
When sending a child off to college, parents are helping them make decisions about their professional future, so it only makes sense to equip them for success in their financial future as well. While students are preparing for dorm life, enrolling in classes and more, parents should prioritize meaningful discussions on financial matters with them — to ensure that there are clear expectations while on campus and to lay the groundwork for long-term financial independence.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only and should not be interpreted as legal opinion or advice.
SEI Private Wealth Management is an umbrella name for various wealth advisory services provided through SEI Investments Management Corporation, a registered investment advisor.
