Starting college is a big life transition for both students and their parents. While your student may be focused on orientation and choosing courses, there are some important financial considerations that accompany this change as well. Some are administrative items for you to consider, such as getting legal documents in order, paying expenses from a 529 plan, and reviewing insurance and taxes. Others are more foundational to your child’s own future financial lives, like setting up bank accounts, establishing a credit history, and talking about money. We hope you find this checklist helpful as you launch your child into this important next phase of life.
Setting Them Up for Financial Success
Before your child heads off to school, set aside time to discuss what they will be expected to pay for and what you plan to cover. Encourage your child to create a budget for the expenses that they anticipate having while away at school (tuition, housing, books, food, entertainment, etc.) and review this together.
If they do not already have a checking and savings account, have your student establish these now. Look for accounts with low or no monthly fees, good overdraft policies, extensive ATM networks, and online banking.
It is not too early to help them develop a credit score. One of the major components of credit history is time using credit, so starting now will allow them to access better interest rates on loans and mortgages in the future. Talk to your student about living within their means, interest expenses, the importance of not carrying a balance from month to month, and encourage them to set up automatic payments from their bank account. Below are some options for first credit cards:
- See if they qualify for a student credit card through their bank. Student credit cards are designed to help college students build credit and have low credit limits.
- Consider adding your child as an authorized user on your credit card. The primary cardholder is responsible for making the payments, but this can be a good option to start credit history if they cannot qualify for their own card yet. (https://www.experian.com/blogs/ask-experian/will-being-an-authorized-user-help-my-credit/)
- A secured credit card could be another good option – these typically have lower spending limits and require a cash security deposit as collateral.
Establishing Legal Documents
Most college students are at the age where they are considered adults under state law and the rights of a parent to make decisions for an adult child can be limited. For instance, parents may no longer have the legal right to access a child’s education, financial, and health records. This becomes particularly problematic if your child for whatever reason is unable to make their own healthcare or financial decisions.
Consider having an estate planning attorney draft the following documents:
- HIPPA Authorization: gives you the ability to ask for and receive information from healthcare providers about your child’s health status, progress, and treatment.
- Health Care Power of Attorney: designates you as a medical agent, so you can view medical records and make informed medical decisions on your child’s behalf if they are incapacitated.
- Financial Power of Attorney: names you as a financial agent, so you can manage bank accounts, pay bills, sign tax returns, break or apply for a lease, and conduct similar activities relating to your child’s financial affairs.
- Last Will and Testament: designates where any assets will go and who will manage your child’s estate if they were to pass. This is truly for the worst-case scenario, but if your child is over 18, it may make sense to set up a very simple will. Down the line, they can always change the terms as they age.
Paying for College
If you have been saving in a 529 plan, now is the time to ask your advisor how and when to access these funds. Keep in mind the following rules of thumb for spending from a 529 account:
Request that the 529 plan pay the college directly when possible – this makes accounting easier at tax time.
- If you are requesting reimbursement from the 529 plan for expenses already incurred, be sure to request reimbursement in the same calendar year that the expenses were paid.
- Qualified expenses include tuition, room and board (subject to limits set by the college), mandatory fees, plus any required material for classes, such as books or computers. Be sure to keep good records of qualified expenses paid in case you are audited.
- If you have not used a 529 plan, work with your advisor to revisit the plan for paying these expenses from your investment portfolio, cash flow, or loans.
- See this link for further information on how to use a 529.
Reviewing Your Insurance Coverage
Do not remove your student from your car insurance too soon, even if they aren’t taking a car to college. Auto insurance can provide protection when borrowing someone else’s car, riding as a passenger in another car, walking as a pedestrian, or riding a bike. Be sure to discuss your insurance needs with your agent, as removing coverage for a child in college potentially introduces a gap in important insurance for these loss scenarios.
If they plan to live off-campus you may need to consider renter’s insurance. Most family home insurance policies automatically extend some property and liability coverage to a temporary residence occupied by a family member away at college. However, with off-campus living especially, there can be good reasons to invest in a separate renter’s policy, including providing some protection from liability related to guests invited to the property.
Contact your insurance agent and sync on all things recommended for your young person at school. Many insurance companies offer a significant discount for a ‘long distance student’ (often defined as attending school full-time at least 100 miles away without a car) resulting in a substantial savings on the cost of the auto insurance and automatically covering your child on visits home for holidays and celebrations.
Thinking About Taxes
Whether or not your child needs to file their own tax return depends on how much income they earn while in school or over the summer, and whether you continue to claim them as a dependent.
- Dependents who are single must file a tax return if their earned income from a job exceeds $12,950, if they have stock sales reported on a Form 1099-B, or if an investment account in their name generates over $1,150 of income.
Even if your student does not have to file a tax return, they may want to if any of the following situations apply:
- They had income tax withheld from their pay and may be eligible for a refund.
- They have earned income and want to contribute to an IRA (funding a Roth IRA is a fantastic way to start saving for retirement).
This checklist may seem overwhelming amongst all the other preparations required for the transition to college. Your Coldstream team can help you work through this list and answer any questions you may have. Additionally, talk to us about scheduling a time with your student to discuss financial planning and investment basics before heading off to school.