Business
College cash flow: Planning can overcome empty pockets
■ Paying for college is hard enough. But helping your not-quite-adult child figure out a budget for living expenses can be a money-management challenge.
By Katherine Vogt — Posted April 25, 2005
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As he prepared for his son to head off to Vanderbilt University, Christopher Randolph, MD, found himself in a situation worthy of the famous parent-child role-swapping movie "Freaky Friday."
Dr. Randolph, a psychiatrist in Anniston, Ala., was discussing a budget for the teen's living expenses and found that he actually had to convince his son to have a little more spending money.
"My son is not an extravagant soul, so I didn't really have to worry about him going off and having a lot of frivolous expenses," he said. "In fact, I ended up encouraging him to get out and experience Nashville more."
Not every parent is so lucky. In fact, some parents find that their kids have little spending restraint or knowledge about how to manage their expenses when they first set out for college. The allure of eating out every night or going on beach vacations and ski trips with friends is too tempting to pass up. The result can be mounting bills that put the parents and their children at odds, and put a strain on the parents' wallets.
To avoid these family woes, financial experts recommend that parents work with their children to develop a budget before they head off to college. The budget should outline living expenses, determine how they will be paid and create a method for tracking costs. By doing this, the child gets a lesson in money managing, and the parents get a better idea of what they might spend to help cover costs.
Doctors, take note
This process is particularly important for physician parents, said Jason O'Dell, chief executive officer of The O'Dell Group, a financial planning firm based in Cincinnati. That's because many practice-based physicians have variable incomes, which makes it necessary for them to be aware of any bills they have to pay so they can plan ahead to cover the lean times.
"Especially if you don't know what your income is going to be from year to year, you need to set a base so you don't run into problems," he said.
The vast majority of O'Dell's physician clients pay at least some of their children's college tuition and many also pay some living expenses. But he said these expenses come at a time when doctors are trying to live up to other financial obligations, straining resources.
"It's not abnormal for physician clients to be retiring right around the same time they're sending their kids off to college, because they didn't start having kids until they were 35 or 40. So budgeting will be extremely important for them around that time," O'Dell said.
If nothing else, preparing a budget can help parents and their children avoid nasty fights over money because it outlines expectations and sets parameters.
"If the parent never conveyed to the child what was expected, it's not fair for the parent to be mad at the child for overspending," said Ginita Wall, director of the Women's Institute for Financial Education, a San Diego-based nonprofit organization for women's financial issues.
She recommends getting started by making a list identifying different categories of expenses such as books, food, rent, car insurance and more, and assigning a dollar value to each category. "Some of them are really obvious, but there may be fees that you don't think of," she said. "Or your child may want a special category called 'pizza and beer.' "
Web sites a start
Parents often can find information about the typical costs of things such as books on the college's Web site. The school also might be able to provide typical rent costs for parents whose children intend to live off-campus.
Expenses likely will range widely for students at different schools and in different cities. And a lot of it will depend on whether the child lives on campus, said Bruce Harrington, vice president of the financial services firm MFS Investment Management in Boston.
"It's a lot like planning a budget if you're a homeowner. You're going to have certain fixed expenses and certain variable expenses," he said. Fixed costs could include automobile insurance or phone bills, whereas variable expenses might encompass entertainment costs and vacations.
Parents and children also should figure out who is going to pay for what, Wall said. Having a clear understanding of this could help avoid unpleasant encounters down the road. This also might be the right time to talk about the child getting a part-time job to meet his or her obligations, she added.
Once the figures are set, parents and their children need to decide the best way to fund the budget, whether through bank accounts or by other means. There likely won't be a shortage of information about what options are available, because many banks, credit-card companies and other financial institutions use college campuses as hunting grounds for new clients.
O'Dell recommends that parents set up a joint checking account with the child, perhaps depositing money once or twice a month, but allowing the child to bear responsibility for how those funds are spent. "And once the money is gone, they'll have to make do like other people," he said.
Beware of credit cards
Giving kids credit cards is one way to ensure a quick bailout if trouble arises when the money is gone. But O'Dell said not all kids can be trusted with a credit card, and parents should follow their instincts about whether their own children can handle the responsibility.
"You have to really gauge the child, because credit cards can get you into significant trouble," he said.
Harrington advocates giving students credit cards with low limits. Parents could request duplicates of the card statements and use them as a means of monitoring their children's spending habits.
More conservative parents might feel more comfortable using a prepaid credit card that won't allow the child to spend more than the value put on the card, Harrington said. A debit card also could provide a similar safety net, Wall said.
Dr. Randolph said his son, who lives on campus, has relied largely on a campus cash card sponsored by the university. The Randolphs pay to add value to the card, which then can be used to buy things such as snacks and books at stores on campus and nearby. Another card pays for meals on campus. It's a college lifestyle that Dr. Randolph said was not available when he was a student.
"Many of the needs that students have from toiletries and everyday items to cultural events are pretty much taken care of on campus or in the immediate vicinity," he said.
The downside to campus cards and meal plans is that many of them must be used up by the end of the school year, which makes deciding how much to spend on them a delicate matter. Even the most detailed budget forecast could result in too little or too much.
But after the child's first year, parents should have a much better handle on what expenses can be expected, especially if they and their children have kept good records. "It might be a good training exercise for your child to learn Quicken or one of the other electronic money-management systems," Wall said. "After all, they're probably literate on the computer."
Records important
Good record-keeping also will come in handy when it's time to revisit the budget. John Sestina, president of the financial planning firm John E. Sestina & Co. in Columbus, Ohio, said a budget should be retooled once a quarter to make adjustments for any miscalculations or lifestyle changes.
College students whose parents taught them lessons about money throughout their lives should have an easier time handling that budget, he said. "There are so many new experiences you have when you get to college that you don't want to have to deal with one more new thing," he said. "Start when they're in high school, at the very latest."
Wall said it would behoove most parents to speak frankly about money with their children. "Be open with your kids and teach them to be open with you. Money is not a mystery. It's just a means of getting what you want. So teach your kids to be open about money."
Still, some lessons are best learned by firsthand experience. Robert A. Lebow, MD, who has three kids who went to college, said even intelligent children who pay attention to parental advice might not really take money lessons to heart until they have their own trials with it.
Dr. Lebow, an internal medicine and geriatrics specialist in Southbridge, Mass., said his son learned about money the hard way when he decided to rent a house while attending Skidmore College in Saratoga Springs, N.Y. He paid the deposit on the house and on the phone, but when it was time to collect from his pals to pay the bills, he had a hard time getting them to pony up their fair share.
"This was shocking" to him, Dr. Lebow said. "Even though you prepare them, it doesn't dawn on them until it happens to them. To some degree, they have to learn by experience."