Parents sending a kid off to college this fall have lengthy shopping lists, from those extra-long sheets for dorm beds to notebooks and flash drives. Your teen also needs to land on campus with some money smarts.
Many teens are clueless about managing their finances. In a study of college students' financial behavior by the National Endowment for Financial Education, 73 percent of the students reported engaging in some kind of risky financial behavior in the past six months, from paying bills late to maxing out credit cards. If you haven't started teaching your teen about money, this summer is go time. (Tweet this)
"Kids go from not paying any bills to all of a sudden having student loans and rent and eating out and groceries, so it's all on them at once," said Vince Shorb, CEO of the National Financial Educators Council.
Luckily, financial literacy experts have myriad suggestions for teaching your teen about money. Even if you have only a couple of months, they believe you can impart a lot of essential information.
Learning about credit is crucial, according to Laura Levine, president and CEO of the Jump$tart Coalition for Personal Financial Literacy. "We want people to understand credit, not just how to use a credit card but how credit works," she said. Too often, teens grow up watching their parents pull out a plastic card to pay for everything, and they may not understand that using credit creates a payment obligation. But in reality, "you can't skip a month" when you owe money without a cost.
Some parents believe that a debit card is a form of training for a credit card, but Levine said that is not so: One taps a bank account and perhaps lets a parent see where a teen is spending money, while a credit card can give much more free rein to seriously mess up their credit rating.
Another element of credit is simply keeping a credit card safe, Levine said. "Young consumers are notorious for not being careful enough with what they do with their credit cards." A case in point: the teen who leaves a credit card sitting out in a dorm room. The roommate may be trustworthy, Levine said, but "what happens with the roommate has friends in the room?"
Shorb recommends that parents do all they can to help teens "build those financial muscles," ideally by gradually increasing their responsibility for money decisions. Without that, he said, they will be susceptible to all sorts of money pitfalls.
"Money is such an emotional subject," Shorb said. "If your buddies are going out to dinner and you are going ot be home alone, there is pressure to go."
Shorb recommends that before a teen moves out, he or she should have responsibility for paying some of their expenses, be it clothing or "rent" to the parents. And before they get to college, they should have a bank account established and ready, and automated bill payment in place if that's applicable. Apart from that, Short said it is important for parents to step back and refrain from rescuing a student who makes poor financial choices.
One obvious risk is that students spend too much money too early. Peer pressure can contribute to that, as does the fact that many student IDs double as prepaid cards onto which colleges load student aid funds at the beginning of a term.
If a student does run out of money, Shorb said, parents can consider it a teaching moment. "Instead of sending money, send a grocery story gift certificate" or some other form of money that can only be used for the purpose parents intend, and make it a loan with interest. "We need to start associating some pain with some bad decisions," he said.
Ted Beck, president and CEO of the National Endowment for Financial Education, said there are three major predictors of a student's success with money in college: parental involvement, as in parents who have communicated money lessons; financial education; and the experience of having a part-time job.
Plenty of money pitfalls lie ahead for a soon-to-be college freshman, he said, from peer pressure to spend to unexpectedly high costs for things such as textbooks. The College Board estimates that on average, each student spends $1,200 a year on books and supplies. (Tweet this)
Ideally, parents start financial education well before a teen is heading to college, he said. (Beck's organization actually publishes a booklet containing money management tips for students, which could be used to start a discussion.) But even if early conversations do not take place, the summer before college is a great time for parents to have a serious money talk with their teen.
"This is your first time to sit down, probably, and have an adult discussion with your now adult child. They are going off. This discussion is critical. It's not a lecture. It's not a threat," he said. "This is your chance to treat them like an adult." After all, he added, "You want them to behave like an adult."
Apart from the financial minutiae of campus life, Beck said, it is important to talk to your teen about completing college. Going over budget for a month is one thing, but leaving college after a year with thousands of dollars in debt is quite another. When it comes to student loans, he said, "the kids that we worry about the most are the people who don't finish."
Levine does not yet have a college-age child, but she does have a clear checklist for what she wants her child to know.
"What I would want is for my college-age child to have a basic understanding of things like credit cards and banking and some basic financial stuff. They don't have to learn how to manage a portfolio," she said. "Boil it down to financial tools like credit cards, debit cards, how a bank account works, understand that. And then they have to understand how to manage their money."
If a teen can develop the discipline to get all that under control, landing a spot on the dean's list should be a cakewalk.