Your college-age son or daughter isn’t the only one who needs to learn; you have new financial choices you need to master
Freshmen aren’t the only ones who need a crash course in student life.
While the kids sweat all-night study sessions, messy roommates and cold pizza for breakfast, college parents face their own challenges from higher education. Problems such as the cost of tuition, the perils of co-signing and the ripple effect of dorm room ID theft can be high hurdles for moms and dads to clear.
If you’re a college parent, you’ve probably already figured out that it pays to confer regularly about any shared bills. Otherwise, how do you know if those recurring charges are the cost of something your student really needs or an unintended add-on from the latest cellphone game your kid downloaded?
Likewise, if your student is paying bills that are linked to your credit, you probably want to keep those financial training wheels on until your young adult figures out how to balance school, work, exams, lab sessions, cram sessions, meals, parties, laundry, trips home and (last but not least) bills.
But there may be a few pitfalls you’ve yet to discover. If you have a student in college, here are five things you need to know to protect your credit:
1. Your student may not need a credit card
Popular wisdom that states that students need credit cards is bogus, says Doug Borkowski, director of the Iowa State University Financial Counseling Clinic.
One popular notion among parents is that a young adult will need a credit rating at graduation to get a job.
That’s not exactly true, says Borkowski. Employers do look at credit, he says. But what they want to see, most of all, is an absence of bad credit.
“No credit is substantially better than bad credit,” says Borkowski. “Many companies are saying, ‘As long as they have a clean slate, we’re fine with that.'”
So when your student calls saying he or she “needs” a student credit card, “think long and hard,” Borkowski says. An ATM card or debit card with a card logo might be a better option, he says.
2.Co-signing is not your only option
The Credit CARD Act of 2009 prohibits card issuers from issuing cards to students unless they have either a co-signer or enough income to pay the bill.
So is co-signing a smart move? It depends on the circumstances and your student.
A co-signed account will go on your credit history, too. The balance will be included when lenders calculate your debt load for loans. And, if things are already tight, that could hurt if you’re planning to buy or refi a house, lease or purchase a car or apply for a credit card of your own.
The student’s late or missed payments will be included in your credit report and factored into your score. Another person burning through a chunk of that available balance each month could also depress your score. And with some cards, you have to pay off and close the account to end the co-signing arrangement.
- Make the student an authorized user on one of your cards. It allows her to charge, and will built her credit, but gives you some control.
- Help him get a secured card. The right card will build credit — and a secured card won’t imperil your finances.
- Or help him set up a checking account so he can use his debit card. And decline the fee-based overdraft protection. That way, when he’s out of money, the card stops working.
3.Budget, then borrow
One big challenge for parents and students: putting a price tag on a year at college.
Adding to the confusion is the fact that two students at the same school can spend very different amounts for the same year on campus.
At Iowa State, the school estimates that a year costs roughly $19,000, Borkowski says. “But I see students that are able to get by and their budget is $13,000. I see others spending a lot more.”
Because a big part of a credit score (yours or your child’s) is determined by debt load, figure out exactly how much your student needs before you borrow, he says.
Ask “does your son or daughter need to borrow the full amount of student loans that the school is offering?” he advises.
While you’d think it would be obvious that parents exhaust grants and scholarships before they start taking out loans, that’s not always the case, says Rich Williams, higher education advocate for U.S. Public Interest Research Group.
“It seems logical that you go with free money first,” says Williams. “Unfortunately, the majority of borrowers don’t exhaust more affordable federal grants and loans before turning to private options.”
So use up all the free money you can get first, says Williams. Next, look to federally subsidized loans, then unsubsidized federal loans — both of which have a multiple protections for borrowers in terms of deferment and repayment, he adds.
Last on the list are private loans, “which you want to avoid at all costs,” says Williams. Interest rates tend to be higher, many carry variable rates, and options for deferment and forgiveness are rare, he says.
Neither federal nor private student loans can be discharged in bankruptcy, “so only borrow what you need,” says Williams.
4. Maximize your benefits, but read fine print
Legislation passed a few years ago gives “huge tax breaks to parents sending a child to college,” says Augie Grant, a journalism professor at the University of South Carolina. “They need to be aware.”
There are limits on what can be expensed, he says.
So if you don’t include the tax codes as part of your regular bedtime reading, consider hiring a professional tax preparer if you have a student in college.
In addition, “most tax software can talk you through the issue,” he says.
You can also lose by using a card for tuition to get points and miles. Many schools levy a convenience fee for using a card for tuition and, in some cases, it can more than wipe out whatever you would have earned in points and miles, he says.
Also, be sure to read the fine print carefully when dealing with off-campus leases. The wrong combination of words can leave parents on the hook for the entire bill incurred by all the roommates, not just your student, Grant says.
“Most leases call for ‘joint and several’ responsibility,” he says. What that means: “Instead of having to sue everyone, the apartment complex can sue whoever they feel it would be easiest to collect from,” Grant says.
If your student needs a co-signer, you want a lease that limits your responsibility to your son or daughter’s portion of the rent and expenses, he says.
5. Lock it up
Dorm rooms aren’t exactly the best place for keeping financial information. Any mentions of the topic will likely earn you an eye roll for your trouble.
But your student’s trust or carelessness can end up costing you in both money and good credit.
Three smart moves you should insist your student take:
- Keep credit or debit cards and other personal information in something that locks, says Michael Gilbert, detective with the Montgomery County (Pa.) Detective Bureau. That could mean a desk drawer with a key or a portable safe that you purchase for the dorm. In either event, don’t leave those keys dangling in the lock, he says. And don’t share the combination or keys with anyone.
- Never share cards or PIN numbers. Dorm environments foster communal living arrangements where students share everything from bathrooms to food to personal grooming products. They need to draw the line at debit and credit cards, says Gilbert. Once you’ve given your PIN number to friends (or allowed them to “borrow” a credit card), you’ve pretty negated any theft and fraud protection if they (or their friends) use it again without permission.
- Check student ID numbers. These days, students use their ID cards and numbers for everything. So make sure that those ID numbers are just random digits and don’t incorporate some portion of your student’s driver’s license or Social Security number, he says.
See related:Credit CARD Act of 2009