My high school student graduated. Now what?
Graduation from high school is a pivotal moment for both your child and you as a parent. It marks a shift in financial responsibility and opens up new avenues for their future, whether it's college, vocational training, or entering the workforce. Here are key financial things to consider and discuss depending on you child's plans and goals after graduation:
College
- Review and Finalize College Funding:
- 529 Plans: If you have a 529 plan, understand how to withdraw funds for qualified educational expenses (tuition, fees, room and board, books, supplies, computers). Be sure to keep meticulous records for tax purposes.
- Student Loans (Federal vs. Private):
- FAFSA: Ensure the Free Application for Federal Student Aid (FAFSA) is completed annually. This determines eligibility for federal grants, work-study, and federal student loans.
- Federal Student Loans: These typically offer more favorable terms, fixed interest rates, and flexible repayment options (like income-driven repayment) compared to private loans. Encourage your child to prioritize these.
- Parent PLUS Loans: If you need to borrow, understand Parent PLUS loans. These are in your name, not your child's, and you are responsible for repayment.
- Private Student Loans: These should be a last resort. Research terms, interest rates, and repayment options carefully. If you co-sign, you are equally responsible for the debt.
- Expected Family Contribution (EFC) / Student Aid Index (SAI): Understand how this is calculated and what it means for your financial aid eligibility.
- Establish a College Budget Together:
- Beyond Tuition: Discuss all college costs: tuition, fees, room and board, books, supplies, transportation, personal expenses, and entertainment.
- Your Contribution vs. Their Contribution: Clearly define what you will cover and what your child is responsible for (e.g., spending money, some books, part-time job earnings). Defining these brackets can foster financial responsibility.
- Tracking Expenses: Encourage them to track their spending. This can be done with budgeting apps, spreadsheets, or even a simple notebook.
- Part-Time Job/Work-Study: Discuss the possibility and benefits of a part-time job or work-study to help cover their expenses and gain valuable work experience.
- Banking and Basic Financial Literacy for Them:
- Checking Account: If they don't have one, help them open a checking account in their own name. Look for accounts with low or no fees, good online banking features, and a wide ATM network (especially near their college).
- Savings Account: Encourage them to maintain a separate savings account for unexpected expenses or to save for future goals.
- Debit Card Usage: Teach them responsible debit card use and how to avoid overdraft fees.
- Online Banking and Mobile Apps: Show them how to use these tools to monitor their balances and transactions.
- Credit Building (Cautiously):
- Secured Credit Card: This can be a safe way for them to start building credit. It requires a deposit, which acts as the credit limit, minimizing risk.
- Authorized User: You can add them as an authorized user on one of your credit cards. This helps them build credit history, but you remain responsible for the charges. Emphasize responsible use and payment.
- Education on Credit: Explain how credit scores work, the importance of paying bills on time, keeping balances low, and avoiding high-interest debt.
- Insurance Review:
- Health Insurance: Confirm how your child will be covered. They can often remain on your plan until age 26. If not, explore college health plans or marketplace options.
- Auto Insurance: If they're taking a car to college, update your policy. Many insurers offer discounts for students far from home without a car ("resident student discount").
- Renters Insurance: If they're living in a dorm or off-campus apartment, your homeowner's policy might offer limited coverage, but a separate renters insurance policy is often inexpensive and provides better protection for their belongings.
Entering the work force, or taking a gap year
- Budgeting for Independence:
- Income vs. Expenses: Help them create a realistic budget based on their anticipated income from a job. Include rent, utilities, food, transportation, phone, and discretionary spending.
- Needs vs. Wants: Guide them in distinguishing between essential expenses and wants.
- Financial Apps/Tools: Encourage them to use budgeting apps or software.
- Banking and Savings:
- Checking and Savings Accounts: Ensure they have both, ideally a high-yield savings account for their emergency fund.
- Direct Deposit: Help them set up direct deposit for their paychecks.
- Emergency Fund: Emphasize the importance of building an emergency fund (3-6 months of living expenses) as a top priority.
- Building Credit:
- Secured Credit Card: This is a good starting point if they don't have a credit history.
- Responsible Credit Card Use: Teach them to pay off the full balance every month to avoid interest and build a good credit score.
- Monitoring Credit: Encourage them to check their credit report annually for free at AnnualCreditReport.com.
- Understanding Employment Benefits:
- Retirement Plans (401(k), Roth 401(k)): If their employer offers a retirement plan, explain the importance of contributing, especially if there's an employer match (it's free money!).
- Health Insurance: Help them understand their employer's health insurance options and costs.
- Other Benefits: Review any other benefits like paid time off, disability insurance, or life insurance.
- Taxes:
- W-4 Form: Explain how to properly fill out a W-4 form when starting a job to ensure the correct amount of taxes are withheld.
- Tax Returns: Guide them through their first tax return if they're working. Even if they don't earn much, they may be eligible for refunds.
For everyone
- Set Financial Goals: Encourage your student to set short-term (e.g., save for a new laptop, car down payment) and long-term goals (e.g., saving for a house, retirement).
- The Power of Compounding: Explain how starting to save and invest early, even small amounts, can lead to significant wealth over time due to compounding returns.
- Prioritize Your Retirement (Your Child's and Yours):
- Your Retirement: While it's natural to want to help your child, ensure you are still prioritizing your own retirement savings. You can't take out loans for retirement, but your child can take out loans for education.
- Their Retirement: Encourage them to start saving for retirement as soon as they have earned income, ideally in a Roth IRA, as it offers tax-free growth and withdrawals in retirement.
- Financial Literacy is Lifelong: Stress that managing money is an ongoing learning process. Encourage them to seek out reliable financial resources (books, reputable websites, trusted advisors).
- Open Communication: Maintain an open dialogue about money. Be a resource and guide, but also empower them to make their own financial decisions and learn from them.
By taking these steps, you're not just providing financial assistance; you're equipping your child with invaluable life skills and a strong foundation for their financial future.
Investing involves risk including the loss of principal.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. |
