In last week’s blog I wrote about Kim, a college student who had been gifted $90,000 for college by her grandparents. Unfortunately for Kim, with a year to go in her degree program, she had depleted her college account. With this semester’s bill just arriving in the mail, she had no way to pay tuition for the upcoming semester. While Kim did not spend the entire $90,000 on food, friends, and fun, a quick guestimate would put Kim’s “excess” spending at around $10,000-$15,000; not quite enough to fund her last year of college, but definitely enough to be considered extensive by most middle class standards. Horror stories such as this put parents and grandparents, who have saved for future college expenses, on edge. No one wants their hard earned savings to become the foundation for another social media firestorm. While there are some simple ways (Parent’s Don’t Turn Over Your Piggy Bank) to protect your hard saved college account from being spent by your student on non-educational expenses, I wanted to put forth another idea that students and their funders can use in order to set clear boundaries and expectations for the use of any funds that have been set aside for college: A Funding Covenant.

I saw this idea in action over ten years ago when I was a financial planner at Morgan Stanley. My boss and mentor had recently purchased a car for his daughter for her 16th birthday. But unlike most parents, who give the gift or a car, not only was the use of the car was conditional upon certain stipulations being met, but the requirements of both parties were documented in a formal agreement and a signing ceremony took place. While I cannot remember all of the stipulations, the general gist will suffice. Mom and dad promised to be responsible for the vehicle costs: maintenance, insurance, and gas. In exchange their daughter agreed to maintain a certain GPA, to complete certain household chores, to adhere to an agreed upon curfew, to limit the number of passengers in the vehicle at a particular time, to abstain from driving impaired, and to obey the rules of the road (i.e. no moving violations). If she failed to follow these agreed upon stipulations, she would lose the right to some of the benefits of the contract: use of car, payment of insurance, payment of gas, etc. While this agreement set some general guidelines related to the use of and care for a vehicle in the home, it was really a stewardship agreement. Her parents had spent their funds on a safe and reliable vehicle for her, yet they did not want that vehicle to become an impediment to her obligations as a student or a member of the family.

Before we set out to discuss some options for your covenant, I want to caution funders actions you should strive to avoid: attempting to control your student, a one party dialogue, and inflexibility. First, realize that the Funding Covenant is not meant as a means to exert control. The objective is to set reasonable and attainable boundaries in which your child can flourish, not to be so strict that they suffocate. In the scenario above, the parents were not asking her to do any more than she was already doing as a student and family member. There was not a ratcheting up of responsibilities because of this new “carrot;” instead, her parents were only attempting to maintain the status quo, an equilibrium which could be disturbed with the entrance of this new found freedom, i.e. the car. Second, realize that your student must be part of the conversation. Your goal is not to put forth a list of dictums to which your student must adhere, or reject all funding. Instead, both parties should bring forth conditions and suggestions, discussing what is reasonable and attainable, based on your student’s natural gifting. Finally, be willing to amend your covenant as needed. Remember that while both parties are putting forth their best effort in the creation of the contract, things change. Job loss or market fluctuations can deplete accounts more quickly than expected and major and minor classes may be more difficult than originally thought. This means you may have to change funding options or GPA. Remember, as a parent your goal is to have your child succeed in attaining an advanced degree. As circumstances change, be amenable to amending stipulations.

Funding & Assistance Opportunities

  • With what percentage of expenses are you able to assist?
    • Tuition
    • Books
    • Room & Board
    • Extra: Outside Food / Clothing / Travel / Dorm Supplies / Fraternity or Sorority dues / Etc.
  • Will you allow them to bring a car?
    • What is your commitment to repairs, insurance, gas, parking fees, etc?
  • Will your student continue to live at home?
    • What stipulations will accompany this arrangement?
      • Pay a reduced rent?
      • Assist in chores?
  • Will your student be on your health plan?
    • What is your commitment to co-pays, deductibles, etc.?

Possible Funding Requirements

  • GPA Minimum:

I begin with this due to the fact that so many parents go immediately to a GPA requirement. Remember that your funding does not change them into a new person. What is reasonable based on your child’s past performance. Set them up to succeed from the beginning. If your student is looking at a more advanced degree (law, medicine, etc.) you may want to set the bar higher, as stellar marks are needed for advanced diploma work.

GPA is an amalgamation of many other components (class attendance and study time). It is difficult to get GPA without also setting boundaries elsewhere.

  • Class Attendance:

What % of classes will you attend. While some courses will have attendance policies, most intro level courses are so large that no attendance is ever logged. Just like high school, perfect attendance is not possible, but perpetual absence. While there is not an absolute correlation to attendance and performance, it is one which is exceedingly high.

  • Study Commitment:

Athletes and fraternities/sororities are notorious for their study hall requirements. When I was in college it was recommended that I spend three hours of outside study for every hour in the classroom. Thus, for a fifteen hour load, I should have spent forty-five additional hours in study. This suggestion required too much study in some areas and enough in others, especially as I moved into my upper level finance classes.

  • Student’s Financial Commitment:

It is not uncommon for parents to ask their children to work during the semester or during breaks in order contribute to their educational expenses. Realize that most students will be making minimum wage, so a 20 hour a week job allows them to earn roughly $130 per week.

In addition to student employment, many students take out loans in order to complete their degree program. Are your parents / grandparents willing to assume these loan payments upon your graduation should you adhere to a certain set of stipulations (GPA, certain amount of loans, length to degree)?

  • Pursue Scholarships:

Regardless of your funding options, all students should apply for scholarships. For students who have to contribute to their cost of attendance, scholarships provide an option to reduce work hours or student loan requirements. Even if you have tuition covered, you can encourage your student to apply for these funds. If they receive scholarships, it would reduce your tuition bill. You could then give that amount to your student outright, or set it aside for them until after graduation. Depending on how proficient your student is at acquiring funds, they could have a substantial graduation present sitting in an account once they earn their diploma.

  • Time to Graduation:

Completing a degree in four years is becoming uncommon. The old adage that time is money is especially true if a four year degree is extended to five or six years. Naturally, most funders cannot finance the education of another indefinitely, so setting a timed goal for degree completion is important.

The list above should provide you and your student with some beginning talking points. Naturally, there are many other points you could discuss: involvement in extra-curricular activities, church involvement/membership, and parental contact or visits to name a few. As I close, remember that the covenant attempts to help you be a good steward with the funds you have saved by coming alongside him during the college process, while holding them accountable for the use of these funds. Your dialogue and the construction of your covenant should deepen your relationship and not cause division or harm. If you find your relationship is deteriorating, revisit your purpose for helping with funding and if you are after control.