Back in July, Yahoo published a story that garnered national attention for all the wrong reasons. Kim, a 22-year-old college student, had called into “The Bert Show, ” an Atlanta radio program to discuss her current financial plight and seek the hosts’ advice. With one year to go in her degree program, she had run out of funding and had no way to finance her final $20,000 tuition bill. While many parents and students could empathize with Kim’s situation of facing a semester without funding, the twist is that her grandparents had set aside $90,000 for her education. Unfortunately, after three years of tuition payments, college expenses, and some loose spending (break destinations, Europe, clothing, etc.) on her part, her once robust education account lies depleted and its primary goal of paying for Kim’s college has failed.
The question I want to tackle today is not who is at fault for such poor decision making; the internet has made their opinions known. Instead I want to discuss what safeguards can you put into place with your college student to be sure that any funds that have been set aside by you or other family members be used exclusively for educational purposes.
Do not cede control of the funds to your college student
Spending power resides with the account owner. When it comes to control, remember, once the money is transferred to your college student’s account, you lose control over how the money is to be used. While there are plenty of mature college students, who would no doubt try to be good stewards of a large windfall, most students do not have the discipline or the training to manage such an account while still in college.
If you are looking to maintain control, the easiest way to do so is to have the parent or grandparent continue to hold the funds in their accounts until payments are needed. These accounts can be a simple savings accounts, an investment account, a trust account, or a 529 Plan.
Link the use of funds to educational pursuits only
Based on Kim’s interview, her major problem was not that she blew $90,000 of her college account, as most websites and blogs suggest. Rather, she probably spent $10,000 to $15,000 over her three years on non-educational expenses. My guess is that the remaining $75,000 to $80,000 went toward tuition ($60,000), room and board, and books and supplies for three years of coursework. Unfortunately, that extra spending was the difference between a partially-funded senior year, and nothing at all.
Explain to your student that the funds which have been set aside are for educational purposes only. This means that funds will only be distributed for tuition, room and board, and books and supplies. If there are excess funds that allow for clothing or travel allotments, give a monthly or semester stipend. Such a gift allows you the opportunity to sit down with your student, work through, and create a budget for the upcoming year.
Encourage Frugality, Motivate to Excel, and Instill a Desire for Timely Completion
As you discuss your college fund with your student, encourage frugality when using these funds. Perhaps you can fund a four-year degree to any institution in the US; perhaps your funding is more limited. Be open and honest about what funding is available and what you can afford to do if and when these funds are exhausted. This information will allow your student to make the best educational choice given his financial options. While your account may not pay for one year at Harvard, it could last for three plus years at a state-school.
Even if you can control the educational funding component of your child’s education, knowing there are funds available to go to college may bring about behavior you were not expecting. Every college-goer has stories of that friend who abused their parents’ generosity. If you are going to fund your child’s education, you should set some guidelines for present and future funding. I am going to go into more detail on how to accomplish this in my next blog: The Funding Covenant, but for now realize that these guidelines are not a means to control your student; rather, the covenant allows the both of you to set minimum standards of academic progress based on your child’s aptitude, as well as penalties if these objectives are not met. Another way to motivate your child would be to have them take out a certain amount of student loans per year for which they will be responsible in the event that certain standards are not met.
Finally, with costs for a college education on a perpetual rise, you want to work with your student to set a goal for the timely completion of her degree. A good motivator for this is your funding for a specific length of time or number of credit hours, with a minimum number of hours required per year or semester. Parents need to set these guidelines, as a recent report by the department of education demonstrates that roughly 60% of students attain a four-year degree in six years or under (http://nces.ed.gov/programs/coe/indicator_cva.asp ).
You can listen to “The Bert Show’s” five part interview by going to the following address: http://thebertshow.com/she-should-have-enough-money-for-college-but-she-spent-it-all/