There are many ways to teach your child the financial repercussions of their college choices. Making a mock budget inclusive of their eventual student loan payments is quite effective...
The following post is by MPFJ staff writer, Melissa Batai. Melissa is a freelance writer who covers topics ranging from personal finance to business to organics to food. She blogs at Mom’s Plans where she shares her family’s journey to healthier living and paying down debt.
‘Tis the time when prospective college students receive their acceptance letters and their financial aid packages. Most students have “reach” schools—schools that may be difficult to get into, as well as more practical schools for which they’ve applied. For many students, the “reach” schools have the biggest pull; if they’re accepted to that school, they’ll do anything to go, even if it means taking out tens of thousands of dollars in student loan debt.
According to Forbes, “The average student in the Class of 2016 has $37,172 in student loan debt.” Yet, chances are if you mention this to a high schooler before they go to college, they’ll just shrug and think they can easily pay it off once they graduate. After all, they have 20 years to repay it, right?
As parents, one of our jobs is to help our student see their financial life in the future because most 18-year-olds can’t do that. After all, most 18-year-olds can’t get approved for a car loan on their own, but every year, millions of students are approved for more than that in student loan debt.
But the job of preparing our kids for their own financial life should start well before the acceptance letters come in. It should start in middle school, or at the very latest, high school.
Give Your Child a Mock Budget
We can talk to our children until we’re blue in the face about the perils of student loan debt, but actually showing them, just like the Ghost of Christmas Future in A Christmas Carol, will have a bigger impact. One way to help them prepare for what life may be like with tens of thousands in student loan debt is to give them a mock budget.
Creating the Basis of Your Mock Budget
Making a budget as complete as possible will require that you spend a few hours asking your child some questions about what she wants to do with her life when she graduates college. Questions might include:
- What career do you want to have?
- Where do you want to go to college?
- How many years of education will your career require?
- What area of the country do you want to live in?
- What car do you want to drive?
- How big is the house you want to live in?
- Do you want to get married? If so, how old would you ideally like to be when you get married?
- Do you want kids? If so, how many, how far spaced apart, and when do you want to start having them?
- How much money do you want when you retire?
Setting Up Your Mock Budget
Next, take some time to dream with your teen. Look at Zillow and pick some houses that she likes in the area of the country she wants to live in. Write down the cost and what the mortgage will be.
Look up the career she wants and how much it pays where she wants to live. Consider all of the variables in her “dream” life. Don’t forget to add in student loan debt, especially if she wants to attend a pricey college.
Create the Budget
Next, sit down and create a budget with her. You’ll start with her base salary after taxes. Let’s say I make one for my child who has decided she wants to be an accountant and wants to stay close to home. Her base salary in this area would be $50,000 a year. I’ll take roughly 22% of that salary for taxes, health insurance premiums, automatic retirement savings, etc. That would give her $39,000 or $3,250 a month.
To a kid who is working a part-time job at minimum wage, $50,000 a year sounds like A LOT of money. Now it’s time to show her how quickly the money will go.
Put in a house payment based on her ideal house, a car payment based on the car she wants, and student loan payments based on how many student loans she would likely need to take out for college. Don’t forget groceries, eating out, clothes, utilities, insurance, etc. All general living expenses should be included, and looking at your own budget can create a nice reference to make sure you haven’t forgotten any expense in hers.
If you have the money, let her actually live her mock budget, but at a smaller scale. For instance, if she’ll make $3,250 a month, reduce the scale down to 10% and give her $325. BUT, she’ll need to pay all her expenses reduced to 10% to you, and the rest is left for her money. That month, don’t buy her any clothes or gas for her car. All of that must come out of her money. She’ll quickly see a few things about her budget
What Your Child Will Realize
Ideally, by actually living this budget, your child will realize several things.
First, student loans can make a tight, just-out-of-college budget so tight that there’s no money for the fun things in life.
Second, the degree you choose as well as the university you attend and the area of the country where you live all make a dramatic impact on your bottom line. Because she will be living this budget for a month, she’ll understand all of this in a way she never would if you just talked to her about it.
Change Things Up
After the first month, create another budget for your child, this time changing a variable or two such as the area of the country she will live in, or the career she’ll like to pursue, or the college she will attend. Again, give her the cash to live the budget down to a 10% scale, and she’ll “pay” you for all of her bills.
She will see, in a very tangible way, how these variables affect her future.
Your Out of Pocket Expense
I get that most parents don’t have an extra $325 a month, or whatever 10% of the mock budget is, to give their child. Keep in mind that your child will pay her bills to you, so you’ll get a large portion of that money back in your pocket. Your out of pocket expense, depending on how tight the planned budget is, will only be $25 to $100, likely.
I don’t know about you, but I’d happily set up a mock budget and give my child that amount of money for a month to truly live out a budget so she can make smart choices when it comes to applying to college, deciding what college to attend, and what major to have.
Hopefully, wise decisions now mean she won’t be returning to my house at 25 to live for a few years because she can’t make ends meet.
Conclusions
There are many ways to teach your child the financial repercussions of their college choices. This is just one way. The point is to talk with your child frequently about this topic, but also let them “live” what their choices truly mean before they even attend college or sign their first contract for a student loan.
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