More Americans are defaulting on their student loans, according to the Department of Education. The two-year cohort default rate on federal student loans rose to 8.8 percent from 7 percent in 2008. While the economy is largely to blame, I would also argue that college graduates, while bearing degrees in computer science, finance and the arts, lack the basic financial literacy skills to manage their debt properly. With some students taking on more than $50,000 in student loans you have to wonder—do they realize this is not necessarily the best way towards protecting their finances?
Financial literacy can go a long way in preventing future financial struggles, from student loan defaults to bankruptcy. Here is some advice for parents on how to educate kids and young adults about money, with the understanding that financial literacy begins at home.
[Related Article: Student Loan Defaults On the Rise]
Elementary Students
Most parents feel it’s important to begin conversations about money with their kids early on. According to a survey by T. Rowe Price earlier this year, three-fourths (77%) believe in beginning the conversations before age 10.
But you don’t need to have big conversations about money all the time. Understand that children are extremely observant. You don’t need to sit down your 8-year old and talk about needs versus wants. He may not have the attention span for that. But do realize that your actions will speak louder than your words. That said, here’s some advice for the younger set of kids:
- Price Compare While Shopping. We tend to shop in a hurry or neglect to involve our kids in the decision-making process. I remember my parents taking me furniture shopping with them, traveling from store to store in search of the best deal. It was nauseating for the 11-year old me, but the message of why you need to price-compare came across loud and clear. The same drill occurred when my parents went house-hunting. I would overhear their discussions and watch as they financially sized up each home. Next time you take your kids on a shopping excursion, make sure to explain why you’re buying what you’re buying, especially big-ticket items. Is it a need or a want? How have you compared prices? Why did you ultimately go with the choice you did?
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- Tie Allowance to Out-of-the-Ordinary Tasks. I think it’s helpful to set up an allowance for your child, but it should be tied to above-average duties. Making your bed, for example, shouldn’t be rewarded with money. Cleaning out the garage or helping dad organize his workspace at home, on the other hand, is more appropriate. This sends the message that you need to work hard to make money. And if you decide on a consistent weekly allowance, know for a fact how that money will be used. Is this money to simply use at the mall? Or is this money going to go toward a cell phone bill every month plus clothes? The amount you allot should reflect how it will be spent.
- Integrate Fun Resources. There are innovative products and videos new to the market that can help parents introduce money concepts in an entertaining way. The JumpStart Coalition For Personal Financial Literacy has a new book called Pretty Penny Sets Up Shop, which is about a young girl who tries to plan, with no money, a birthday party for her grandmother. It teaches kids how to be resourceful and to think outside the box, which is sometimes needed in order to earn money. Also, Sesame Workshop and PNC Bank have joined forces to create some very cute videos starring Elmo, Grover and the rest of the furry gang, teaching kids about spending, saving, sharing and delaying gratification. Finally, for kids ages 7 and up, there’s the Savings Spree mobile app, which teaches kids how the choices they make each day can add up to big savings or big expenses, depending on how they decide to spend (or not spend) their money.
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Image: Bill Ward, via Flickr.com
Teens and College Students (cont.) »
Teens
- Avoid Hand-Outs. Your kids are not too big too fail. If your child asks for money outside his allowance, make him work for it or present a trade-off, like “I’ll give you $20 for the dinner out with your friends this weekend, but you’ll need to babysit your brother next Saturday night.”
- Discuss College Costs and Be Open-Minded About College. The school your child chooses needs to be affordable. It should not be a place where you and your child are required to stretch every penny and take out $100,000 in student loans. The earlier you and your teen discuss college costs and how the whole family can help pay, the more time you can give yourself to research schools. Also, be honest with your child’s level of preparation for college. Maybe he’s better off attending a two-year or community college first. Why spend $30,000 a year when you have no idea what you want to study? A community college gives students a chance to explore their academic interests and get through introductory or first-year courses cost-effectively. Or, your son or daughter may prefer to spend a year between high school and college working or volunteering. Keep an open mind.
[Related Article: Pay for College With Your 401(k)? Think Again.]
College Students
- Keep Communication Open. When your children enter college, keep the lines of communication open over money. When you call to check in about life on campus, inquire about their expenses, ask about their budget and keep your kids on their toes so they know not to run wild with their debit card. Keeping communication open is also a way to avoid having your children keep secrets from you (and thus avoid learning about their need for a “bailout” after they’ve accumulated debt). Make your children feel like they can come to you in the early stages when they may need some guidance to make the best financial decisions possible.
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- Encourage Working. Having a part-time job while in school is one way students can continue to contribute to the cost of college, especially to pay for “extra-curricular” expenses. The key, of course, is to find a job that doesn’t compromise a student’s ability to graduate on time. Students should pick a job that’s on or near campus that works around their class schedule, rather than fit classes around shifts. Some smart ways to earn money while in school include applying for federal work-study programs, or selling class notes on sites like Notehall or ShareNotes. Also check to see if your child’s school offers Co-Ops where they can work for pay and sometimes college credit toward their major. Keep in mind that working while in school can help students develop actual work experience, which may set them apart from other candidates to potential employers.
- Encourage Graduating on Time. Most full-time college students today do not graduate in four years. Most take five or six years to complete a bachelor’s degree. That’s an expensive way to get a degree. The earlier students graduate, the less debt they may have and the faster they can get a job to start paying off loans.
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