Journal of Financial Planning: March 2024
Paulina Mejia is national fiduciary counsel at Fiduciary Trust International (www.fiduciarytrust.com), a global wealth management firm headquartered in New York, NY.
Clients rely on your guidance when it comes to making life’s biggest financial decisions, such as navigating the real estate market, starting a business, and planning for retirement. For clients with families, whether it is a first child or a seventh grandchild, sending a child to college is an important milestone.
It is typically the first time children experience real independence—living away from home, managing their time as well as their finances. Promoting financial education from an early age is arguably as important as a financial strategy for paying for college. Whether children sink or swim at college will indicate whether Mom and Dad’s (and oftentimes Grandma and Grandpa’s) investment paid off. As their financial adviser, you do have skin in this game.
It’s critical that you help initiate college planning conversations early. As financial professionals, it is our responsibility to help clients get this ball rolling. The best way to do so is an exercise that all exceptional financial planners do well: ask the right questions early.
Communication and Expectations
Effective communication and setting expectations early are cornerstones of the value that professional financial planners bring to clients. When meeting with extended families, facilitate open and transparent discussions about financial goals, college prep, and the expectations around financial responsibilities.
Initiating conversations about college preparation with children is crucial for their academic and financial success. Here are some questions that can serve as starting points for meaningful discussions with children who have reached the appropriate age and maturity level, typically during the high school years:
- What are your thoughts about your academic future, and do you have specific goals or aspirations for college?
- Have you considered the careers or fields of study that interest you? How can your college choices align with your career goals?
- Are there specific factors you’re looking for in a college, such as size, location, or academic programs?
- Are you aware of the costs associated with college, and have you thought about how we can plan for these expenses together?
- Have you started looking into scholarship opportunities or the process of applying for financial aid?
- What extracurricular activities or hobbies are you passionate about, and how can they contribute to your college applications?
- Would you be interested in visiting some colleges to get a feel for different campuses and environments?
Here are some conversation starters for when the student is an athlete dedicated to continuing to play sports in college.
- What sports do you plan to participate in, and how well does the college’s athletic program align with your athletic aspirations?
- Have you done research on the coaches at the college to understand their coaching philosophy and expectations?
- Have you explored the availability of athletic scholarships or financial aid, and do you understand the terms and conditions associated with them?
- Should we visit the college’s sports facilities to see if they meet your standards for training and competition?
- How do you envision your athletic and academic experiences at this college contributing to your future goals, both in sports and beyond?
Early communication about all aspects of college life enables families to plan and make well-informed decisions. Establishing clear expectations from the outset helps avoid misunderstandings, encourages accountability, and lays the groundwork for a successful partnership between planners, parents, and their children as they navigate college planning and financial education.
Financial Health Checklist for College-Bound Children
Before children and grandchildren leave for college, clients should consider several often-overlooked legal and financial issues. For example, once a child turns 18, they become a legal adult. Parents cannot access health, financial, or sometimes even educational records without the child’s permission.
To understand and address such issues, it’s a good idea for financial planners to meet with the entire family to explain key issues and provide recommended steps.
Topics to discuss before a child leaves for school include: naming a healthcare proxy, appointing a durable power of attorney, creating a will, understanding cybersecurity, and the importance of a credit score in determining one’s financial future.
Here are examples of conversation starters:
- Have you and your family discussed the importance of estate planning before your children or grandchildren leave for college, including the need for legal documents such as a will, power of attorney, and healthcare directives?
- How well-prepared do you think your children or grandchildren are for financial independence in college, and have you discussed budgeting, expenses, and financial responsibility with them?
- Have you reviewed your family’s insurance coverage, including health insurance, and discussed how it will apply to your children or grandchildren when they are away at college?
- Have you and your family discussed emergency preparedness and how your children or grandchildren should handle unforeseen financial or legal situations while they are away at college?
- How do you plan to maintain open communication with your children or grandchildren while they are in college, and have you established a support system for them in case they face financial or legal challenges?
Facilitating the conversations that emerge from the questions above will add tremendous value to your client and give you a sense of how prepared they are for upcoming college life.
What Does it Mean to Be Prepared for College?
Feeling confident about paying for college can help clients achieve financial well-being, which is the singular outcome that everyone in our industry is working toward. Education plays a pivotal role in future financial success, which is another critical ingredient for financial well-being. Here are some examples of how education impacts future financial success:
Employment rates: According to the U.S. Bureau of Labor Statistics (BLS), individuals with higher levels of education, including a college degree, generally experience lower unemployment rates. As of 2020, the unemployment rate for those with a bachelor’s degree was lower than the national average (Torpey 2021).
Earnings potential: On average, individuals with a college degree tend to earn higher salaries than those without. BLS also reported a positive correlation between educational attainment and median weekly earnings. However, specific earning potential can vary based on factors such as field of study, occupation, and geographic location.
Career opportunities: A college degree often opens doors to a broader range of career opportunities. Graduates may have access to professional roles that require specific qualifications and may be more likely to advance in their careers over time.
Entrepreneurship and innovation: College graduates are often well-positioned to pursue entrepreneurial endeavors and contribute to innovation. Many successful entrepreneurs hold college degrees, and higher education can provide the knowledge, skills, and network necessary for starting and growing businesses.
Job satisfaction: Studies suggest a positive correlation between educational attainment and job satisfaction. College graduates may have access to fulfilling and challenging roles that align with their interests and skills.
Networking and social capital: College provides opportunities to build a professional network and social capital. Alumni networks and connections made during college can be valuable resources for career development, mentorship, and job opportunities.
Lower likelihood of unemployment during economic downturns: Historically, individuals with higher education levels have faced lower unemployment rates during economic downturns. A college degree can contribute to greater resilience in the job market.
There is no question that a college degree is additive. Yet there are many schools to choose from and many ways to earn a college degree. As an adviser, you can add depth and value to the college planning conversation by acknowledging the pressures associated not only with going to college, but also where.
An adolescent’s perception when selecting a university is often influenced by their peers and by social media personalities. It is crucial to acknowledge a university’s educational value beyond its public perception or the opinion of social media influencers. Social status is important to the younger generation. While acknowledging that, it’s important to emphasize that choosing a school should first come down to their educational needs.
Similarly, when talking to parents or grandparents who are providing the funding, financial professionals have an opportunity to help alleviate any feelings that the student should attend an expensive or prestigious school simply because they have the financial capacity to do so. Having these conversations early can help clients and their families better understand the goals involved in attending the right institution for that child and supporting them in their choice.
Understanding Financial Basics
As a financial professional, you can help educate grandparents and parents on the importance of fostering a financially literate environment at home before students head off to campus. This is especially important given that, according to a 2017 survey from T. Rowe Price, 69 percent of parents have some reluctance to discuss money matters with children, while 61 percent of parents only discuss money with their kids when they ask about it.
At the same time, as a country, the United States is doing a poor job when it comes to educating young people to become financially literate. According to a 2018 study from the Paris-based Organisation for Economic Co-operation and Development (OECD), more than one in six students in the United States failed to reach the baseline level of proficiency in financial literacy.
These are more reasons why it is important to educate families on the benefits of financial education beginning at an early age. In fact, financial literacy stands to impact more than just a student’s money management at college—some studies suggest it can have positive effects on academic performance as well as overall emotional well-being. For example, a study published by College Student Journal found that college students who completed a personal finance course had a significantly higher probability of year-to-year retention and successful degree completion (Eichelberger, Gerbing, and Gilpatrick 2020). And there are countless studies that show being in control of one’s finances can reduce stress.
Setting the Stage
Family meetings are a good way to connect with children and take an active role in their financial education. By emphasizing financial responsibility and introducing age-appropriate lessons on money management, you can contribute to a foundation of financial knowledge that will serve them well in college and into adulthood. Gradually transferring financial responsibility to the students helps pave the way for a successful and financially sound college experience, setting the stage for a lifetime of responsible financial management.
It starts with instilling a foundational understanding of financial basics. Take any opportunities to work with the family to educate the next generation on budgeting, the importance of managing credit responsibly, and setting realistic financial goals. Work with families to set realistic allowances and educate students on the consequences of overspending.
Another idea is to check with local banks and financial institutions, which often provide services designed to foster children’s financial education and independence. Tailored checking accounts for teens and a variety of apps offering foundational financial education for children are readily available.
Emphasizing financial responsibility and independence will help students navigate living expenses, from textbooks to personal spending, and instill good financial habits. This holistic guidance sets the stage for a financially savvy student, well-equipped to face the challenges of financial independence during their college journey.
Become a Valued Partner
Preparing children financially for the independence of college life may be just as important as the ability to pay for higher education. Financial advisers are uniquely positioned to be a guide for families as they navigate their children’s path from childhood to career-bound, financially savvy adult.
Encourage clients to involve their family in the planning process. Leverage meetings with clients to develop a relationship with their children or grandchildren when possible. By becoming actively involved with your clients on their college preparatory journey, you become more than a casual adviser. You become their partner, and their children’s trusted resource, on life’s journey.
References
Eichelberger, Brenda, David Gerbing, and Thomas Gilpatrick. 2020, March 15. “Financial Education, College Retention, and Graduation Rates.” College Student Journal 53 (4): 479–489.
Organisation of Economic Co-operation and Development. 2018. “Programme for International Student Assessment (PISA) Results from PISA 2018.” www.oecd.org/pisa/publications/PISA2018_VolIV_USAcountrynote.pdf.
T. Rowe Price. 2017, March 23. “T. Rowe Price: Parents Are Likely to Pass Down Good and Bad Financial Habits to Their Kids.” Press release. www.prnewswire.com/news-releases/t-rowe-price-parents-are-likely-to-pass-down-good-and-bad-financial-habits-to-their-kids-300428414.html.
Torpey, Elka. 2021, June. “Education Pays, 2020.” U.S. Bureau of Labor Statistics Career Outlook. www.bls.gov/careeroutlook/2021/data-on-display/education-pays.htm.