Reducing the Post-College Cash Crunch

By Mike Condrey, CLU, CFP, Northwestern Mutual Financial Network

Each year a new group of parents begins the process of guiding their 11th or 12th grader through the challenge of preparing for and selecting the right college. Parents and their kids invest vast amounts of time and emotion to get into the right school, but they might be overlooking the most important factor that will determine if they complete college successfully – budgeting the money they have to live while in college.

The cost of attending a four-year public or private college is daunting. For the year 1999-2000, tuition and fees for resident students at public colleges/universities averaged $3,356 a year, and private (not including the Ivy Leagues) institutions averaged $15,380 according to the Chronicle of Higher Education. Most families know that they and their children will shoulder some amount of debt to make it happen. What they may not realize is that more and more college students turn to credit to cover basic living expenses, unintentionally increasing their indebtedness to untenable levels.

In a survey of college graduates in 2001 called Generation 2001 conducted by Harris Interactive for Northwestern Mutual, 37% of college students reported that they had three or more credit cards. While it may be expected that great spring break vacation plans will tempt even the most cautious student, college students get into credit trouble by charging small purchases for food, rent and weekend entertainment. To make matters worse, students underestimate the total cost of their student loans and overestimate their salary after college and ability to repay their debt, according to a survey by the U.S. Public Interest Research Group in March of 2001. In the Generation 2001 Survey one in five students reported that they were about to leave campus with a debt burden of more than $20,000.

How serious is this? In 2001 more than 100,000 Americans under age 25 filed for personal bankruptcy, according to a report by the Harvard Law School. The Government Accounting Office estimates that those under 25 now account for 6.9% of all bankruptcies.

No parent wants their child to start out their adult life having to work for years to dig themselves out of a financial hole. But the time to prepare children for the difficulties of managing money through college is long before they send away for college brochures. If you are a parent of a young teenager, you know that they hold a very narrow view of money; it is dominated by the practice of spending, then saving only to spend more. Adding a credit card to their wallet without basic personal finance skills is a disaster in the making.

What can a parent do? To start, recognize that you have to take the time out to talk to your teen about money. But talking is not a classroom lecture. It is important to find ways to help your child learn by doing. For example, set up a simple money diary with your teen. From this they can learn when and why they spend. Do they spend money to make themselves feel better or because a best friend has bought the same thing? Help them set up a budget and savings plan. This will motivate them to take a hard look at how they manage money between paychecks and learn where they can invest their savings.

Fortunately, there is good news. There are a growing number of resources to help parents teach the basics of saving, investing, budgeting and managing money. TheMint.org is a Web site developed to present age-appropriate information and explanations on the topics of saving, spending, investing and earning. Sponsored by the Northwestern Mutual Foundation, the charitable arm of Northwestern Mutual, the site offers fun and interactive ways to get the facts about money management to teenagers, through games and calculators.

For example, the Spending Game, is a challenge to test how your child would use a credit card over 16 weeks of real-life spending choices.

And for those parents who are convinced that they have an unprepared child heading to college right now consider a visit to www.icfe.info, to get credit card warning labels with messages such as: Can I afford it? Or if you can eat it, drink it or wear it, it is not an emergency.

Guiding kids to become responsible adults can overwhelm any parent, particularly as the pressures of college selection enters the picture. Preparing a child for college requires discussion on so many important topics including money management. To ensure that our kids grow up to understand the value of money, the risks of credit and the importance of saving for the future, it is never too early to start.

Mike Condrey, CLU, CFP is the Managing Partner with The Northwestern Mutual Financial Network based in Raleigh, for The Northwestern Mutual Life Insurance Company, Milwaukee, Wisconsin. To contact Mike Condrey, please call (919) 834-7772 or e-mail him at mike.condrey@nmfn.com.

Return to Resources