Ground rules for students funded by the bank of mom and dad

Studying at a tertiary institution is a new and exciting chapter in your child’s life and an important transition into adulthood.

It is also an expensive time for parents who may be expected to fund these studies, either partially or entirely. It can be a tricky time to navigate your finances and your relationship with your child, but it will be easier if you are clear about how their studies and student life will be funded and what you will pay for.

Three financial advisers who have recently funded their children’s studies shared their experiences.
 

Conversations regarding where to stay

A big decision you and your child will need to make is where your child will live while they are studying. Staying at home is likely to be much less expensive than paying for student accommodation, but many young people long for the freedom of living away from home on campus or in student digs.

Craig Torr, director of Crue Invest, saw this as a great learning moment with his sons. His family lives near some excellent tertiary institutions, but his sons were keen to move out.

“As a family, we discussed the impact on our retirement plans and other consequences, like having to cut back on family holidays,” he explains.

“While it was tempting for them to move out, they chose to stay at home while studying, allowing us to continue enjoying many more memorable family holidays.”

If you don’t live close by their place of study, consider your options carefully and find the cheapest solution, such as sharing accommodation with other students. Try not to incur extra expenses you cannot afford or to take on debt simply because your children want their freedom.
 

Set a budget

Create a student budget with your child and discuss how their expenses will be funded. Budget for their living expenses and entertainment as well as for irregular expenses such as fees, books and stationery and necessary equipment such as a laptop. It is an excellent opportunity to talk about the distinction between wants and needs, as well as the importance of saving for special expenses such as holidays back at home or away with friends.

Decide what you will fund

As a parent, you need to be clear about what costs you can afford to cover. Kenny Meiring, a financial planner at SPF Wealth who holds the certified financial planner accreditation, says he pays for his children’s needs, rather than their wants. This covers basic clothing, food, transport and some pocket money. If they want designer clothing or the latest technology, they must fund these themselves.

He was also challenged when one of his children wanted to study overseas.  “The fees were the equivalent number of dollars as rands, and I was unable to pay that kind of money. I agreed to pay the cash equivalent of what I would have paid if he studied here, and he had to secure funding for the remainder,” he says.

Encourage your children to find part-time work to supplement their income, but make sure that the job doesn’t interfere with their studies. “These life lessons that come from earning money from a young age are really valuable,” adds Meiring.

Practical issues

Your children’s approach to money may differ from one sibling to another. If they are disciplined, you can give them a credit card to use for their expenses, knowing that they won’t abuse it by incurring more than agreed amounts. If a child is less disciplined, it may be better to transfer a fixed amount into their bank account monthly to cover the basic expenses you agreed to fund.

Dealing with overspending

Torr believes that having open conversations with your children around money can help them understand the consequences of overspending. “To do this, we encourage an ‘either/or’ approach to spending money, rather than an abundance mindset,” he explains.

If they do overspend, it may be a valuable lesson. Jessica Pillay, a certified executive financial adviser at Momentum Life, believes that financial mistakes are very important because they allow you to learn, revise and change your behaviour. “It helps if your children understand why they are in this situation so that they can become more financially responsible,” she says.

If you need to incur debt

If your child needs a student loan to fund all or part of their study costs, you will need to sign surety for the loan. You will also need to pay the interest and service fees monthly. If you cannot afford this, you will need to have a discussion with your child about how they can earn enough money to cover these expenses.

Pillay advises that if you take out a loan, once your child starts working, he or she must prioritise repaying the loan. The interest will accumulate rapidly if the loan is not serviced.

Avoid sabotaging your retirement plans

There is a delicate balance between giving your child an education that will serve them for life and ensuring your own financial security in your old age. Funding your child’s studies could impact directly on your retirement planning, and Torr believes that your children need to understand this. Have honest money discussions with your children explaining the consequences of inadequate retirement savings, which may result in your children having to support you one day.

Having children late in life can have a big impact on your retirement plans. Meiring has a 21-year age gap between his youngest and oldest child. He had to rethink his retirement strategy when he discovered his youngest was on the way. “If you can’t make the necessary adjustments, you may have to work beyond the traditional retirement age,” he warns.

Pillay reminds parents that they have much less time to save for retirement and pay off debt than children who have recently finished their schooling – they have their whole working lives ahead to plan and save for their future. “The only way to break the generational interdependence is for parents to prioritise their own retirement planning and assist their children within their limits,” she says.