Your child is heading to college this fall. After you’ve figured out the big spending issues—tuition, room, meal plan, and fees—you need to consider how your scholar will handle spending on everyday expenses, such as toiletries, supplies, laundry, travel, activities, and entertainment. Here are some smart ways to handle transferring funds and teach your child how to manage money.
1. Get a free checking account. Your child can open an account alone, or you can have a joint account, which will let you monitor spending. To limit the number of fees you’ll pay for cash withdrawals, pick a bank based on the convenience of ATMs on or near campus. Local banks or credit unions may offer free checking accounts with no maintenance fees, and some either offer a network of no-fee ATMs or reimburse fees charged by other banks when you use their ATMs. Another option is to choose an online bank with no checking-account fees that also reimburses ATM fees; Ally Bank is one example. Major banks offer "student" bank accounts with less-stringent requirements and lower minimum balance requirements, but several have monthly fees.
If you'll be depositing money into your child's account, a national bank in your hometown that also has a branch near the school can allow you to do it easily.
2. Weigh cash vs. debit cards for everyday purchases. With a no-fee checking account and a convenient ATM, your kid can easily access cash when needed. Taking out $50 maximum at a time can limit her spending. Your child can also use a debit card linked to the account for everyday purchases, which will allow you to see how he is spending the money, assuming that you’re a joint owner of the account or allowed access to online statements. Your child also might benefit from budgeting tools many banks offer on their websites.
A downside to a debit card is the risk that your child might spend more than what’s in the account, which can result in steep overdraft fees. Banks must ask you if you want to enroll in “overdraft protection” programs, which allow you to make one-time point-of-sale purchases and ATM transactions with a debit card even if the account balance is insufficient to cover them. By opting in, you give the bank the right to charge high fees, averaging about $35, each time an overdraft occurs. If you opt out, which we recommend, your child’s debit card will be denied if she tries to make a purchase or ATM withdrawal with insufficient funds to cover it. Your child might be embarrased if that happens, but overdraft fees can result in additional fees if they’re not repaid within a certain time period.
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3. Use credit cards cautiously. Before federal credit-card reform went into effect in 2010, credit-card companies solicited students on campus to open accounts, offering T-shirts and other gifts to entice them. The law now requires students to have either proof of income or a co-signer before they can open a credit-card account. If you co-sign for your child’s credit card, you’ll be responsible for paying the balance if he fails to do so. Another option is to add your child as an authorized user on one of your accounts. Under the Fair Credit Reporting Act, being an authorized user of a credit card will still allow her to build her own credit history.
Some credit-card issuers offer student cards, which generally carry a low credit limit. You can search for these cards on credit-card comparison sites such as CardRatings.com and LowCards.com.
Before you put plastic in your child’s hands, make sure she understands how a credit card works. LowCards.com advises that you show your child your own credit-card bill to explain finance charges, grace periods, and minimum payments. A good teaching tool is the “minimum payment warning” that credit-card issuers are required to place on bills. It shows how long it would take to retire your debt and the total amount of interest you’d pay if you made only the minimum payment each month. Instruct your child to charge no more than he or she could afford to pay in a month, and to avoid carrying a balance.
The tendency to overspend when using credit cards makes them best suited for emergency purposes. As with a bank account, you can set up online features and alerts to make sure your child keeps his or her spending in check.
4. Be careful with student-aid debit cards. A June 2012 study by the U.S. Public Interest Research Group found some 900 agreements between colleges and banks to electronically disperse financial aid and grant money on debit cards that often double as student IDs. Some of these cards carry hefty overdraft fees, reload charges, and fees for using debit cards with a PIN instead of signing for purchases. Some programs have limited ATM access, causing students to use outside ATMs, thereby racking up fees.
If the program offered by your child's school is laden with fees, or the ATM locations are inconvenient, she should ask to have the student aid electronically deposited into a checking account not affiliated with the school, or to have a check mailed.
5. Check for fees on prepaid cards. Reloadable prepaid cards, which work like debit cards but are not part of a checking account, are attractive to people who don’t have a bank account or who spend too much using credit cards. Prepaid cards usually bear familiar logos such as Visa, MasterCard, or Discover, and they can generally be used to make purchases in stores and online, receive direct deposits, pay bills online, and obtain cash at an ATM. Some, such as the UPside Visa and American Express Pass, are marketed to students and their parents as a way to help young people learn to manage money.
A 2013 Consumer Reports analysis of prepaid cards found that they can be loaded with fees, only a few of which might be disclosed at the point of sale. Prepaid cards can have monthly maintenance fees, reload fees, and inactivity fees. Moreover, they lack the guaranteed protections we take for granted with debit and credit cards, including what happens if the card is lost, stolen, or used for unauthorized transactions, or if the bank behind it fails. The good news: The better prepaid cards no longer have these fees, overall prepaid card fees have fallen, and features have improved.
Recently, some mostly fee-free cards have popped up on the market, though they typically require money to be added via direct deposit or from a bank account to avoid fees. Bluebird or Green Dot prepaid cards are such low-fee and high-feature cards, notes Christina Tetreault, a staff attorney at Consumers Union who wrote the prepaid-card report.
"The Green Dot card has an edge for college students because you can pick either Visa or MasterCard branded cards," she said. "For parents who want to keep close tabs on their kids, Bluebird allows for the creation of sub-accounts. That means parents can open an account and give their kid a Bluebird prepaid card linked to a sub-account, allowing the parent to monitor the sub-account (the kid's account), transfer funds, and otherwise keep an eye on the financial habits of the student."
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