Financial Lessons | Capital Group

Ready, set ... it’s almost time to go!

Even though your college-bound teenager may be squeezing in every minute she can with her friends, you’ve got a lot of wisdom to share. Sitting down with your teenager and helping her get her head around the financial realities of college can help her feel more prepared and give you two a little quality time.

Students ready for college

Key takeaways

  • Set her up for success by helping her get her finances in order.
  • Approach credit cards with caution, but discuss opportunities to build a credit history.
  • Understand the basics of student loans, even though repayments don’t start until after graduation.

Your final financial prep.

Knowing your child has her finances in order before she leaves for school will help to ease some anxiety — both yours and hers.

Be prepared.

Once your teen has made the decision about where to go to school, you two can sit down together and make a plan. The school may be able to give you an idea of the overall costs of campus life, including tuition, books, housing and entertainment costs. You can also speak to friends or relatives who have children already in college to get information about budgeting and expenses that may not be on your radar.

Credit cards: Proceed with caution.

Take this opportunity to teach your teen about the essentials: interest rates, cash advances and finance charges on late payments. And make sure she understands the dangers of charging up a card with dinners out or a shopping spree.

Once your teen understands how to use (and not use) a credit card, you can explain the importance of building a good credit score and how a bad one could affect everything from getting an apartment to landing a job.

To help protect her credit score, your teen can set up automatic payments to make sure her bills are paid on time. If she keeps her credit limit low, she can build up her credit score and learn some personal discipline.

Continue the 529 education savings plan.

Many freshmen start their college experience with an open mind when it comes to careers. However, if your future student already knows what she wants to do, she’s in a great position to go for it. If that career involves continuing education, make sure you keep contributing to that 529 savings plan, which can be used for many kinds of education. It’s also a great opportunity for your teen to contribute to her own future and learn about the advantages of investing as she watches her money grow. As you probably know by now, starting small and starting early will make a big difference.

Know the student loan basics.

Many students will be responsible for paying back a student loan. If this is the case for your child, she should have a clear understanding of what that entails.

Explain the types of loans, the interest rates and when she’ll be expected to start making payments. Stress the importance of avoiding heavy debt, just when she’ll be setting up her independence.

Got leftover cash? Leave it alone.

Her student loan amount may be more than enough to cover essential educational costs, like tuition and fees. If there's extra spending money, she should spend it carefully. It could go toward transportation for home visits, for example, rather than a shopping spree.

One way to keep your teen on track is to set up automated monthly transfers of set amounts from the student loan money to a separate account. If there’s less money available, she’s less likely to overspend.

If she’s picking up a paycheck from a part-time job, it’s a good idea to designate a percentage of that for savings. Building a reserve of cash can be empowering. Think how good she’ll feel when an unexpected expense comes up and she’s got it covered.

Be a trusted resource.

Even though your teen will be on her own when she gets to college, let her know that you’re there if she needs you. Keeping the lines of communication open will help your child feel comfortable discussing her finances with you. That way you can help her catch any financial missteps when they’re small, and she can rest assured that you’ve got her back as she starts the next phase of her life.

Things to do next:

  • Make a date with your teen to sit down and plan a budget for school.
  • Suggest your teen open a checking account at a bank near campus before she starts school.
  • Show your teen how quickly credit card interest can add up if a purchase is not paid off quickly.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and CollegeAmerica Program Description, which can be obtained from a financial professional and should be read carefully before investing. CollegeAmerica is distributed by American Funds Distributors, Inc. and sold through unaffiliated intermediaries. 

Depending on your state of residence, there may be an in-state plan that provides state tax and other state benefits, such as financial aid, scholarship funds and protection from creditors, not available through CollegeAmerica. Before investing in any state's 529 plan, investors should consult a tax advisor. 

If withdrawals from 529 plans are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. State tax treatment of K-12 withdrawals varies. Please consult your tax advisor for state-specific details.

American Funds Distributors, Inc., member FINRA.

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.