College money all at once or allotted over time?
By glblguy
I received a very interesting question from a reader this week. Marsha asks:
If a child has money given to them for college, should it be
literally given to them, or slowing allotted to them? Please explain the
answer. Seeking wisdom….
Well, I’m not sure if I would be considered wise or not, but I certainly have an opinion and here’s what I would do:
I would allocate it over time. As I read your question, the wisdom of Luke 16:10 came to mind:
Luke 16:10 – “Whoever can be trusted with very little can also be trusted with much.”
While most of us are adults when we get to college, we’re young adults and in many cases new at managing large sums of money and still somewhat immature when it comes to life in general. The primary reason I would allocate it is to help the student manage the money. The temptation for a young student to use those funds for things other than college is just too great. Having been a young college student a few years back (okay, maybe more than a few years), I wasn’t financially mature enough to manage a large lump-sum of cash. Help them become trusted with with “very little” first so they can manage much later.
Managing the college funds
Here’s how I would manage and allocate the college funds:
- Work with the student and involve them so they can learn – Make sure that you involve the student in each and every step of the process. This is a great opportunity to help them learn to manage a large windfall of cash and teach them how they can make the money work for them in the short term. This is also a great opportunity to help them create and follow a budget and learn how to allocate out the money to last the duration.
- Make a budget – Lay out how the money will be spent on a month to month basis. I would go ahead and do this for the full 4/6/8 years, based on the type of degree they are getting. Things to include are: tuition, housing, food, books, computer, furniture, gas, etc. Work with the student to come up with the various different expenses and allocate money to them. Doing so will help you identify whether the money is enough, where you may need to cut-back or maybe even where you have excess. The budget will drive how money is allocated to the student on a monthly or weekly basis.
- Determine where the money will be kept – This depends on the age of the child now. For a younger child that is still a few years away from college, I’d place the money in a high-interest bearing CD. If the funds will be immediately required, than I would place the money in a high-interest bearing savings account. I would also establish a checking account, and set-up an auto-transfer to the checking account. I would not place the college money in the students name, this is again to avoid temptation.
- Consider any tax implications – You didn’t specify the amount, but I would make sure you consult a tax professional to understand any tax implications as well. I’m not a tax expert at all, and there may not even be any implications, but it surely wouldn’t hurt to understand this so you aren’t caught off guard down the road.
A blessing
With all of that said, I think it’s awesome that you are having to ask this question! Having been someone that worked some of their way through college, what a blessing to have college expenses paid for! Make sure your child/student understands how great of a blessing this is and the opportunity this gift provides. Going into a career student loan free, and with a fully paid for education will really give them a head start financially. Make sure they take advantage of the opportunity.
Thoughts from readers
Thanks for the question, and I hope I’ve provided some “wisdom” as requested. I’d like to ask my readers to chime in as well: Do you agree with my take? What other considerations have I missed? Add a comment and help Marsha out!
Photo by: brunkfordbraun
August 14th, 2008 at 6:55 am
I think it depends on the maturity of the student. I come from an Asian culture and over here, our parents will scrimp and save for years to put their kids through college, but I’ve seen some students take advantage of their parents.
They will tell their parents that it costs a certain sum to enroll but after receiving it, they will use the money to fulfil other pleasures. Then, they tell their parents that the college wasn’t very good so they will pretend to drop out and ask for money to enroll in another one.
On the other hand, another student was given a huge sum of money that will cover college fees + allowances for the next 4 years. He paid the college fees in advance and spent everything else within the first month.
Even though he came from a wealthy family, he had to humbly work while studying like the rest of his college mates.
August 14th, 2008 at 7:47 am
I think allocating it is a good idea. It gives time for both parties to adjust to the new change. The young adult will be improving on their financial skills. The parents can give their child more freedom with each passing semester and also based on their habits.
August 14th, 2008 at 8:14 am
One of the things I learned at Body World (it’s a museum exhibit showing the human body) was that the portion of the brain that handles long term planning and risk analysis isn’t fully developed until your early 20s. It essentially means that the typical person wouldn’t consider planning for retirement when you were in college (obviously people develop at different rates, so it’s not true across the board) so I think that giving someone all the money at once would be a mistake in most cases. I agree with the idea that allocating is the way to go.
Also, like Laura just wrote, the adjustment period is important. College is a big step, you don’t want to make things more cumbersome by giving them the money without the skills to manage it properly.
August 14th, 2008 at 9:44 am
I think it depends on the age of the student NOW more than anything else. If the kid is 10, there is plenty of time to teach good money management, budgeting, etc. so that by the time college come around you can feel good about allotting 1-4 years of the money at a time.
But, if the kid is 17 and hasn’t really had this training, then parceling it out is probably the way to go.
August 14th, 2008 at 10:29 am
I don’t even believe in giving kids money for college at ALL. Then again, I have no kids and I had to work my way through school with two very small scholarships. My mom probably could have helped me if I’d asked but I didn’t. My brother on the other hand is in the hole for 40k and my mom is cosigner. :( And she helped pay for his expenses.
I am graduated with a full time job. He still hasn’t graduated (9 years later) and is a waiter.
I love my brother and there are other health issues for why he didn’t graduate, but being handed things does not help you appreciate what you are earning. Unless you are a very special person. And most kids at the age of 18-22 are not mature enough to appreciate a parent’s generosity.
August 14th, 2008 at 11:29 am
My stepdaughter was in an accident when she was younger and received a lot of money for college. She got $20,000 each year for five years, plus she had a huge amount in investments. Her first year, she lived at home, was working, and went to community college. She blew through the entire $10K that year, plus her entire earnings. On what? We don’t really know–dumb things. One thing that really hurt her was that she had the money in savings, and whenever her checking account got down to $50, $200 would automatically transfer from savings to checking.
The next year, we tried to be smarter. She went away to school for the year. We allotted her a certain amount of money each month, we “paid” it into her checking account like a paycheck. She didn’t work, she just went to school. And she really noticed this, she was calling to ask for more money all the time.
It was frustrating, we did that for two years until she decided that she didn’t want to continue with school :(
I don’t know how we could have done it differently, but for her–not having to work for her college education at all or contribute anything to it made her apathetic to college as a whole. She’s now 22 and living off her investment money, supporting her deadbeat non-working boyfriend as well.
August 14th, 2008 at 11:47 am
I am generally against pre-paid college tuition plans because they are usually a horrible rate of return when purchased years before students attend college. However, as a short-term solution, it might make sense to “pre-pay” tuition for the student directly and then allot any additional money at the beginning of each semester for books, housing, incidentals, etc.
I agree this is a tremendous blessing, and I’d hate to see the money squandered when the return on a college education will pay dividends for years to come in terms of a higher salary, more employment opportunities, etc.
August 14th, 2008 at 12:13 pm
Be sure to look at the legal implications as well. Was this money given directly to the child? If so, depending on the laws in your state, you may have no right to withhold that money after a given age. (Technically, even before that age, you can only hold it in a joint or UGMA account.)
In the end, it’s really what the kid can do, mixed a bit with the parents. My parents had my college savings (IE, anything I’d saved while being a kid) in UGMA accounts. I never asked for control over them. I trusted my parents to handle them appropriately, and I was kept generally informed of their status. Dad paid my college bills and let me know what I was personally responsible for as well (IE, from summer jobs, and I always had a campus job). When I was way over the age of majority, Dad finally transferred them completely over to me. One, I actually asked him to keep until I got married (although the company was a bit putout when I said I was transferring it finally to my own name, and it was 8 years late; they still did it). [Yes, I did so well that some of my college savings paid for my wedding! Some more of it has never been touched and hovers around $8000 these days….] Anyway, my point is that I managed my money just fine, but left it in the hands of my parents to dole out appropriately for college. Mainly because it was easier–I didn’t have to track the investments, and Dad just forwarded the annual statements to me for taxes.
On the other hand, my brother spent money like water. If he had had full control of all of his money, it would have been gone in a year, too.
August 14th, 2008 at 6:04 pm
My brother and I each have money direct-deposited into our accounts from our trust fund every month (our mom is notoriously bad at getting money to us quickly), and we’re responsible for budgeting. To pay for this fall’s tuition, I decided to not use my mom’s credit card (for which there was a surcharge) and had the amount wired to my account, where I immediately paid my bill. (I have to admit, it was kind of awesome to have “that much” money in my account – my checking balance has never been so high! And probably won’t be until I get a job in the real world.)
Truth is, if my brother and I had direct access to our money, we’d probably have blown it. (He definitely would have – he’s got some money-eating hobbies, and I just took up scuba diving!) As it is, this way, we learn to budget and keep track of where our money is going. (And I have to save up to buy scuba equipment :D)
My first roommate’s parents gave each of their children a certain amount of money (I don’t remember how much) to do, in what is as close to a quote as I can remember, “get married, go to college, buy a Corvette, or whatever” they wanted to do. Luckily, all their children are responsible, though my roomie DID buy a motorcycle (used, at least – and her mom told her it was too much bike for her!).
So it all depends on how well you think your kid(s) will do with oodles of money – though I personally vote for allocation, as I think 95% of the people who are heading off to college for the first time have their heads up their butts in regards to personal finance.
August 14th, 2008 at 8:52 pm
I would definetely allocate it. While my children are only 1 (almost 2) and 7 months we have already begun to discuss their future. We have debt we are paying off with the goal in mind of being able to put what we paid in debt into savings accounts for them every month within the next two years. We want them to be able to go to college for at least the first two years worry free of student loans and what not. I did not have that opportunity but I want my children to.
I would personally, thinking about it, allocate the funds by semester allott for enough to pay for that months financial burden for school and enough to secure the needs.
August 14th, 2008 at 9:10 pm
I think a lot of commentors here are putting the cart before the horse. You’re arguing that 18-22 year olds don’t have good financial sense, therefore they should not be trusted with the money. Why not ask instead why 18-22 year olds don’t have good financial sense. Sure, some of it has to do with actual brain immaturity, but a lot more of it has to do with lack of training and practice.
Attack the root of the problem first, rather than treating the symptoms and consequences of it.
August 15th, 2008 at 12:49 am
Great story from college. I will also mention it was a Christian collge, so no bias on the public sector. We had a group of guys that would travel to Las Vegas frequently and gamble. Yes, I know what you are thinking, and yes it happens. They also drink too:) The parents of one of these boys, gave him tuition money for the entire year in his checking account. Yep, you know what happened. On one of these trips he got carried away and bought everyone a nice suite and flew everyone to Vegas because he was going to win big. Well, he spent everything, and didn’t come back the next semester. How much did he lose? Over $10k.
I could argue that students should be prepared before college and be educated to budget funds for books, food, tuition, medical. I hope to teach my children the benefits of fiscal responsibility, tithing, budgeting, and saving. Will it all stick? I hope, but giving a child $10k upfront might be asking for trouble.
August 15th, 2008 at 10:50 am
I think that having that much money up front would be a great way to introduce a teen or child in a very real and practical way to money management and financial planning. While their brains may not be able to fully understand long term planning (as one commenter pointed out) that is what you are there for, to be their long-term thinking parent. You can help them understand the different methods of investment – from CDs to bonds to equities to mattresses depending on the time horizon you have. If the child is 9 or 10 you could probably put a small portion of the money into equities with the bulk of the money still in high yield CDs or savings accounts. You might even want to use some of the money to help them start their own business.
That way you could help teach them a whole slew of money management skills at the same time and still be helping them afford college.
August 15th, 2008 at 1:34 pm
In addition to tax implications, you also need to consider the money’s effect on financial aid. Money kept in a student’s name is considered “college money” in the eyes of FASFA – it counts against the grants they may be eligible for. Parents are allowed to have more money before it counts against grants and other forms of aid.
I had a sizable sum from a car accident for college, which we put into an account in my mom’s name. Each semester I sat down with my parents and discussed tuition costs, and she wrote a check. Any day-to-day expenses had to come from my job… I argued about it then, but now I realize what a smart decision they made!