Personal finance 101: Student life

College is the perfect transition period for students to become financially responsible, according to Robert Stammers, the director of investor education for CFA Institute. To be financially responsible doesn’t necessarily mean 100% self-sufficient money-wise but it does mean being fully accountable.

The idea is to have students slowly take over budgeting and spending decisions over a four-year period, explained Stammers. In the beginning, parents will have most of the decision-making power. “By the time (the student) is a senior, they should be fully in control,” he said.

The road won’t be easy—people learn from their failures just as much as their successes, Stammers says—but you’ll all be better off for it.

The first step is to work together to create a back-to-school budget (try the government’s student budget worksheet). Determine how much you’ll need to cover tuition, course materials and living expenses. Friends and older siblings can be helpful in setting realistic expectations, keeping in mind that the average undergraduate tuition fee was $5,366 for the 2011/2012 school year, according to Statistics Canada. Tack on roughly another $10,000 per year for students living away from home.

Next, calculate how much you expect to receive from government student loans and grants/scholarship and how you intend to cover the difference. Will mom and dad step in? Is there an RESP to tap? Will the student use some of his or her own savings? Or work a part-time job? Perhaps a personal loan or student line of credit is needed to finance the gap?

Whatever funding methods are chosen, it’s important to set clear expectations. Let’s assume mom and dad agree to pay for food while the student accepts responsibility for monthly transit passes. During freshman year, parents should probably provide a food allowance on a weekly or monthly basis. As the student progresses, however, consistently meeting their own payment deadlines (bus pass), parents should be able to distribute cash when it’s convenient for them without worrying that their young scholar will call home in a panic because they blew the cash all at once and have nothing left for groceries.

“In the beginning, you’re going to get the calls,” said Stammers. “Hopefully you get them less and less.”

This type of self-discipline becomes important when and if you take on a student line of credit. As Stammers rightly points out, parents have to sign off on initial bank paperwork but it’s often the student who decides how much, when and where to spend the borrowed cash.

“There’s a real temptation to overspend. Borrow only what you need.”

Graduating with student debt is expected—the average debt load is $37,000, according to the Canadian Federation of Students—so you’ll want to keep that already-high figure as low as possible. To do so, avoid going into debt for non-essentials like concerts and spring break trips.

To finance things like entertainment and travel, which (within reason) are part of a full student life, a part-time job is your best bet. Juggling course work and a few short shifts a week is possible; it can actually create good time management habits, Stammers said.

“It helps drive home that idea of deferring immediate gratification for future savings goals.”

As for credit cards, “I don’t think they are necessarily bad. They are great for emergencies but you’ve got to make sure they are not an excuse to spend,” he added.

If students can successfully balance a budget while in school, chances are they’ll be able to manage their own debt repayment when the time comes.