Personal finance expert Deborah Ross Nayrocker is determined to help families live debt-free lives. In her book, The Art of Debt-Free Living: Living Large on Less Than You Earn (Pleasant Word), Deborah provides tips and strategies to help people manage their money.
But Deborah is more than a financial expert: She's also a parent and a strong supporter of Christian colleges. Deborah's a graduate of Bethel College in Indiana, and her husband graduated from Taylor's Fort Wayne, Indiana, campus. Their daughter recently graduated from Indiana Wesleyan University, and their son starts at Taylor University's Upland, Indiana, campus this fall.
In this interview, Deborah answers common questions about preparing financially for college, finding financial aid, and teaching your high school student money management skills for college and beyond.
"Sit down with your kids and help them figure out how to budget their money for items like clothing, school supplies, entertainment and other expenses."
How should a family prepare financially for the college years?
Families pay for college using yesterday's money, today's money or tomorrow's money. Yesterday's money comes from savings, today's money comes from a family's current income, and tomorrow's money is the money borrowed for a student's education. As their children approach their freshman year in college, parents need to pay off as much credit card debtas much of yesterday's moneyas possible. This provides more of today's money to go toward college tuitionand will hopefully reduce the amount of tomorrow's money going toward loans.
Sometimes parents are tempted to invest in high-risk stocks, thinking that investing more may leave them with a larger amount to spend on college. But that can backfire. I recommend that parents invest more conservatively, opting for certificates of deposit, money market funds or low-risk mutual funds.
What are some concrete ways of freeing up more of "today's money?"
Look closely at household expenses. Try to keep your cost of renting or owning a home to less than 25 percent of your income. Also, look for ways to lower household expenses. Look at your grocery bill. Are there changes you can make in your food budget to save money? Assess your family's transportation needs. Do you have more cars than you really need? Could selling one and carpooling or taking public transportation free up some money?
You may also be able to rethink your insurance coverage. For example, when it comes to health insurance, car insurance and other kinds of insurance, you can lower your monthly payments by paying a higher deductible. For example, collision coverage is 15 to 30 percent less with a $500 deductible than with the $250 deductible. That's a strategy that can also work with health insurance.
Finally, look for ways right now to simplify your lives. Don't buy items that will become garage sale items or clutter. Form a strategy so that each purchase you make is a wise one. Preparing a year or two in advance helps you improve your cash flow so that when your student starts college, the financial adjustment won't be quite so dramatic.
Many parents believe strongly in the value of a Christian college education, but may already struggle to make ends meet. What advice do you have for these parents?
Don't be scared by the "sticker price" of a college. Financial aid formulas do take a parent's income into account, and they also include federal aid. Instead of focusing on that sticker price, work on getting federal aid. You start that process by filling out the Free Application for Federal Student Aid (FAFSA). It's the only form used to calculate federal aid. So it's important to fill that form out as soon as possible after January 1. Follow the deadlines to make sure the information is sent to the schools your student is interested in early in the aid process.
What factors can help bring that "sticker price" down?
One factor is the date the financial aid application is filed. It's so important to file financial aid applications like the FAFSA and the applications for specific schools as early as you can. That way, you'll be considered for aid early, when the most funds are being awardedinstead of hoping for what's left after most of the money has already been awarded.
A second factor is the student's academic record, which affects their eligibility for scholarships, grants and loans. Third are the student's special talents or achievements. Many scholarships and merit awards are based on these talents. Financial need is a fourth factor, and that's based largely on the parents' income. Fifth is the student's year in college. Federal programs and financial aid packages tend to offer more aid for freshmen, and it's important to plan ahead for the possibility that tuition may increase, even as the financial aid package may be smaller.
A sixth important factor is the amount of federal and state money the college has. The more money that's available, the more generous the college can be with the student. Also, larger schools may have more money available for work-study programs. Seventh is the college's recruitment goals, and a final factor is the size of the college's endowment.
Are there ways parents can get a sense of how much money their student may be eligible for?
When you and your student start visiting colleges together during sophomore and junior year, you can usually get a brochure from each campus explaining how merit scholarships are awarded. My son will start college this fall, but we were able to get a sense of how much he would be eligible for during the search process, based on his grade point average and SAT scores.
Every school is different, so it's important for parents to familiarize themselves with a school and what types of grants and scholarships and merit awards their students may be eligible for.
So far, we've talked about things parents can do to make sure their students can afford college. How can students help with this?
There are five ways high school students can cut college costs. First, students can work for a high grade point average. A higher GPA helps students qualify for more scholarships and grants. In the long run, it may be worth it to encourage your son or daughter to focus on grades rather than a part-time job. While a job might help your student save money, it could also hurt his or her grades. And this could potentially hurt your child's chances for scholarship and grant money.
Second, strong SAT and ACT scores will give your child an edge, not only when it comes to getting admitted to their top college, but also when it comes to qualifying for grants and scholarships to that school. Third, if your child is a strong student, encourage him or her to take Advanced Placement (AP) courses. Students who take these courses are offered a test through the College Board (the group that administers the SAT). If they score well, they can earn college credit. With enough of these credits, a student can "test out" of a full semester's worth of credits before they even move on to campuswhich saves a lot of money.
Summer school is a fourth option. By taking a summer class at a local community college, your student can earn a few hours of credit that may be transferred to the college he or she attends. Be sure to have your teen call the colleges he or she's interested in to make sure those credits will transfer. Finally, your student may be able to save money by being flexible in choosing a college. If a second-choice school offers a financial aid package that would allow them to avoid loans, it may be worth looking closely at whether that second-choice school could be a good fit.
What about incurring loan debt?
Sometimes we have no choice but to get a student loan. If you do need a loan, it's better to get it through a federal loan program, because the interest rate is lower than most private loans. Do everything you can to keep the amount you take out in loans as small as possible. Right now, the average college student graduates with $20,000 in student loans. That's a lot to repay. Still, a student loan can be seen as an investment if your student will be able to make more money than they would without the degree and if they have a workable plan to pay it off.
What are some personal finance skills parents can teach their high school and college students?
I recommend teaching your child to ask themselves three questions before making a purchase: First, is what I am buying a need, a want or a luxury? That helps them make wiser choices. Next, how many hours of my life is it worth? If your child works for an hourly wage, that really puts things into perspective. Third, teach them to ask if the purchase helps advance any of their goals. If your son or daughter plans to go to college and knows they'll need some savings, this question will steer them toward wiser decisions. If they can develop a habit of answering these three questions, they'll have a head start in being wise consumers as adults.
Sit down with your kids and help them figure out how to budget their money for items like clothing, school supplies, entertainment, and other expenses they can be responsible for if they have an allowance or work. Help your son or daughter learn how to use a debit card and how to balance a checkbook. Also, if your son or daughter uses a credit card, teach him or her to use it wisely. I read recently that the average college student accrues more than $2,700 in credit card debt while in school, and about 10 percent owe more than $7,000. These statistics show that we need to help students understand the importance of paying off a credit card balance within a short timelike two to three months.
How can parents encourage high school students to save money toward school?
If you can afford it, set up a "match your savings" plan. For example, you could promise your daughter that if she saves $1,000 for school from her summer job, you'll match itor double it, even. Give your kids incentives so that they'll realize there's a reward for saving. If your child is constantly careless with money, consider using consequences, like taking away privileges. Again, remind your children of their goals, and help them see how they can work toward the goal of going to college through actions like saving money.
What kinds of mistakes do college students tend to make with money, and how can parents help them avoid those mistakes?
Kids often run into problems with the "miscellaneous" category of the budget, because they often don't realize how much they've spent. Kids like to have fun and they want to treat their friends so they might buy pizza for everybody, or they might do something like go on a ski trip because they want to hang out with their friends. Help them realize that if they spend their whole miscellaneous budget one weekend, they won't have any money the next.
I was reminded of a second major money problem when I had a book signing at my alma mater, Bethel College. The bookstore manager shared that students often charge the semester's books to their credit cards knowing they won't be able to pay the balance off at the end of the month. The attitude is Oh, when I get out of college I'm going to be making all this money, so I'll be able to pay it off. But these are students who are planning careers in social work or music or art where they shouldn't expect to make high salaries. As you deal with issues of budgeting, credit and loans, it's important to help your student to be realistic about the realities of the economy and how factors like occupation affect the availability of jobs and what kind of salary a student can reasonably expect to make at an entry-level job. If they can think realistically, they can plan, spend and save accordingly.
For some college students, credit ratings and payment history seem like something you worry about in the futureafter graduation. How can parents help students see money management as something with more immediate consequences?
Talk to your son or daughter about how their spending habits now will affect their futuresnot far in the future, but just a few years ahead. One trend I've noticed is that Gen X and Gen Y college graduates are more inclined than older workers to leave jobs or to start their own businesses if they aren't happy at work. Today's college grads are looking for the "right fit." They're more concerned with having the right match in an employer or in the workplace. But if money hasn't been set aside in an emergency fund or savings, this could lead to financial hardships. So these grads need a bit more in savings or emergency funds than older grads.
In my book I talk about the roadblocks to debt-free living and the benefits of debt-free living. And one benefit of not having loads and loads of debt is that you are free to make a career change, or you are free to search out what you think you'd enjoy doing more in life without feeling confined to that paycheck. Graduating with fewer loans and less credit card debt gives your child more freedom to make choices after graduation.
Do you have any final thoughts to share with parents?
This whole process of looking at Christian colleges and figuring out financial aid can be interesting and exciting. We've enjoyed learning how the financial aid process works and observing how different schools prepare the parents for what to expect. For my family, it's been fun visiting college campuses so our children can decide which school is the best fit for them. I think the Christian college atmosphere is so important, because it can help your student define who he or she is as a Christian and meet friends that will be there for them throughout their lifetimes.
Deborah Nayrocker's book, The Art of Debt-Free Living, is available on Christianbook.com, or through her website, artofdebt-freeliving.com.