Heading to college means students are going to become much more independent. Many are going to college for the first time, meaning they will be responsible for managing their finances, paying their bills, tracking their expenses, and generally being in charge of their finances on their own for the first time. This can be a wild ride. By learning a few basic money skills before they head off to college, students can make the transition to financial independence much easier on themselves and avoid a lot of financial pitfalls along the way.
Acquiring a few essential skills before venturing off to college will better prepare students for managing their money during their college years. Independent students with a good grasp of financial management can avoid excessive debt, better navigate through financial aid, organize and track their expenses, and make sound financial decisions to meet their financial objectives.
Understand the True Cost of College
In addition to tuition, students should also plan for housing, a meal plan, transportation, textbooks, technology, school supplies, and other expenses to find the true cost of a college. They should also review scholarships, grants, savings, work-study, and federal financial aid such as loans and grants to see how much will be covered for the academic year. If there is a remaining funding gap, students and their families can compare private student loans, making sure to carefully review interest rates, repayment terms, and total amount to be repaid in the private loan for the college they choose.
Before choosing a school, students and their families should calculate the full estimated cost for each academic year. They should then review scholarships, grants, savings, work-study opportunities, and federal financial aid to determine how much of that cost is already covered.
If there is a funding gap after exhausting grants, work-study, and federal and state aid, it is also worth comparing the terms and conditions of any private loans for college that may be available. For example, students and their families may wish to look at private student loans offered by institutions as well as those provided by other lenders, such as SoFi, and then compare the interest rates, fees, repayment terms, and total amount to be repaid of each.
Understanding the full cost in advance helps students avoid borrowing more than they actually need.
Learn How to Build a Realistic Budget
A student budget does not need to be complicated. It simply needs to show how much money is coming in and where that money is going.
Understand where your money is coming from and how to account for every dollar of it. Students can begin to make a budget by first categorizing all of their income. For most students, this would include funds from financial aid, refunds, family contributions, savings, and a part-time job. Then they should list all of the expenses for which they are responsible and categorize these as fixed expenses (such as rent, lease agreements, a cell phone bill, etc.) and as variable expenses (such as going out to eat, buying things to keep in the dorm room, clothes, etc.). It is good to track spending for a whole month in order to understand where there is room for improvement in the spending habits of a student. Keep in mind that even the best budget does not account for all unexpected situations that can arise, and therefore room should be left for such occurrences.
For one month, write down everything you spend. You will see little purchases that you had no idea were adding up so quickly: small purchases here and there, the fee for delivery, a subscription that you had forgotten about, the frequent meals you have off campus, and more.
A student’s budget is always going to contain elements of uncertainty. Therefore, while a student’s budget should set out ideal scenarios of how a student intends to spend their money, the budget should also attempt to allow for certain ‘extra’ expenses to account for any unexpected costs incurred by a student during the academic year.
Know How Interest Works
Interest can significantly increase the total cost of borrowing. This applies not only to student loans but also to credit cards, personal loans, and other forms of debt.
A student should know how much he or she is borrowing and how much he or she will have to pay back. This includes knowing the difference between the initial loan amount and the total repayment amount. Students also should know the difference between fixed interest rates and variable interest rates. They should also know when interest starts to accrue and how long they will have to repay the loan.
By learning how interest on a student loan works, a student can determine how much the student is really borrowing, compare financial products offered to similar students, and avoid agreeing to terms and conditions that aren’t clearly explained.
Use Credit Carefully
When credit cards first come to your attention, they can often be presented as a positive tool to establish good credit. As with any financial product, though, if you end up using too much credit and cannot pay back the borrowed funds in time, it can have serious and long-lasting financial consequences. Avoid borrowing more than you are able to pay back every month and make payments on time. Review your monthly and periodic statements to detect errors or fraud, and keep your outstanding borrowed funds as low as possible.
Students should not charge more than they can afford to pay back by the end of the month. By making timely payments, keeping their balances low, and monitoring their accounts for errors or fraudulent activity, students can use credit responsibly to help establish a good credit history. This can be important for future financial needs such as renting an apartment or qualifying for a car loan.
Making good choices with your credit can be beneficial to your future. Whether it is renting an apartment, purchasing a car, or even looking for financial services of any kind, having good credit can make your life much easier.
Prepare for Emergencies
Unexpected expenses will occur. You can plan for them by having some money set aside to cover any emergencies that may occur. Even a small amount set aside each month will help you cover any unexpected expenses without having to turn to credit cards and accumulate debt to pay for an emergency repair to a laptop or car, or to pay for an unexpected trip home to attend a family funeral.
Students can build up an emergency fund even with the smallest of monthly savings. That way you will not have to rely on your credit cards to pay for unexpected expenses, and you will not have to miss a payment for your other expenses.
However, there is no need to be an expert on all of these financial issues before sending your child off to college. By educating your child on the basics of creating a budget, comparing options for borrowing to help pay for college, using credit responsibly, and saving for the unexpected events that may occur, your child will be well-equipped to handle any financial situation that may arise while he or she is in college and after graduation as well.
