By Carol H Cox
At this time of year, the attention of many high school seniors’ becomes focused on transforming into college freshmen. It’s a thrilling time for young adults as they experience increasing independence, emotional untethering, and face new challenges. But before they “cut the cord” there are a few personal finance basics they should know.
- Having a checking account with an ATM/debit card attached can make handling student finances easier.
Ideally, with the help of a parent, college-bound teens will have opened a checking account sometime during their junior or senior year of high school. Checking accounts are a convenient and easy way to store and access money. And most student checking accounts are free until the accountholder graduates from college. There will be many expenses in college that aren’t included with the payment of tuition, room and board, and fees, whether it be books, class supplies, toiletries, meals off campus, transportation costs, or other things. Using an ATM/debit card or writing checks can be an efficient way to handle these costs.
To avoid ATM fees, students will want to have an account at a bank or credit union that has ATMs near their chosen college. Teens and parents can check out the following NerdWallet article for some pointers: “How to Choose a Teen Checking Account.”
- A spending plan can help students avoid running out of money unexpectedly.
Setting up some kind of control and tracking system of money flows is an important habit to establish before going off to college. Students need to manage their spending so that they have enough money each month for living expenses. They can download budget worksheets online and complete them or use smartphone apps to help them stay on top of their spending. It doesn’t matter how it’s done, as long as it’s simple to use, easy to record spending, provides relevant information, and is flexible so that plans can be adjusted without too much trouble. (Some popular budgeting apps to try are as follows: GoodBudget, Level Money, Mint, and Mvelopes.)
- Knowing how credit works and how to build a favorable history is important.
Some college students may have access to a credit card either as an authorized user on one of their parents’ accounts or by having a parent co-sign on a credit card account. In either case, the student’s credit behavior can affect the parent’s credit history. And many students, usually after they turn 21, will eventually have a credit card account that they are wholly responsible for.
The credit history is used to determine a person’s credit score—the credit history being the credit related actions of the card user(s), such as the credit bill paying behavior, the amount of available credit being utilized, and the longevity of credit accounts. Having a favorable history can lead to a higher credit score. And having a higher score can mean that the given individual will be offered lower interest rates for borrowing funds, like to purchase a car or house, and it can even make getting a job or a cell phone contract easier, as well as renting an apartment.
Beyond an understanding of the importance of higher credit scores, it’s essential for students know how to stay out of debt trouble by avoiding the over usage of credit and by developing the habit of always paying a credit card bill in full every month, so that a balance never carries over into future months, growing and incurring interest charges. To gain a better understanding, read this Reader’s Digest article:
“Your Credit Score: The Magic Number Explained.”
- Understanding how student loan debt works before signing up is crucial.
It’s vital that students understand any student loan obligations they are considering, long before they commit to anything. Student loans are a huge responsibility—the standard federal student loan has a 10-year payment schedule. (There are also many income-based repayment schedules of varying lengths available.) Once a student is finished with school, loans typically enter the repayment period after a six-month grace period.
According to The Institute for College Access and Success, the average graduating college senior in 2014 had $28,950 in student loan debt. A 10-year repayment plan for $28,950 at the current undergraduate federal student loan interest rate of 3.76% translates to payments of $290 for 120 consecutive months. That’s quite a financial weight for a 21-year-old to bear.
College selection decisions are best made with a thorough understanding of all financial obligations involved by students and their parents. Here are 3 helpful articles on student loans:
“10 Common Student Loan Mistakes”
“Taking Out Student Loans? Do It Right with These 8 Tips”
“The Right Way to Borrow for College”
These are just 4 important bits of financial knowledge a student should have before going off to college. Please share with us your experiences. What other information/tips/tools do you think are useful before or during college?