Financially Savvy Students
Before any student leaves for college, a discussion about finances is in order.
Below are discussion topics excerpted from Charles Schwab’s On Investing, (Summer 2011), which I’ve expanded upon, that provide keys to being financially savvy both in and out of college. Each section addresses the needs of everyone affected.
Parents or guardians must decide how much they’ll personally contribute to their child’s education. Be realistic about what you can afford for tuition, books, food and housing. Honesty is critical at this point–never downplay your current financial situation. It’s important to draw up a budget, including your child in every aspect of budget creation. Be sure to allow room for “emergencies” or unforeseen expenses, such as tuition or housing increases.
Stick to your budget once they leave for school, don’t just write checks in reaction to overspending. Rather, make it clear a budget is designed with the idea of not having unnecessary spending. Any overages must be discussed as soon as possible and find out why they occurred. No parent should be left holding the bill for irresponsible spending. Make a plan that the student can follow to pay back any major overages–a part-time job or withdrawal from their own savings account. However, the idea of the budget in the first place is to have no major overages!
Students, the family budget for your college education is something parents or guardians usually lose a great deal of sleep over. Here is where your personal responsibility and maturity come into play–don’t disappoint them–or yourself. Many families are strapped, college expenses can put added strain on the already frayed nerves of parents concerned they might be out of a job, or not be able to afford a mortgage. Do all you can to put their minds at ease while you’re at college and follow the budget to the letter. Let them know ahead of time about possible increases, do all you can to keep your expenses low, find ways to save money.
If the plan is to have a student work their way through college, or over the summer, they can take advantage of an IRA account which ensures decades of tax deferred growth potential. Or, if finances are tight, have them put their earnings into a savings account earning the highest interest possible (see BankRate.com) which is earmarked for only college expenses. Parents or guardians who are able, may want to offer incentives to save by matching the amount their child deposits at the end of the summer.
While the word “saving” might be foreign to some students, it’s imperative you know this word well. The Great Recession changed a great deal–many people are going back to safer (and more sane) ways of dealing with their finances. Gone are the days of racking up massive debt to buy all the “I wants”. Now, it’s all about saving for emergencies and buying what’s needed. This is how Americans lived for a very long time, and now it’s back by necessity. Save your earned income, learn what it means to control self-gratification by not purchasing everything you want, but rather purchase only what you really need. There is something to be said for the feeling you get when a bank account starts to fill with money. You don’t get that feeling looking at a credit card bill!
Some parents have no qualms about handing over a credit card to their child. But is this the wisest thing to do–for you or your child? In order to make the best decision, you’ll need to weigh the pros and cons, along with honestly assessing your child’s ability to be responsible. The first question should be: have they been responsible with money in the past? Below are possible arguments for, and against, giving your child a credit card:
Give them a card!
Yes it is useful to have a credit card for unpredictable situations and for building a good credit score. But whether a student is mature and responsible enough to deal with a credit card has to be considered. Discuss how you want the card to be used and also discuss what happens if it is abused.
A credit limit is a good place to start. No college student requires a limit of several thousand dollars, in fact, that would be a big mistake. Starting off with a few hundred dollars is more than reasonable. Protection must be discussed and what the student will do if the card is lost or stolen. Have the bill sent to you, this way, there is full disclosure how the card is being used. Some parents pay their child’s bill outright, while others take payment from the savings the student built over the summer or school year. Still others leave it completely up to the student.
Forget it, no card!
One recent study in the Journal of Consumer Research, provides a good argument for nixing the credit or debit cards. The author, Cornell University’s Manoj Thomas, Ph.D., states that, “Paying with cash is more psychologically painful than putting the same amount on a card. This dampens the anticipated pleasure of cookies or candy, so you’re less likely to toss them into your cart.” Basically, the study found when you don’t use credit or debit cards, you spend less and an added bonus is you don’t reach for as much junk-foods. Unfortunately, using plastic often gives us a false sense we have more, therefore we can spend more. And since many students pack on 15-30 pounds in their first couple of years at college, offering less opportunity for junk-foods being placed in the shopping cart is a good thing.
If a student has never had a credit, or doesn’t have much history being monetarily accountable, they’ll be at a great disadvantage once at school. Balancing a check book, monitoring how much they spend on non-necessities, and actively saving, all fall under being responsible. These are financial lessons which should be taught early on in life, instead of right before leaving home.
No matter what the decision is about finances, students should have a clear understanding of the expectations regarding their spending while in college. Tuition debt in the thousands is a hefty enough weight on your back, but adding to the insult would be unnecessary spending. The credit rating (FICO Score) you receive and your payment history for debt are with you for a very long time. FICO Scores range from 300 to 850, the higher the score the better. A low score will adversely affect your ability to rent, buy a home or car, and now employers will pass up a potential employee with too much debt, or a bad payment history.
You’ll work hard for the good scores you receive on your exams–treat your credit rating the same–work hard to have the highest score possible.
Be financially savvy, it pays off.