Ask a mid-lifer what they wished they’d learned in college, and chances are they’ll say they wished they had used their time more wisely or really knew more about financial literacy, because such knowledge would have set them up for more success in life.
While most students matriculating in college this fall may be focused on academic plans, dorm and Greek life, and their extra-curricular activities, advisors say they’d be well-advised to focus as well on their finances. The college years are a key time to pick up smart money habits, begin building credit, and learn to manage both a budget and debt. Whether you’re a freshman or deeper into college, financial advisors recommend studying the following measures.
“I’m surprised how many students don’t understand how they and their families are paying for college, and how that will impact them later,” says Rita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland. “Many students don’t understand the difference between loans they or their family are borrowing, versus grants and scholarships they’re receiving and which may be tied to a minimum GPA or other requirements.”
Understanding these financial vehicles is vital for students so they can set priorities while in college—and understand the value of the education they’re receiving.
Most college students are cash-strapped, yes. However, many also spend their money on disposable products and experiences—lattes, pizza, regional weekend travel, concerts. If you want to make the most out of college, it’s important to know where your money’s going, notes John Flavin, a certified financial planner with Synergy Financial Management.
Whether you review your monthly bank statement or use an app or online tool such as Mint.com, you need a sense of both your textbook and takeout budgets if you’re going to make informed decisions about your money as time passes. You’ll also need to understand your budget if you’re to succeed in the next lesson: saving. Because setting aside money for savings is often dependent on your trimming from your “fun money” budget.
If you can put aside about $100 per month, through a savings account or by investing in the market (stocks, funds), you’ll be happy later. The results won’t vary that much initially, but over a decade or multiple decades, your savings habit will help you establish a safety net, says John Flavin, a certified financial planner with Synergy Financial Management in Seattle.
Take this example: If you started with $100 and deposited $100 per month for four years from ages 18 to 22, at a 1.3% annual interest rate (typical for a savings account), you’d have $5028 at the end of four years—a nice nugget. What if you started with $100 and added $100 per month for four years at a 7% interest rate (more in line with stock market returns)? You’d have about $5412, factoring in mutual fund or other investment management fees. Check this
Check this calculator at Bankrate.com for motivation or this article which discusses rates of return in the stock market.
“Don’t take out more student loans than you really need,” Cheng says. “This is a mistake I’ve seen, and it can lead the borrower to over-spend on their education.”
Other students may not know which debt they’re assuming and which debt their parents may be shouldering for them. They may not know that unless they satisfy certain conditions (unemployment, further education, forbearance agreements) they’ll need to begin repaying student loans within six months of graduating. And if they haven’t used a student loan debt repayment calculator, they may not know that their loan payments can resemble that of a car–or in some cases, a mortgage–given many new graduates haven’t had these types of debt yet.
Fortunately, many student lenders allow young adults to make payments that don’t exceed a certain fraction of their income. If entry-level pay in your field is low, this can be reassuring. Additionally, some student loans can be partially forgiven if you work in the nonprofit or education sectors, or in government outreach programs such as Americorps.
You’ve heard of the freshman 15. What about the senior $1500? That could be the debt upon graduation for students who signed on to a high-interest credit card upon matriculating their freshman year. Carrying this much debt at double-digit interest rates won’t be easy to repay in student jobs or entry-level work.
But not all debt is created equal. There is “good debt”—debt on student loans or auto loans, which you repay at a set rate and on time over time. Even credit card debt isn’t bad if you repay it efficiently (within the month you made the charges, or within a few months). If you plan to use credit cards, understand their terms and shop around.
While it’s bad to go overboard on credit cards, neglecting to use them at all can also have adverse consequences. That’s because using credit cards is one key way to build your credit card score. Getting a lease, auto loan, mortgage loan, or small business loan is all dependent on your credit score. Additionally, many employers look at credit scores in evaluating your job-worthiness, Flavin notes.
“College is a great time to learn to use your credit cards wisely,” he notes. “Credit cards and other loans you repay regularly help you establish a good track record.”
There are some alternative lending platforms that look at non-credit metrics (your alma mater, grades, etc.) to determine your loan-worthiness, too. But old-school credit scores are important across more loan types.
Many students weigh whether to work more hours at a job that helps subsidize tuition and thus reduces their need for loans versus whether to focus most heavily on their academic experience, perhaps tapping a higher amount of student loans to enable their participating in more extracurricular activities, field study abroad, or low-paid but professionally informative internships.
“This is a tough choice,” Flavin says. “Focus on your grades and your social network in college. And do those pre-professional internships if you can afford to. The connections you make at this age can be really valuable over time and give you a leg up when you’re starting your career. If you amortize the extra $5000 or $10,000 you made in a dead-end summer job against the value you got interning in a profession you might pursue, everything points to the internship—if you can make it work for you.”
While students shouldn’t toss their report cards overboard because they’re so busy flipping burgers, they also shouldn’t overlook the importance of the social networks they build while on campus. If you’re going to work, look for work that ties closely to your future career aspirations or that conveys office skills that will be translatable to many future fields.
“Grades are important, but real-world work experience and social capital are, too,” says Rita Cheng. “Be intentional about the way you make money if working in college.”
Aspiring journalists might see about a paid job at the large campus newspaper, while would-be psychologists might work at the local crisis hotline.
The majority of students graduate with student loan debt. This debt can be refinanced through a variety of programs—but it’s important to understand your refinancing options well before graduating. Some programs may require strong credit scores, or perhaps with savings you can make an upfront payment to lower your overall debt balance. But students shouldn’t assume they’ll automatically be eligible for all refinancing programs advertised.
“It’s incredibly important for students to understand their future options,” Cheng says. “Their student loan debt is typically one of their major expenses when exiting college, and the difference of a few points in interest rate can influence what they’re capable of saving or spending on other important expenses.”
College is a necessary stepping stone for most young adults. But with skyrocketing tuition costs and student loan debt, a competitive job market, and expensive rents in the sorts of urban areas where young grads may be flocking for jobs, college is also a financial minefield. For many students, it’s a first lesson in “opportunity cost” — the pros and cons of different choices. Over-borrowing now could mean prohibitively high loan debt later, while working too much just for spending money may eat into more valuable work or educational experiences.
Students spending four years of their young adult lives are building what financial advisors call their “human capital” — their initial job skills, their social networks, the professors or group leaders who might provide references for them — and that in turn helps set the stage for a college grad’s career prospects and income.
“There’s more than one way to take advantage of your college years,” Cheng says.
Managing money carefully, however, is a vital lesson that all students need to learn.
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