Millions of newly minted college freshman will participate in an annual rite of passage this fall when they arrive on campus to begin their college career.
They’ll experience many new things – both good and bad – that will shape their future. For many, one of those new experiences will be managing their own finances for the first time. Making mistakes could cost them for years.
New freshman often struggle with financial responsibility because they are transitioning from an environment with lots of rules and limits – parents – to one where they make all the decisions. That sense of freedom can lead to bad choices that result in long-term financial problems.
As a parent, it’s important that you help your departing freshman prepare for these challenges ahead of time and that you give them the tools to make sound financial decisions during this important time of their life.
Here are 6 tips that can help your freshman pass college finance 101:
Prepare and organize
Setup any bank accounts BEFORE they get to school. If your freshman will have an ATM card, make sure the bank has a branch or ATM (through an ATM network) near school to avoid fees. If not, consider working with a bank near school.
Make a budget. Outline how much money your student will receive monthly and what he will need to spend. Be sure to include an allowance for walking around money. Track spending to make sure he is sticking to the budget.
Be cautious with credit
The minute your freshman sets foot on campus, he or she will be bombarded by credit card offers. A credit card can be a useful tool and can help build a credit history. But all too often they lead to disaster.
If you and your freshman opt for a credit card, be sure to stress that a credit card doesn’t equal free money. It should only be used when necessary. Start with a low credit limit – less than $1,000-card that offers points or other rewards – and pay the balance monthly. A good option is to work with your local bank to setup a card for your student, where you can get better terms and options.
Avoid Identity Theft
College students are typically at a higher risk for identity theft. However, by following simple steps like keeping their dorm room locked when away and shredding documents that contain personal information (for example bank and/or credit card statements) your student can greatly reduce the likelihood of being victimized.
Teach the power of saving and compound interest. If your freshman can put a little money aside each month, especially if she has a part-time job, she’ll develop good financial habits for the future.
Consider this: investing $3,000 a year between 20 and 30 into an IRA with a 7% average annualized rate of return will yield $442,000 by the time they are 65. Wait to start until 30, however, and setting aside the same amount of money each year until 65 nets just $283,000.
If that goal is too big, maybe taking $10 out of each paycheck and saving it for some unexpected expense is a good start.
Going to the movies, riding the bus, or even ordering pizza might cost less if your freshman uses his student I.D. Many businesses have discounts for students. Be sure to ask or search the student newspaper or Internet for local discounts.
Make sure he uses his meal plan. It’s a lot cheaper than eating out.
Don’t buy new books at the campus bookstore. Campus prices are almost always higher than at online retailers like Amazon.com or eBay.com.
Minimize your loans
The average college student leaves school with about $23,000 in debt. If your freshman has to borrow money, make sure he or she fully understands the cost and other terms of the loan before signing on the dotted line. While most loans are issued by the government, some schools offer institutional loans, and there are private lenders who will make private loans.
Research and understanding is key to avoiding problems down the road.
Search online for scholarships, grants and other financial aid based on gender, religion, race, ethnicity or type of degree your student is pursuing.
All of this can be overwhelming to a newly independent freshman. But adopting good financial habits in college can lead to greater financial success later in life.