Every August, millions of parents nationwide load up minivans and head out to drop off their high school grads at college. But while college freshman may be academically prepared for school, they often still have a lot to learn when it comes to managing money. Most new college students have little to no experience handling money on their own, and they end up paying dearly for that inexperience by making costly mistakes. Here we look at some of the most common money mistakes college students make, and provide some tips on how to mitigate or avoid them.
1. Getting a Credit Card
When the Credit Card Accountability Responsibility and Disclosure Act of 2009 takes full effect in 2010, college-age students will be restricted from applying for credit cards on their own. Until then, this demographic is ground zero for credit card companies' marketing efforts. According to the Department of Education, more than 50% of all college students receive a credit card application on a daily or weekly basis. Credit card companies set up booths on campus and at sporting events, enticing students to sign up for a pre-approved credit card with free T-shirts, concert tickets, water bottles, bobble-head dolls and more - including high fees and interest rates. According to Sallie Mae, 84% of all college students have at least one credit card and the average college student has nearly five cards. And they're using them: the average college students carries a credit card balance of $3,173, and most grads are entering the workforce with a significant amount of high-interest credit card debt. (Find out what you're getting into before signing up. Read How To Read Loan And Credit Card Agreements.)
Money Saving Tips:
- If you do sign up for a credit card, either with your parents' help or on your own, ask you parents to help you formulate some guidelines for how much you can charge, and what types of things you can charge for.
- Review the bill carefully to monitor your credit usage.
- Watch the movie "Maxed Out", a 2006 documentary that exposes the dark side of excessive credit card use and the extraordinarily high cost for a few college students.
2. Spending "Leftover" College Loan Money
If you receive student loans, it's possible to receive more each semester than your actual tuition bill. That "leftover" money can be enticing - a way to buy a few more late-night lattes or finance a spring break trip, right? Remind yourself that the money isn't leftover, and it isn't free - it's a loan that charges interest and that will have to be repaid. (If your loans get too big, you may have to consolidate. Read more about this option in Should You Consolidate Your Student Loans?)
- Create a loan repayment plan from day one.
- Use all remaining funds to begin repaying the loan and save money on interest.
3. Ignoring Your Checkbook
Sure it seems tedious to enter every check, ATM withdrawal, debit card transaction and account fee, but not doing so is a great way to get hit with expensive overdraft fees. If your bank charges $50 per overdraft, one slip-up could set off a cascade of overdraft fees, setting you back hundreds of dollars. (For more on the costs of overdraft, see When Good People Write Bad Checks.)
- Learn how to balance a checkbook, read a bank statement and reconcile the two.
- Review your account's overdraft fees and penalties.
- Block off time each week to balance your checkbook.
4. Blowing Through Meal Plan Points
Most colleges let you deposit money into a meal plan that you can access through a debit-type account to pay for food. But today's college students aren't limited to using meal plan money for chicken salad at the cafeteria – now they can use those cards to buy fast food at local off-campus drive-throughs, snacks at local convenience stores, and to order pizza for delivery. But more spending options mean you can go through that money more quickly, leaving you broke (and hungry) before the end of the month.
- Break down that big meal plan dollar amount to a daily/per-meal basis.
- Track your card usage to make sure you don't run out of funds - and food!
5. Lending Money to New Friends
You'll meet a lot of new people in college. Unfortunately, not all of those new friends will be worth keeping, so be wary of any new friend that regularly asks for money.
- Decide in advance how you will respond to such a request and stick to it.
6. Cosigning for a Loan
While you may want to help a friend in need, taking on any type of financial commitment is a legal agreement. If you go into a loan with a friend, you are guaranteeing that person's debt. If your friend can't repay the loan, the lender is going to come after you, and even your parents! According to the FTC, 75% of all lenders who hold defaulted loans pursue cosigners for repayment. And that's only the beginning. Cosigning could wreck your credit score, diminish your ability to get your own credit in the future and lower the amount of money you can borrow. (For more insight, see The Importance Of Your Credit Rating.)
- Decide in advance that you will not cosign a loan or credit card agreement if asked and come up with ways to respond to such a request in case it arises.
7. Sharing Personal Information
A 2007 FTC report revealed that 31% of identity-theft victims were between the ages of 18-29. According to CEO Identity Finder Todd Feinman, college students can be at a higher risk for identity theft because they share personal information online and use on-campus public computers or wi-fi systems that may not have particularly high levels of security. In addition, most students living on-campus have a roommate, which means that anytime their room is open their information is available for their roommate (and their roommates' friends) to see. (To learn more, read Identity Theft: How To Avoid It.)
- Buy a shredder and learn how to use it to destroy unneeded paperwork that contains personal information.
- Purchase a small lock box that you can use to lock up important documents and personal papers instead of leaving them out in the open.
- Obtain a free copy of your credit report yearly to make sure it's accurate. If you find errors, correct them.
- Install spyware and virus protection programs on your computer.
College is a learning experience, both academically and personally. Rather than falling prey to these common financial mistakes, get a jump on your classmates and make smart choices to emerge from college with solid money management skills.