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Creating a Financial Plan

SEPTEMBER 2017

7 Ways to Help Your Children Avoid Costly College Money Mistakes

College years are a great time to adopt smart financial habits. Before their dorm days begin, help your college-age children along by teaching them how to avoid some common campus blunders.

As students head to college this fall, they’ll face difficult financial decisions, some for the first time in their lives.

Having the money talk before they hit the college campus can help them avoid money traps. Just ask Erin Lowry, 28, millennial personal finance expert and author of Broke Millennial: Stop Scraping By and Get Your Financial Life Together, whose own parents taught her some valuable lessons. The payoff: Lowry worked throughout her college years, saved her earnings and graduated with no credit card debt.

Here are 7 tips to share with college-bound students to help them make smart money decisions on campus.

1. Manage Expenses

“The main mistake college students make when heading off to college is not establishing a budget,” says Michelle Perry Higgins, a principal of California Financial Advisors and the author of College Poor No More!

Students need to take control of their spending:

  • Track every dollar in and every dollar out. Record even the small expenses. Financial management apps like Mint.com can help students monitor their cash flow. Learning basic spreadsheet skills can help, too.
  • Distinguish between wants and needs. Spend money on essentials first and splurge only when there’s money left over.
  • Understand that living beyond their means leads to debt, a burden they want to avoid.

2. Save Now, Celebrate Later

The urge to splurge can be strong, especially when it seems like everyone else is having fun at concerts, shops and restaurants. It’s no wonder 72% of people age 18 to 24 have less than $1,000 saved, according to GoBankingRates.com.

Saving money can have its own rewards. “Think how great you’ll feel when you do run into a situation requiring unexpected, unbudgeted-for money, and you have it!” Higgins says

Undergrads who have earned money from summer jobs or part-time work might consider contributing to their future retirement with a Roth IRA. Contributions are taxed up front and are always tax-free. That feature can be especially beneficial for young savers who are in a low tax bracket today but expect to be in a higher tax bracket down the road. 

The earlier you contributed to an IRA, the more time you have to take advantage of the compounded, tax-free growth. Also, when you take a distribution from a Roth IRA, both the contributions and earnings tax-free if the the distribution is qualified.

Try plugging some numbers into an investment calculator. For instance, $5,000 invested by an 18-year-old would grow to $234,510 over 50 years, assuming an average annual rate of return of 8%.

3. Demystify Student Loans

The average college graduate leaves school with more than $37,000 in student loan debt, according to Cappex.com, a scholarship and college information website. Don’t let student loan repayment catch you off guard.

It’s important that undergrads understand what types of loans they have, the interest rates charged and when their repayments will start.

“Lots of people wait until graduation to even begin looking at their student loan picture,” Lowry says. “It's much better for you to start early and know the total tally of your debt well before you walk the stage.”

4. Make Savings Automatic

Sometimes there’s cash left over after student loan money covers direct educational costs, such as tuition and fees. It’s up to students to use this “refund” money responsibly on other education-related expenses.

“All too often this is money burning a hole in students’ pockets,” says Mark Kantrowitz, the publisher and vice president of strategy for Cappex.com. Unfortunately, those extra student loan funds often wind up being used for “Starbucks and spring break, not textbooks and transportation.”

One way to avoid this mistake is to set up automated monthly transfers of set amounts from the student loan money to a separate account. “If there’s less money available, you’re less likely to spend it,” Kantrowitz says.

5. Protect Sensitive Information

College students are frequent targets of identity theft. In fact, nearly one-quarter of students found out they had been a victim of identity theft only after being denied credit or being contacted by a debt collector, according to a study by Javelin Strategy and Research.

Unfortunately, identity theft could saddle young adults with serious problems, including fraudulent charges and damage to their credit profile.

Students “don’t always understand the repercussions of over-sharing, nor do they realize that it has the capacity to impact them negatively further down the road,” says Eva Velasquez, president of the Identity Theft Resource Center.

These small efforts can help protect a student’s identity:

  • Be careful to guard personal information, such as Social Security numbers, ATM codes and computer passwords.
  • Avoid using public Wi-Fi.
  • Be cautious about sharing information on social media.

6. Avoid High Bank Fees

Bank products and fees can get confusing. Making matters worse, some banks are actively promoted on college campuses — even if those banks charge high fees.

For instance, the median overdraft fee for a university-affiliated checking account is $35, according to a recent survey by NerdWallet. Students can easily end up spending hundreds of dollars in bank fees each  year

What can undergrads do?

  • Shop around. Compare rates and fees before committing to a bank. “You can’t trust your school to tell you which bank is best for you,” says Liz Weston, a certified financial planner and a columnist at NerdWallet.
  • Try to use only ATMs owned or affiliated with your bank.
  • Don’t opt in for overdraft coverage, a practice by which banks will cover your transaction even if you have insufficient funds, but will charge you a fee. “If you’ve accidentally signed up for overdraft coverage, ask the bank to turn it off,” Weston says.

7. Be Careful With Credit

Establishing credit is important, but mishandling it can put your finances at risk.

In fact, one-third of college students with credit cards have been late on payments at least once, according to a survey by Experian. That means those students are likely getting hit by hefty late payments and penalty interest rates.

The average late payment for student-specific credit cards is $35, according to the NerdWallet study. On top of that, many cards impose penalty interest rates of up to 30% — more than twice the average minimum interest rate on student credit cards.

The message for undergrads: Misusing credit cards could land you in serious debt, damage your credit and make it more difficult to purchase the big items — like a car or a home — in the future.

Borrow only what you can afford and pay your bills in full, on time. Need some help? Set up automatic payments from your checking account so you won’t forget to pay your bills.

The college years are filled with educational opportunities. Make sure new students also learn how to manage money responsibly.


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