College freshmen are already excited and stressed about those early days on campus, thanks to the mixture of newfound freedom and the insecurities of making new friends and taking college-level courses. It’s not exactly a time when the average 18-year-old is thinking, “Hey, I should probably get my financial house in order.”
But that’s exactly what college freshmen should start doing by taking these four simple steps.
[See: 10 Ways to Save on Your Wardrobe.]
1. Set a budget. Setting a basic budget will help freshmen avoid overspending, which prevents those expensive and annoying overdraft fees, with the added bonus of preventing consumer debt.
As digital natives, most incoming freshmen (and existing college students) can find an app or budgeting software that fits their needs. Or they could also just kick it old school and use an Excel spreadsheet or, gasp, pen and paper to determine how much they have to spend per month without dipping into the red.
Even students who need to use student loans to subsidize lifestyle expenses should be setting budgets in order to take on the minimum debt necessary. It seems like play money in college, but their future selves will want to go back and shake them for mindlessly spending loan money on Red Bull energy drinks and spring break trips.
[See: 8 Hacks to Ease Your Financial Life.]
2. Form the habit of saving early and consistently. It sounds absolutely insane to tell a cash-strapped college student, who might be checking pockets of winter coats and jeans for spare change to save money, but it’s an important habit to develop early. While working your way through college and paying off the bill without any student loan debt may be much tougher in 2016, about 40 percent of undergraduate college students still work at least 30 hours a week according to a 2015 study from Georgetown University’s Center on Education and the Workforce.
Setting aside even a small amount every pay period – perhaps $5 – lays the foundation for a habit, which sets up the student to start saving more aggressively post-graduation. It will then seem more natural to opt into an employer-matched 401(k) and to put money into an emergency savings fund after each paycheck. Plus, saving during the college years can provide a nest egg for life after graduation. After all, it’s much easier to get your own place when a security deposit is already saved up, which means no need to boomerang back home.
3. Understand your student loans. It’s easy to sign the dotted line for student loans without thinking about the repercussions. Besides, many freshmen won’t need to worry about making those payments for nearly four-and-a-half years. Instead of waiting until after graduation when pressing matters, such as finding a career path and paying rent, are a burden, freshmen should take time to learn about their student loans.
They should be able to answer these questions:
• How much have I taken out in loans?
• What are the interest rates on the loans?
• Are the loans federal or private?
• How can I log in and see the loans, the interest that’s accruing and where to make payments? Federal student loans can be found by logging into the National Student Loan Data System while private loans can often be found on a credit report if a student hasn’t kept careful records.
• Am I in a position to make interest-only payments? Making interest-only payments during college and the grace period is one way to keep the amount owed back lean and even shave off time from the repayment after graduation.
• Can I return unneeded funds? In some cases, students may find that they overestimated how much was needed to cover the costs of tuition. Instead of using the excess to fund lifestyle, they may be able to return unnecessary funds without any penalties or interest owed. However, this does depend on the time of loan and how early the student makes an effort to return the money.
Remember: Don’t incur more loans than you need and avoid credit card debt.
[See: 12 Ways to Save Money on Food.]
4. Learn the truth about building a credit history and score. Finally, freshmen should also understand the truth behind building a strong credit history and how a credit score works. Credit history is an important part of post-college life and could even impact getting a job (employers can check your credit report) and being approved for a place to live. Having student loans doesn’t necessarily help build a strong credit history while in college, unless payments are being made. The proper use of a credit card can be an effective and free way to build a healthy credit history, but only if used correctly.
College students carrying a credit card must ensure they use no more than 30 percent of the total available credit limit each month and pay it off on time and in full. Never carry a balance month-to-month. They should also start to monitor their credit reports by using annualcreditreport.com to pull free copies of their reports from the three credit bureaus (Experian, TransUnion and Equifax) once per year.
It’s easy for college students to fall victim to poor financial advice. Suggestions to carry a balance on a credit card or get a loan just to build credit history are two common fallacies.