Personal Finance 101
FOR JENNIFER BLACKSHEAR, a freshman at the University of Maryland in the early 1990s, the college experience was anything but idyllic. The financial temptations seemed to be endless, yet her part-time on-campus job barely covered her books and car payments. So when she stumbled upon a credit-card offer enticing her with money for pizza and spring break, she answered with a resounding "yes."
By the end of her first year, she had more than five credit cards and a heap of debt. "I had to cut back [my course load] to part-time, so I could work full-time and keep up with my credit-card payments," she says. But the spending didn't stop. During the next four years, she amassed so much credit-card debt — a staggering $26,000 — that when she sought help from a credit-counseling agency, she was immediately referred to a bankruptcy lawyer. And so, at age 23, Blackshear became a member of the under-25-and-bankrupt club, a group that adds nearly 100,000 unfortunate souls to its ranks each year, according to Harvard Law School's Consumer Bankruptcy Project. Today, after more than a decade of denied credit, the 31-year-old accountant anxiously waits for her bankruptcy to come off her credit report late next year.
These days, credit-card offers are ubiquitous on campuses across the U.S. Colleges are cutting big deals with lenders, letting them plaster applications everywhere and, in some cases, even supplying them with students' names and addresses.
Not surprisingly, this is taking a toll on student finances. Graduates now leave school with an average of $3,262 in credit-card debt, according to the latest figures from student loan provider Nellie Mae. Granted, not many of these students wind up in bankruptcy — but, unfortunately, there are no figures for the countless number of students who get bailed out by exasperated parents.
Students aren't solely to blame their poor personal-finance habits. Many receive no education whatsoever on how to handle money. "Most students who get into trouble don't know what to do," says Dr. Robert Manning, a professor of humanities at the Rochester Institute of Technology and author of "Credit Card Nation."
If you haven't already done so, now's the time to implement a crash course in personal finance for your college-bound child. Some wise tutoring now can help Junior avoid a degree from the school of hard knocks down the road.
Basic Budgeting
Two big questions arise when shipping a kid off to college: How much spending money will he or she really need, and how much — if any — should you give? Many students get part-time jobs to help finance their junk food and partying needs, while some parents are willing to cover these costs, in the hopes of freeing up more time for studying.
"These are decisions that need to be put on the table early, before students go to their first day of class," says Rudy Cavazos, spokesman for Money Management International, a nonprofit credit-counseling agency. So be sure to sit down with your child and prepare an itemized monthly budget. (The college's financial-aid office should be able to provide some guidance as far as school expenses go.)
Just how much your child will need depends on myriad factors, including the meal plan he or she chooses, housing costs (on-campus or off), the location of the school (urban settings are more pricey than rural ones) and the amount of driving that's involved on a weekly basis. Manhattan-based New York University, for example, estimates its students need about $3,700 a year for personal expenses (other than books, room, board and transportation), while Amherst College, located in rural western Massachusetts, estimates that kids can get by with $1,550. In most cases, $100 to $200 per month should be enough, says Peggy Houser, a certified financial planner and author of "How to Teach Children About Money."
Once you've committed to a reasonable monthly allowance, don't crumble when you start getting the inevitable phone calls begging for more. Remember: Thanks to that meal plan, your son or daughter isn't going to starve, even if the monthly fun money is gone by the end of the first week. Students need to learn how to spend within their means, says Cavazos. If they run out of cash, parents shouldn't increase their stipend but instead help them manage their money better by finding out where the money is going.
Once the budget is under control, you should be able to send a two- to three-month allowance in advance, says Celia Ray Hayhoe, a CFP who specializes in family financial management. This way, the student can practice managing larger amounts of money over a longer period of time.
The Evils of Credit Cards
Credit cards are fiercely marketed on college campuses, and all a student needs to do to get one is show a college ID, says R.I.T.'s Manning. These days, lenders are getting 'em while they're young: According to a study Manning conducted at George Mason University last year, more than 60% of first-year students had one or more credit cards, and of those who did, almost all had at least one that was already maxed-out.
As disturbing as this may be, most college kids probably should have at least one card. It can be a godsend during emergencies, such as when a car breaks down. And establishing a solid credit history during the college years can make the post-college years easier. Ironically, it's easier for a college student to get a credit card than for a recent college grad with no credit history.
The key is to make sure your child uses the card wisely, which means no weekly retail therapy at the nearest Abercrombie & Fitch. One way to take preventive measures is to cosign a credit-card application, says Houser. Doing so gives you some control over the account — including setting up a credit limit and monitoring monthly expenditures and payments. Be sure to review the credit-card statements with your child, explaining how interest, cash advances, late fees and other charges work. Most important, says Houser: Stress to your child that interest compounds — meaning debt grows if it's not paid off. A word of warning, however: If you do go this route, be prepared to keep a close eye on the account at all times. After all, if your son or daughter turns out to be a deadbeat, your credit report will take a beating.
Some parents feel more comfortable starting their kids out with a prepaid card, such as Visa Buxx, which allows them to load a certain amount of money onto the card. This way, students borrow from their parents, not a bank. This works more like a phone-card than a credit card; in fact, it's not even reported to credit bureaus. This option can make sense for freshmen and sophomores, but students nearing graduation will benefit from having a credit card in their own name to help establish credit.
The Almighty Credit Report
If your child is old enough for a credit card, then he or she is old enough for a lesson on credit reports. And earning an "A" in credit reporting is essential. After all, late payments will stay on a report for seven long years, making future loans difficult and more costly.
As a tutorial, show your child your own credit report, explaining how information is collected from your creditors and then used by other lenders when you apply for a car loan, an apartment, even for a job, says Cavazos. What if you have a few blemishes on your own report? All the better, Cavazos says. "It might be a good example to say, 'Look, this is what happens when you overextend yourself like we did three years ago. It's still being reported, and this is what you want to avoid.'"
Safeguard Against Identity Fraud
It's the fastest-growing financial crime. According to a survey released in July by research company Gartner Group, seven million adults became victims of identity theft during the past 12 months, a 79% increase over the figure reported in the company's pervious survey in February 2002.
And college students are particularly at risk. "Credit-card offers, dormitory burglaries, poor financial management skills and even the way many professors post grades leave students extremely vulnerable to identity theft," says Mary Ann Avnet, vice president of marketing at the Chubb Group of Insurance Companies. According to a survey released by the company last September, almost a third of college students throw away credit-card solicitations without destroying them, and almost half say their teachers still post grades using their Social Security numbers, even though federal law prohibits the practice.
What to do? First, you should insist that your child's student number be different from his or her Social Security number. You should also teach your child to tear up credit-card offers and to keep the dorm room locked when no one is in it. Last but not least, says Avnet: Tell your child to keep receipts for credit purchases and match them against the monthly credit-card statement to make sure they're paying only for what they bought.
