If money makes the world go round then the average college student’s world is likely spinning more and more slowly each day. According to the Federal Reserve Bank of Cleveland, outstanding student-loan balances reached $1.2 million in 2015, making student loans second to mortgages as the largest type of debt that Americans face. A study by the Federal Reserve shows the average student debt is over $30,000. As these numbers continue to skyrocket, student loan debt continues to be the fastest-rising debt across the nation. As if college students don’t have enough to worry about, between keeping up with schoolwork, searching for a job and maintaining a normal social life, it’s understandable that students tend to put financial literacy off to the side. But what happens after college? In the midst of this impending student debt crisis, gaining a head start in financial security is a must to make those student loan payments.
So, where does one even start? Rita Sprouse, assistant branch manager at Huntington National Bank’s Ohio State Central Office recommends students start by simply looking at what money they have coming in versus what money they have going out.
“Look out how much you are getting paid, how much you are spending on rent, on food, on gas and on utilities. Then how much are you putting away for if the car breaks down? How much are you putting away for if you want to take a vacation? It’s important that you have a savings, that you have a budget and that you plan.”
Despite the fact that keeping a budget is the most basic way to begin managing finances, a Gallup study from 2013 found that only one in three Americans actually prepare a detailed household budget. Sprouse, however, did note that graduating college students nowadays seem to be increasingly more aware of the importance of saving.
“I think that savings is something that society is getting back to,” observes Sprouse. “I think it’s a generational gap. [There was] the time when if we couldn’t afford it we wouldn’t buy it. Then there was the idea to just finance everything, but then you were in debt up to your eyeballs. Now this generation is more conscious of the fact that ‘I need to save, I need to have money and have it for a rainy day fund.’”
Luckily for those looking to begin preparing a budget, most banks offer online banking and planning to make keeping track of income and expenses more accessible. Furthermore, Sprouse encourages students to sit down with their parents and bankers to outline a plan.
When forming a budget, Sprouse urges students to include putting money into a savings account that will end up being used to pay off student loans. Or, if possible, students should start paying off their loans while they’re in school. When it comes to applying for loans, Sprouse emphasizes one point.
“Don’t borrow more than you need.”
This goes for any loan. For student loans specifically, every dollar spent with student loan money will take about twice as much money to pay off that debt, according to Fastweb.com.
“That’s where students get themselves into trouble,” states Sprouse. “You don’t want to borrow an extensive amount that will put yourself upside down in having to pay it back when you should be focusing on finding a job and establishing yourself.”
Also, students should not borrow more than $10,000 for each year in school. Fastweb states that undergraduate students borrowing $10,000 or more a year will graduate with more debt than 90% of undergraduates borrowing less.
Moreover, consumers should borrow less than allowed under the loan limits whether they are student, auto, personal or other types of loans.
For students trying to figure out from whom they should apply for a student loan, Fastweb claims that federal is the way to go as federal student loans are “cheaper, more available and have better repayment terms than private student loans,” and come as both subsidized and unsubsidized.
As loans become something for which virtually every college graduate will have to apply, this makes establishing good credit early on a must.
The most common way to establish credit is by applying for and responsibly usinga credit card. However, giving college students credit cards is a practice the United States government is hesitant to condone. In 2009, Congress and President Obama approved and signed the Credit Card Accountability Responsibility and Disclosure Act, which aims to protect consumers and change the practices of credit card issuers.
A provision of that law is that credit card issuers are banned from issuing credit cards to anyone under 21, unless they have adult co-signers on the accounts or can show proof they have enough income to repay the card debt. This also ridded college campuses of dozens of credit card companies vying for students to sign while ultimately piling on more debt for young adults.
“The biggest thing is to makes sure you have enough money in your account to be able to pay it back,” states Sprouse. “That’s where students get themselves in trouble; don’t spend more than [you] can afford to pay back.”
Sprouse continues saying that normally students should be 21 years old before they apply and make at least $15,000 a year. Students younger than 21 who do want to start establishing credit can get a credit card through a department store. Another option is to get a card in a parent’s name and the parent can add the student as an authorized user on that credit card. “[This is] nice because if parents keep maintaining good credit, then that can transfer as the student’s. It can also be good [for] if you’re not making $15,000 a year, which is the case for most college students because they’re going to school,” says Sprouse. A caution to co-signing with a parent, however, is if the parent fails to make payments it will hurt the student’s credit.
Once a person does start using a credit card, it is imperative to always pay off the credit card statement on time and in full every time.
“You want to start establishing your credit and you want to be able to purchase something and be able to pay it back so you can start giving that report to the credit bureau. Your credit report is something like a report card and you want it to be a good report card.”
Just like consumers should regularly track their budget, credit cardholders should check their credit frequently to monitor their credit use and check for fraud. Websites like Credit Sesame, FreeScore360 and Credit Karma allow consumers to look at their credit without lowering their score.
“Every time you allow someone to pull your credit, that is going to lower your credit score. It’s going to set off red flags because someone could have stolen your social security and is trying to open credit in your name. Or it could start taking off points because you’ve applied for so many different things so it’s hurting your credit as. Be very careful when you’re applying for [loans],” Sprouse warns.
While most students already have some ideas in regards to the previously-mentioned areas of finance, investing is sometimes viewed as foreign territory and often not even thought of until years after graduation. But investing is perhaps one of the areas in which young adults have a striking advantage— time is on their side.
The best way for people to begin investing is to enroll in a retirement plan.
“You should always allocate parts of your income for retirement and rainy day savings,” advises Stephen D. Garrett, financial advisor at The Huntington Investment Company. “Start with reserving a portion [of income] for a 401(k)… ideally we like to see a percentage in the mid-tweeds for students.”
If a 20-year-old college student earning $15,000 a year allocated 10 percent of that to invest in a retirement fund starting at a balance of $1,000 with a 7 percent rate of return, he or she would earn over half a million dollars by the time he or she was 65 years old— and that’s saying he or she kept that same salary for 45 years.
This just shows that when it comes to investing, time really is money.
But students wanting to invest beyond a retirement plan must take into account whether the returns on that investment will be greater than paying off any debts.
For instance, paying off a $1,000 credit card balance with a 15 percent interest rate in full is a guaranteed return, unlike any investment. A subsidized federal student loan, however, has a low interest rate and does not accumulate interest for the student until six months after graduation, so it may be more beneficial for the student to invest his/her spare money in a mutual fund.
Along with looking at what outstanding debts he or she has, a person should also make sure they have enough money in the bank account.
“A good guideline is to have savings from six to 12 months…or around $6000. You want to have had enough already set aside and established in savings before looking into investing,” says Garrett.