Study This: Freshmen Finances

Look closely: when parents are leaving their freshman students on campuses around the country each fall, are they tearing up because a) they are proud to see their child advancing academically, b) the baby has left the nest, or c) they’re picturing the years of student loan repayments, credit card debt, and phone calls from creditors in their child’s future? With tuition on the rise (a College Board report says Minnesota tuition and fees rose 8 percent at public four-year colleges, and the past five years of tuition hikes across the country account for the biggest increases in the past three decades) and three out of four college students carrying at least one credit card, don’t bet your student loan money on anything other than C.

Having teenagers means having difficult conversations. Yet parents are often reluctant to delve into money matters with their children, setting them up to falter financially when they are inundated with the independence of college and the fiscal freedom it provides. How do you keep your child from becoming freshman year financial road kill? A little know-before-they-go can go a long way to keeping kids out of debt, up to date on their loans, and on track to graduate without fear of defaulting on payments.

Pre-College Preparation
In the same way parents prepare their high school seniors for college by making them laundry literate—colors need to be sorted, delicates don’t go in the dryer—experts agree that financial know-how is just as important for pre-college preparation. “Parents should be educating their students on how to handle money, understanding debt and how investments grow, where the money comes from in an ATM, how to write a check, handling plastic to pay bills. There are a multitude of things families need to talk about to educate a kid going off to college,” says Russ Kruse, senior vice president of student banking for U.S. Bank.

That might seem like an excessive list to tackle, which is why Kruse and others advise parents to begin educating their kids in high school with real-world, hands-on experience that will put them ahead of the game when they hit campus. But credit cards in the teenage years? Eric Forstrom, vice president and district manager of Associated Bank in Minnesota, says it’s not just for the Paris Hiltons of the world—as long as parents are paying attention. “Teenagers should absolutely have a credit card as soon as possible and with as small a limit as possible. This serves the purpose of teaching about credit and how it works without the risk of getting into too much trouble. By setting kids up with a card early, parents don’t run into the issue of their eighteen-year-old getting a pre-approved $3,000-limit card when they get on campus without knowing what they’re doing.” Assistant Professor Felix Meschke of the Carlson School of Management’s finance department suggests parents make the entire process of setting up a credit card a learning experience for their children. “Ask your kids to help pick out the credit card they are going to use and tell them to compare rewards programs and gather information for at least five cards,” says Meschke. “Ask them why they picked the cards they did. Make it a homework assignment.”

For parents who are squeamish about even the idea of a credit card while a kid is in high school, an easy alternative is the pre-paid spending card. These cards look like credit cards, carry the Visa or MasterCard logo, but because they’re prepaid cards the spending is limited to the amount of money parents load onto the card—consider it a credit card with training wheels. Kids get the look and feel of a regular credit card and learn how to use it at stores, but parents get the peace of mind of knowing there’s no way to go beyond the amount pre-set on the card.

Along the same lines, parents should set teens up with checking and savings accounts to get them well-versed in the art of ATM usage, paying regular bills, and setting aside money each month. One father that Michael Uran, associate director of financial aid at St. Cloud State University, talked to recently created a system for when his children turned sixteen: he figured out how much money he spent annually on clothing for his children and doled the entire year’s money out to each child to make them responsible for budgeting the money to last the year. “He told his kids that when the money’s gone, it’s gone,” says Uran. “It was his way of giving his kids the responsibility of managing money where the risk is smaller, and it was a chance to help them learn a budget while the father is still available to guide them and bail them out if necessary.”

Another perk of exposing kids to the ins and outs of financing early is making them more aware of the banking industry. One financial fallback college students are particularly susceptible to is fraud, and those who keep close track of their accounts are less likely to be victims. Shirley Ringhand, vice president and campus regional manager for TCF Bank in Minneapolis, says the days of Internet banking have simplified much of the system that used to trip up students.

Today checks can be set up for direct deposit, transactions are visible within minutes online, and monthly statements come to e-mail inboxes instead of dorm mailboxes. The advantage of the Internet age is students aren’t leaving paper statements and cancelled checks out in the open for roommates and friends of roommates to steal, and overdrafts are less likely to occur because accounts can be so closely monitored, with money easily transferred from savings to checking.

Add in the ease of automatic bill paying features that pay monthly invoices like cell phone bills and credit card payments and the only thing students have to be conscious of is their balance. “Automatic payments are great for things you know you have to pay, so you know every month your bills cost “x” amount and it’s covered,” says
Ringhand. “Students can look online everyday. Of course we want them to keep a paper ledger too, but if you look online at least you know what you’ve been doing.”

Campus Crusade for Cash
Several years of money management in high school goes a long way, but the game changes when kids get on campus—and that means parents should be ready to advise their students on the best way to get on firm financial footing right off the bat. Kristie Paulson, assistant director of student financial services at North Dakota State University, suggests students use the first month on campus to keep track of every dollar they spend each day. At the end of the month, that information will help them create a comprehensive budget based on how they are spending their money.

“A dollar here for a pop and a dollar there for a snack adds up, and you have to know where your money is going. We recommend students track all of their expenses that first month and then they can average what their budget should look like each month and they can determine where to cut back.”

Cutting back isn’t always a popular suggestion though. Many students see credit cards as a chance to upgrade their lifestyle as well as an opportunity to spend money with newfound friends. “Students need to distinguish between needs and wants,” explains Paulson. “You need books for class, but you want to go on spring break. Some of those choices seem clear-cut, but for students they’re not because their priorities are different, and I see students struggle with whether things are
essential or luxury. I tell them to live like a college student now so they don’t have to live like a college student after they graduate.”

Elizabeth Stevens, director of financial aid at the College of St. Catherine, has found that students understand budgeting better when it’s broken down into smaller parts. “It’s much easier to understand your finances if you break it down into not only monthly and weekly but daily amounts. It’s all about leaving student with choices and letting them know it’s up to them to make the right choices during the day and that empowers them. If you buy a coffee drink every day, that’s a choice, and that choice might mean less money on the weekend for entertainment.”

For students who have trouble making the needs-vs.-wants distinctions, colleges are usually ready to step in. Both St. Cloud State and North Dakota State University offer freshman transition courses that brief students on the basics about life on campus, including money management. “It’s becoming the responsible thing for colleges to do to teach kids about budgeting and handling money because we’re also offering them alternative loans and we want them to borrow money to pay their tuition,” says Paulson. “It’s the responsible thing to provide students with good information.”
Students Going Solo
Parental advice and guidance can only take a student so far, especially when a  student isn’t getting any financial help from parents to pay for school. In that case, kids have to rely on themselves to make sure tuition is covered, and that starts with a visit to a college’s financial aid office. Forstrom says that visit should take place as early as the first prospective campus trip during the junior year of high school.

“The financial aid process is difficult to navigate so I recommend prospective students always go to the financial aid office on their school tour because some are better than others. You want a financial aid counselor who goes step by step through your choices. A good financial aid office should be part of the school selection process if financing is a concern because you want a good resource for information.”

Students and parents should also have a serious discussion about whether any money can be contributed towards tuition. Uran says many parents who say they can’t pitch in still have some wiggle room in their wallets that they didn’t realize. “Parents should think about all the expenses they paid for during their child’s senior year of high school like food, clothes, yearbooks, prom, car insurance. Once their child is at college they won’t be paying those day-to-day expenses anymore, so if they simply shift the dollars they were using to pay for those things, that’s hundreds of dollars available to help a student out without changing the parents’ lifestyle.”

Second only to parents is the federal government. Amy Carroll, a student loan specialist at Bremer Bank, says Stafford loans top the list. “Students should first obtain the Federal Stafford loan, which still has the best fixed interest rate and repayment options available to students.” Next up are Federal Parent PLUS loans, which—obviously—require a parent to obtain the loan on behalf of the student. “It has a fixed interest rate and remains the parent’s loan for the life of the loan,” says Carroll, that  means parents have to trust that their son or daughter will step up and make the payments upon graduation, lest they be left with the balance. The last and “least desirable” option that Carroll lists is the alternative educational loan, which is available through most student loan lenders. Their undesirability stems from tougher interest rates that mean the amount of the loan can increase rapidly. Kyle Markland, president and CEO of Affinity Plus Federal Credit Union, adds that parents can save their children from excessive interest by getting inventive and using their own equity to nab lower-interest loans. “Parents may look into nontraditional lending options by using the equity they have in their homes to finance college, and that interest is then tax deductible,” he says. “You also probably get a better interest rate than what a student could get on their own through a private lender.”

Overall it can be a lot of information to ingest, from credit card APRs and FAFSA forms to just remembering to pay rent. Professor Meschke points out that plenty of aspects of life come down to budgeting—even the dreaded ‘freshman fifteen’ can be considered bad caloric budgeting—and finances should be no different. “Sometimes this kind of information is like telling people to stop eating junk food. You can come up with a laundry list of reasons why it will be good for you, but the really difficult thing is implementation.”