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 Knowledge for the CommonWealth

Helping College Students Manage Finances

Farm Business Management Update, August 2001

By John E. Howe

College life presents financial challenges for students and parents. Often college is the first time the student is away from home for an extended time period. During the first weeks of college students must conquer social, financial, and academic challenges.

College costs can be divided into basic categories: tuition and fees, housing and meals, and other expenses. I call these other expenses "soft costs." They include books, supplies, communications, clothing, transportation, entertainment, and meals not covered by a meal plan. I use the term "soft costs" because getting a firm estimate on these costs is difficult compared to the costs for tuition, fees, housing, and meal plans. These soft cost purchases are made daily, weekly, and monthly during the school term, and the student must manage most or all of them. Developing a spending plan for soft costs will help students prepare for this money management challenge.

There is no best way to approach managing soft costs. A number of approaches or combination of approaches may be used to manage these expenses. The amount of money required and how it is managed to meet daily expenses will be different depending on the student's individual needs and money management abilities. Planning for these expenses may require input from both student and parents to achieve a realistic plan.

The first step in developing a successful spending plan for the soft costs is estimating what these expenses might be. Parents can use several sources of information. A good starting point is information from the college on how much a typical student might spend. Talking with current college students to find out what they are spending is another source. Estimates and a timeline for these expenses should be discussed and written. Books and supplies are a big expense at the start of the term. Entertainment, phone, and food are spread throughout the term.

Depending on the student's financial management skills, the parents and student should review the proposed spending plan with what is actually being spent to determine if plan is being followed. This review needs to take place early in the term. Four to six weeks of experience are probably all that is needed. The cost of books and supplies will be known, and college-spending habits will have been started.

Basic tools for managing these expenses include checking or savings accounts, credit cards, cash. Many schools offer a debit card that can be used on campus. These tools each require different financial management skills.

If parents are funding part or all of the soft costs, an important consideration is when they make the money available to their college student. Giving a student all his/her semester's spending allotment at the start of the term requires disciplined management of that money for three or four months. The parents need to consider how realistic is it to expect their student to manage a lump sum compared to a monthly allowance for these expenses. A monthly allowance might suit your income stream better and provide a comfort level from knowing that it cannot all be spent in the first few weeks of school.

Checking and savings accounts are a good method to manage most of the general expenses that a student may encounter while at school. Checks can be used to purchase books, school supplies, and clothing. Bank accounts provide a safe place to maintain money and offer a convenient way for parents to deposit a monthly allowance to a student's account. Bank accounts require that students maintain adequate records of their accounts.

Many schools offer a debit card that can be used for making purchases on campus. The student deposits money in an account and is then able to use these funds as spending money for meals, snacks, laundry, and other items. These accounts generally have a minimum initial deposit, and additional deposits can be made as needed. They are a safe way to manage money and usually password-protected.

Credit cards can be used to purchase much of what a student might need. However, they do carry the risk of over spending if they are not well managed. If you are going to send a student off to college with credit card privileges, the card should have a credit limit consistent with the spending plan. Most routine college expenses do not need an excessive credit limit. A $500 to $1,000 credit limit is a good starting point and can be increased only if more credit is needed and prudent spending habits are demonstrated. Establishing ground rules for credit card use and having them in writing is a practice that will help avoid surprises and potential conflicts. Simply providing a credit card for emergency use without defining an emergency may well set parents up for credit card bills that are higher than expected.

Students need to be aware of the risks of credit card debt. Credit cards make purchasing now with repayment later very tempting. Many credit cards offer minimum repayment terms that make repayment appear easy. These minimum payments extend the repayment over many years. A modest $1,000 credit card balance paid off, using typical minimum payment requirements, will require 3.9 years to repay and cost $383 in interest.

Most likely a combination of cash, bank accounts, credit cards, and campus debit cards will be used to meet a student's daily expense. A little planning, realistic expectations, and open communications between student and parents will set the stage for successful management of the soft costs.

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