In many ways, college is the perfect environment for learning. Most students are on their own for the first time, and the lessons they learn, both in and out of the classroom, will last a lifetime.
Unfortunately, many recent college graduates learn some very expensive lessons too late. Even though millions of college students fall into the same financial traps every year, it is an avoidable problem.
To help out the students who are headed off to college this fall, here are five personal finance lessons that are better if you don’t have to learn them the hard way.
Lesson One: Be Smart with Credit Cards
The best way to use a credit card in college is to have one card, with no yearly fee, and to pay off the balance in full each month.
Having a card is preferable because it helps you build your credit score, which will be a very important asset once school is over.
The first college credit card is highly beneficial in two ways. First, each month you pay off your balance in full, the timely payment will show up on your credit report. Second, the day you open your credit card account, it will establish your oldest line of credit. As your oldest line of credit grows in age, your credit score will go up. Because you will want to keep this line of credit open long after college, it is critical you pick a card that does not carry a yearly fee.
A common mistake in college is to open an account and not pay off the balance in full each month. For some reason, people seem to think that carrying a balance improves their credit score. It doesn’t. You will likely be paying over 20% interest on that debt, so even if it did help, it would still be a waste of money.
Lesson Two: Minimum Wage Goes Really Far
Many college students think that making $7.25 an hour is a waste of their time as they will be making far more money when they graduate. They also tend to think that this time is better spent studying. These myths are both wrong.
For starters, even working just 20 hours a week can generate a lot of money over 4 years. We did some basic math and found that working a part-time minimum wage job could reduce student loan debt by over $20,000. That change can have a dramatic influence on the lifestyle you can live after school.
Lesson Three: Don’t Compare Your Spending to Your Peers
If your roommates all spend money one way, it doesn’t mean that it is money well spent or that you can afford it.
Many college students get financial support from mom and dad. Many others have great scholarships and financial aid packages.
If you are borrowing money to attend college, you are in a dramatically different financial situation.
Lesson Four: Pay Off Your Student Loan Interest Each Month
On the surface, this is silly advice. If you are borrowing money each semester to pay off living expenses, why borrow more in later semesters just to pay off the interest on the older loans?
The benefit of this lesson cannot be seen by looking at numbers on a spreadsheet.
Nobody graduates college wishing they had borrowed more student loans. Many graduate wishing they had borrowed less. Paying the interest off each month helps students borrow less.
The idea here is that each semester the monthly interest payments will go up.
As a freshman, making those monthly interest payments will seem like nothing. As time progresses, that monthly payment will represent a growing future burden. Students making interest payments will quickly realize that if they are not careful with their borrowing, they will have a tough time paying back the loans once they graduate.
Getting into this habit breeds smart financial decisions during school.
Lesson Five: Just because the money can be borrowed doesn’t mean it is a good idea.
This all goes back to the myth that student debt is good debt.
The reality is that borrowing money for college can still be a very good investment. There was a time that this investment was a good investment for nearly everyone who attended college. Today, many of these investments do not pay off.
Classic examples of student debt being bad debt include high-priced for-profit schools, and for people who do not finish school. However, borrowing mistakes exist at nearly all schools.
To find out if your borrowing is a good idea, you need to take a very close look at the job placement numbers at your school. The key is to look at the numbers specific to your major. How many people find jobs in the field? What do these jobs usually pay? How much debt will I be in by the time I graduate? Am I likely to be able to afford the debt payments based upon my likely salary?
If the financial outlook seems bleak based upon your borrowing or the stats for people in your major, it is probably time to consider changing majors or finding a way to dramatically reduce your borrowing.
These five lessons are lessons that many college graduates learn the hard way. They are five avoidable mistakes.
It is hard to convince an 18-year-old that thinks they know it all, but anyone who learns these lessons at 18 instead of 25 will be in much better financial shape.