College Debt 101
KORVA COLEMAN, host:
I'm Korva Coleman and this is TELL ME MORE from NPR News. Michel Martin is away. Coming up on our regular Washington Post Magazine series, a military program tries to win hearts and minds in Afghanistan. We'll hear more in a few minutes. But first, if you decide to attend college, then managing your money could be as tough a challenge as the classroom. And our money coach Alvin Hall is here to offer college students and their parents a few tips. And welcome again to the program, Alvin.
ALVIN HALL: I'm glad to be here.
COLEMAN: Alvin, one of the biggest challenges that students face is learning how to manage their personal money. And all of us have horror stories, of course. But how can college students learn personal finance skills?
HALL: This is a great opportunity for parents to begin the discussion about children actually managing their personal finances. So they should sit down before the kids have ever gone to college or during the first week and talk about the basics - budgeting, how much money you need to spend every week or every month. And most importantly in these days, how to handle your checking account and your credit card account, because those are the two areas where kids tend to go overboard and make the biggest mistakes.
COLEMAN: Well, let's face it, some students also come from families that will be able to take care of them financially no matter what happens. But most of them don't. So what should college students from working-class families watch out for?
HALL: Korva, this is such a good question because last night I was at a dinner party talking to people who had just recently graduated from college, and I took a little survey to ask how many people had checking accounts before college and how many people did not. Half the people, like myself, never had a checking account before college. So the first thing the parents should do is to sit down with their son or daughter and make a budget. The idea is that the money that they have must stretch over the entire school year.
They should also sit down and talk to them about the type of checking account that this individual should open. One of the important things they should look at is the overdraft facility. At many of the checking accounts that are open to students, the checking account itself is free, but then if you overdraw the account the fees can rack up to be astronomical amounts of money per year.
So they should definitely look at an overdraft facility, and where the student can the student should monitor this on an ongoing basis. The third point is credit cards. Credit cards are often very, very damaging to students because for some reason it feels like free money.
(Soundbite of laughter)
HALL: And all they focus on is the minimum amount they have to pay back. Oh, I can go out and get this and all I have to pay back is $25 a month. Well, that $25 a month plus interest adds up to be a huge amount of money. So parents need to sit down and place very strict limits on the use of credit cards by their students.
COLEMAN: Well, what about debit cards? Are they better?
HALL: Debit cards can be better because it's like using cash. But in that period when banks are really desperate for profits, they can tack on huge fees for debit cards. For example, let's say your son and daughter is hungry and they go to McDonald's and they decide to use their debit card and they go over the amount of money that's in their checking account.
Guess what? There could be anywhere from a $25 to $35 fee, so that little McMuffin which cost $3.25 can end up costing over, you know, about 10 or 100 times, right, what it cost just in fees alone. So debit cards can be useful, but again, sit down and have a very, very disciplined conversation about how to use money.
COLEMAN: Well, nobody likes to read the fine print on your bills or your credit cards. What's the one thing that people should read when they open up a checking account?
HALL: They should look for any additional fee for everything, from overdraft to falling below a certain minimum balance - all of those things cost your student money and adds to the cost of an education. And you know, I was recently visiting a friend who's sending off her son to college and he had his iPhone with him. And I said to him, one of the best things you can do is to get an app on that phone that allows you to track your checking account or your savings account, as well as your expenditures on a daily or weekly basis.
When you're walking around, why not have an app? You enter the amount that you spend. There's no reason for a student to be naïve these days. These apps are great for young people and they love them. So between playing a game, studying, right, enter your expenses into this.
COLEMAN: You know, new credit card legislation will make it harder for college-aged kids to get cards, whether or not they have an app on their phones or not. But there are ways for parents to co-sign for certain amounts on their credit cards. Should parents do that or should they just forego this altogether?
HALL: I think it's good to give them a credit card but make sure that they understand that it is only to be used in emergency situations. They should not use it to go out and buy a new top on their birthday. They should not go out and use it to have drinks or whatever they can with their friends, you know, at a restaurant. No, that is not permissible at all.
It should only be used in emergencies. I recall a friend of mine's daughter getting really stranded in the Midwest because there was a snowstorm at the airport. They didn't have anyplace to go. Without a credit card she would never have been able to get a hotel room. So I think in emergency cases like that, yes, it's always good to have a credit card. But sit down and tell your son or daughter when they should or should not use it.
COLEMAN: Alvin, should students work when they're in college or is it smarter to accumulate debt instead and pay it off when they get done?
HALL: I think this depends upon individual circumstances, but overall, I don't think that working hurts the student at all. I think it really gives you a sense that you're actually paying for your education, and you have much more invested in it if you've had to work during the school year, or work during the summer. Then it's your money that you've earned. You're paying for your education.
It means something to you because you worked for it. But for some people this is very, very hard. Some people don't have the ability to work at the same time and focus on education. But if you can, it is a good thing because coming out of school with the staggering amounts of debt that people do these days really causes them to defer things in their lives.
For example, they might want to buy their first apartment when they get out of school. They won't have the money for that. They may want to travel when they get out of school. They won't have the money for that, all due to the size of the loans that they have. So the extent to which you can lower your loan by working, either during the school year or during the summer, can be a good thing.
COLEMAN: Alvin, what's the one big financial mistake that routinely trips up college students?
HALL: I would say spending too much money on entertaining. When you're young, if you want to go out with your friends, you want to have dinner with your friends, go to games or concerts with your friends, all of these things gradually add up to a lot of money. And students need to realize you can have fun while you're in school. But it's getting the balance right. You should be having a good time, but you need to do it within a context where you do not run up debt that causes you to suffer later on.
COLEMAN: Alvin, should college kids bother requesting their credit reports once a year?
HALL: I'm mixed about this, to be honest with you. Some people would say, yes, if they have a credit card it's good, but under the new legislation the credit card would more than likely be in their parents' name. So checking their credit reports would be good because the parents would then be able to see if the child is damaging their credit rating.
But in most cases kids don't need to worry about this until they're in their junior or senior year because that's when it becomes an issue. Once you get out of school, your credit report becomes an important factor in getting your first apartment. In many cases jobs now will check your credit report. So I think in your freshman/sophomore year, less of a problem, junior/senior year, yes, you should focus on it.
COLEMAN: Personal finance expert Alvin Hall joined us by phone from Poughkeepsie, New York. Alvin, thanks very much.
HALL: You're welcome.
COLEMAN: And remember, at TELL ME MORE the conversation never ends. And now we want to hear from you. Do you have your own financial horror story from your college years? Or do you have children who are learning their first financial lessons on campus? To tell us more, please call our comment line at 202-842-3522. That's 202-842-3522. Remember to leave your name. You can also share your story online. Just go to the new npr.org, select TELL ME MORE from the program tab, and blog it out.
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