What Your College Freshman Needs to Know About Finances

A YourMoneyCounts® Exclusive by Lynnette Khalfani-Cox, The Money Coach

For many college freshmen, the first year of living on one's own - and sometimes far away from home - can be an exciting experience. But it can also be overwhelming.

If your child is just starting college and doesn't have a plan to manage his or her finances, he or she could potentially rack up money problems well before graduation day. Even worse, mismanaging finances could hurt your child academically. Studies show that one of the top reasons students drop out of college is due to debt and financial pressures.

So here are five important things every college freshman needs to know about finances:

#1: The Value of a Budget

Living independently means that it's time, once and for all, for your child to learn the basics about budgeting. Budgeting will help your college freshman keep track of spending and learn to allocate funds for the items that are needed - not just wanted.

To help your child create a realistic budget, don't simply account for school-related expenses like tuition, books and supplies. Also factor in transportation costs, trips home, membership dues for extracurricular activities, and entertainment. By creating a realistic budget, your child is more likely to stick to a pre-determined spending plan.

#2: The Truth about Credit Cards

According to the student loan company Sallie Mae, 91% of undergraduates have at least one credit card, and the average debt is $3,173. Explain to your child that credit cards are fine - as long as they are used responsibly.

Too much reliance on credit cards during that first year of college could wind up generating high-interest debt that becomes very difficult to pay off by graduation. Perhaps that's why the average college senior will graduate with $4,100 in credit card debt, Sallie Mae reports. Aid your child's efforts to manage credit wisely by insisting that he or she only charge what can be reasonably paid off each month.

#3: Meal Planning Basics

Meal plans during college can be a cost-effective way to manage a budget because each meal usually ends up costing much less than eating out. On-campus meal programs can also be a pre-paid expense that you and your child can plan for in advance.

But be forewarned: Some college freshmen wind up paying for meals upfront and then not fully utilizing their meal plans, because they're studying, busy socializing with friends, or they simply haven't coordinated their own preferred eating time with the school's meal schedule.

Whatever the case, if you've already paid for on-campus meals, remind your college freshman to go ahead and eat what's available at the school's dining hall or cafeteria in order to avoid wasting money.

If your child is living off campus and commuting to school, have him or her create their own meal plans to avoid constantly eating at fast food chains and restaurants.

#4: Saving Money

Stress to your college freshman how important it is to save money, but don't make it a chore. Instead, make it fun and tie it to something they want to do.

For example, suggest that your child find creative ways to save money each week for something desirable like a spring break trip or new clothes. The idea here is that adopting a frugal mindset for one specific goal can help your child learn to better manage his or her overall budget, and become a better saver in other areas too.

Also, strategize together about money-saving tactics. For instance, your child may carpool with fellow students if he or she lives off campus. Alternatively, public transportation may be a good option to avoid the cost of car maintenance, gasoline, auto insurance and parking.

Other ideas: Find study groups instead of hiring a tutor if your child is struggling with a class. Use coupons when shopping for groceries, and look for buy-one-get-one deals at restaurants and retailers. All these savings add up over the course of a semester.

#5: Student Loan Smarts

According to the College Board, the average college graduate from the class of 2011 will leave school with more than $23,000 in student loans.

If it's absolutely necessary to take out student loans, make sure your child is aware of what his or her likely student loan repayment will be after graduation. Don't let your college freshman simply say "I'll borrow money now and worry about how to repay it later." That's a recipe for a financial disaster because defaulting on a student loan has very serious implications - such as hurting one's credit rating and jeopardizing career options.

Use online calculators to estimate future monthly student loan payments, as well as the kind of salary your child will need to earn to afford those payments.

Also, when choosing educational loans, start with federal loans first - instead of private loans - because federal loans typically feature:

• lower interest rates and fees
• better loan forgiveness, deferment and forbearance options
• subsidized loans, meaning the federal government pays the interest on the loans while your child is in school, saving you money

By sharing these key financial ideas with your son or daughter, he or she will be well positioned for academic and economic success as your child begins life as a college freshman.