For many students, the college years are when they learn to live the frugal life. (Ramen noodles, anyone?) Not coincidentally, it’s often the first time they step out on their own and manage their money and credit for the first time.
But some prevalent college money myths involving credit can do damage that can dog young people well after they collect their sheepskins.
Before heading off to school, every college student needs to recognize these nine money myths as either not fitting everyone or just plain wrong:
Myth No. 1: Students don’t need to worry about money.
“I’ve found that parents are really reluctant to have honest discussions about money,” says Helen E. Johnson, co-author of “Don’t Tell Me What to Do, Just Send Money: The Essential Parenting Guide to the College Years,” and former director of the Cornell University parents’ program. “They don’t want their kids to experience anything unpleasant, so they shield them from their financial life.”
Because many parents hand over credit cards as their children leave for school, that means “they have credit cards, but they haven’t had any discussion on how to use them,” she says.
When students hit the credit limit or don’t pay the bills, “parents are inclined to pay it for them because they don’t want their kid’s credit rating to get ruined,” she says. As a result, “Kids look at credit cards the way a lot of adults do: as free money.”
“Before our kids went to college, we laid out the budget,” says Johnson. “‘This is what we can afford to do. This is what we can’t.'”
If a card or stash of cash is “just for emergencies,” define what constitutes a worthy crisis. “Running out of pizza on a Friday night is not an emergency, and you have to make that clear,” says Johnson.
Myth No. 2: A college student needs a credit card.
Not every college student is capable of managing credit, says Doug Borkowski, director of the Iowa State University Financial Counseling Clinic.
Both parents and students believe that students need a card to build credit so that they can get a good job when they graduate. But having no credit is better than having bad credit, he says. “Employers would rather see that you haven’t messed up than have to deal with ‘I can’t hire you because you have $30,000 in credit card debt,'” he says.
The Credit CARD Act of 2009 prevents issuers from granting cards to anyone under 21 unless they have income to make the payments — or a co-signer. That’s led many parents to co-sign card accounts, believing that students need them.
“Some parents are too willing to assist in getting a credit card,” says Borkowski. “The new laws certainly have helped. But there still are students who shouldn’t have a credit card. They don’t understand how carrying that balance from month to month adds up” — and how carrying debt damages their credit, he says.
What parents may not realize: If they co-sign, the debt goes on their credit report, too. Their child’s missed payments will affect their scores. And if the student stops paying, the co-signing parent will be held liable for the debt.
One good alternative: a checking account with a debit card and no overdraft protection. It stops working when the account hits $0.
Myth No. 3: Parents should have their names on their college students’ checking accounts.
Getting a teen a bank account and teaching them to use the debit card responsibly is a great alternative to getting them a credit card, says Julie Stav, author of “The Money in You! Discover Your Financial Personality and Live the Millionaire’s Life,” and host of the daily Univision Radio program “Tu Dinero con Julie Stav.”
But you don’t necessarily want to put your name on the account.
Stav made that mistake, and she was turned away when she later tried to open a bank account. The reason: The teen racked up a record of overdrafts. And because Stav’s name was on the account, she was also put on the bank’s naughty list.
“If parents put their name on a checking account with them, parents will be affected, too, if they bounce checks,” says Stav.
The new laws certainly have helped. But there still are students who shouldn’t have a credit card. They don’t understand how carrying that balance from month to month adds up.
|— Doug Borkowski|
Iowa State University Financial Counseling Clinic
Her takeaway: Open an account for your college student before he or she leaves for college. Teach your young adult how to keep track of purchases and track spending. You can make a deposit to your student’s account, even if your name isn’t on the account. All you need is the account number.
If you feel the need to monitor spending, make your continued monetary contributions contingent on your access to the account.
Myth No. 4: College comes with a well-appointed dorm room.
One thing about college most students don’t consider: the cost of setting up the dorm room and getting settled into college, says Johnson.
What surprises most parents and kids is that the dorm rooms are pretty bare bones. Families supply everything from sheets and pillows to cleaning supplies. Johnson even remembers hauling in a piece of plywood to shore up a sprung bed frame.
Students can take the lead, too. “Talk to kids who’ve gone to college and talk about what will it cost to set up their life in college,” she advises. “Plan a chunk of money that’s just going to be startup costs.”
Then start putting aside money. “I think that kids should plan to save and, hopefully, have a summer job,” Johnson says. And they “should plan to save more than they think they’re going to need.”
And check with your roommate-to-be before you buy a lot of stuff. “No room needs two refrigerators,” she says.
Myth No. 5: My parents understand/will handle my student loans.
Not quite, says Borkowski. Students who sign off on loans are responsible for repaying them.
Too many times, he sees families involved in the decision to take the loans. But four years later, when it comes time to discuss repayment, the parents admit that they don’t understand how the loans or repayment options work.
At that point, the students “look pretty desperate when I talk to them,” says Borkowski.
The solution: Get everyone involved before the paperwork is signed. Some items to cover: How much will be due, and when? What is the interest rate? What are the repayment options? Is that a reasonable load compared to what you can expect to make in your chosen field? What are the options for deferment if you don’t get a job right away or want to get additional education?
Myth No. 6: What happened in college, stays in college.
Chances are only the first employer will ask about a new grad’s GPA. But those bad credit marks will stay on his or her credit report for at least seven years. (It’s 10 years if the student declares bankruptcy.)
That means a new grad’s youthful mistakes will stick around until nearly age 30.
Credit reports aren’t used just for credit anymore. Employers, insurance companies, apartment leasing agents and even cell phone companies use them to divide the desirables from the undesirables.
Even if a student or young grad gets approved, poor credit means higher bills for things such as cars, phones, insurance and credit cards.
But the effect can hit them while they’re still in college, too, says Johnson. These days, with intense competition for jobs and internships, a bad credit report or score “says to the employer ‘this is not a very responsible person,'” she says.