This past spring I was asked to make a financial literacy presentation to a group of high school seniors that were going to college in the fall. In a survey the year before, seniors at this high school indicated that they wished they had received personal finance instruction prior to graduation.
During the last week of school, the students were scheduled to receive a variety of life skills seminars to help them survive in the real world and financial literacy instruction was on the program. "How much time do I have to teach them personal finance?" I asked. "Forty-five minutes" was the response. I decided to accept the challenge. Here is what I told the students:
Know Your Student Loan Deal. If you have student loans, do you understand how much you will need to borrow over four years and what your monthly payments will be when you graduate? You may want to visit your college's financial aid office and find out. Then, if you feel your loans will be too much for you after graduation, start working on minimizing them while you're in school. That means borrowing less and working during the school years and summers. Get a checking account and a debit card. Know the fees that apply to your account. Make sure you're never overdrawn and use fee-free ATMs as much as possible. Use electronic banking services to keep close track of your account. Ask your employer to electronically deposit your pay into your account. And choose your bank wisely; they may be your partner later when you need a credit card, auto loan, or home mortgage.
Know what a credit score is and how it works. You all know your SAT and or ACT scores. It's important to know your credit score too. It's the number financial institutions use to predict how likely you are to pay back a loan on time. A good credit score will reduce the interest paid on credit cards and auto and home loans. A bad credit score will cost you tens of thousands of dollars over your lifetime in additional interest and could even prevent you from getting a loan, a job or an apartment. One way to get a good credit score is to always pay your bills on time. Go online and research how credit scores are compiled.
Handle your credit card carefully, just like a loaded gun. I passed out a credit card offer to every student. These offers usually include multiple interest rates charged to purchases you don't pay right away, and the rate you pay--13 percent, 18 percent, even 23 percent-- depends on your credit score. The better your credit score the lower your interest rate. And if you fail to pay your bill on time, you could be charged a $35 late payment fee and an even higher penalty interest rate (29 percent) may apply to all past and future card purchases. Try to pay more than the minimum owe on your credit card each month. Making a minimum payment of $75 on $2,500 in credit card debt (at the above penalty rate) will take more than five years to pay off and cost you $5,100. Better yet, don't use your credit card if you don't know how you will pay for your purchase.
Majors matter. College majors produce various levels of earnings after graduation. Make sure your major offers starting salaries that will enable you to pay off your loans comfortably. Don't get me wrong--you should follow your passion. The founder of PayPal, for example, was a philosophy major. Check out the expected salary from your major here. If your monthly student loan payment is greater than 15% of your expected monthly pay, then your debt load may be too high.
Exit Carefully. Before you graduate from college, you should do an exit interview with the financial aid office to ensure that you know how your federal student loans work and what you should do if you are having trouble repaying your debt. Don't rush or ignore this requirement as many celebrating graduates do. Default and delinquency on student loans could lead to poor credit scores, collection costs added to your loans and even part of your wages and tax refunds going directly to the government. Know when your first student loan payment is due and what your monthly obligation will be. Understand all of the federal student debt relief options legally available to you. These options can help you avoid disastrous consequences: grace periods, varied repayment plans, loan consolidation, loan forgiveness, deferment and forbearance.
Resist Peer Pressure to Spend. About a third of college students graduate without student loans. You may be one of those fortunate students who have extra spending cash from your parents or from earnings from a job. If you are not one of these students, don't try to match your friends spending behaviors on food, clothing and leisure items. You will regret taking out a student loan to go to Florida on spring break. Live within your means.
You have many important decisions ahead of you. Ask for help. Do your research before you make these critical choices. The path you choose will impact you for many years to come. Good luck!
John Pelletier is director of the Center for Financial Literacy at Champlain College, Burlington, Vt. Follow John on Twitter.