It’s the time of year when new college students--and their parents--are anxiously preparing for the shift to campus life.
When it comes to personal finance, most college students need to be educated before they step foot in a dorm room. To avoid perennial money woes like overdrafts and running out of money, students need to understand the basics about budgeting, loans, ATMs, credit cards, and bank accounts.
As parents and grandparents, we can teach students money skills now that they can use for the rest of their lives.
Money Skill Number 1: Understanding Loans
Given how many families rely on student loans to cover at least a portion of college costs, students need to have a basic understanding of what it means to be a borrower.
True, first-time college students won't begin paying off their loans for several years. Nevertheless, if they understand the financial obligation at the onset, there will be fewer surprises when the first payment is due.
Some questions to answer will include: How much will a loan cost them over time in terms of a monthly payment? When do they start repayment? What's the interest rate?
According to a study by LendEDU, an online loan service, some 80% of students surveyed don't know the repayment terms of their federal student loans, and an astounding 90% didn't know the current interest rate on those loans.
How do federal and private loans differ? (Hint: federal loans are more flexible because there are nine repayment options.) If examining federal borrowing, go to the government's repayment site and plug some numbers into their "repayment estimator." Most of the questions relating to federal loans are answered on the Department of Education's website.
Money Skill #2: Setting Up a Budget--and Following It
Unless you hand your child a credit card and don't worry about how much he spends (which, by the way, is a college student's dream), they'll need a budget.
That means setting limits on how much they can spend per semester or month. While you'll want them to have some pocket money for meals outside of the dining hall, you'll need to know what spending level is right for your child.
"The biggest 'gotcha' is spending," says Sarah Schupp, founder of Universityparent.com. "You need to have a talk [with your child] about expectations."
Where do you start with the budgeting discussion? Schupp says you should look at their college meal plan. How many meals does it include? Many don't cover Sunday night meals. How much will a healthy meal cost on campus? What about other costs such as laundry, supplies, and unanticipated expenses?
Some parents have their student open a debit card on a joint account. Parents can deposit an agreed-upon amount every month based on your budget. If you're way off in your estimate--or if the student is overspending--you can discuss the withdrawals or tweak the budget. That's what we did with our daughter last year when she went off to college. It worked pretty well.
Since this is the age of the mobile app, students can monitor their spending and budget goals with their mobile devices. Two user-friendly applications include You Need a Budget and Mint. They are both easy to set up and use.
Money Skill #3: Avoiding Banking Fees
Banking fees are a nuisance and ever-rising. In its 2015 annual survey, Bankrate.com found that ATM, overdraft. and other banking charges all surged to new highs. The average out-of-network ATM fee, for example, is around $3 per transaction.
There are myriad ways to avoid banking fees. Find out what banks and ATM networks are on campus and look at their banking agreements. The fine print will tell you if they have a wide network of ATMs and what will trigger an overdraft fee.
As I mentioned earlier, you should be able to link a parental account to the student's debit card. Again, you'll need to see if your account can be accessed through on-campus ATMs. Online accounts, it should be noted, can also be linked to any other bank account. You can transfer money between accounts with a few keystrokes.
One of the best ways to save is through credit union accounts, which often cover out-of-network ATM fees. These primarily local or regional institutions often have lower fees across the board. You should be able to find a no-fee checking account that doesn't charge you for ATM withdrawals.
To locate a credit union, visit The National Credit Union Administration’s website. To find no-fee checking accounts, check out Nerdwallet.com.
When it comes to credit cards, again, it's important to know the annual percentage rate and what will trigger late or over-the-limit spending charges. While learning about and obtaining credit is a good idea, establishing monthly spending limits that are linked to a budget is a solid plan. Shop around for the best deal at Bankrate.com.
Keep in mind that you may have to maintain a minimum balance in a checking account to avoid fees and overdrafts, so you need to read their service agreements carefully, which presents a good teaching moment on basic banking.
Money Skill #4: Shopping Smart
Shopping smart begins with school supplies. Most colleges will give you a list of what's provided in a dorm room and what's not. They will even tell you what's banned such as microwaves or toasters.
Many families overspend, although the average family spends about $600 on back-to-school supplies, according to the National Retail Federation, so it helps to have a list of essentials.
Some dorm-room staples include pillows, comforters and bedclothes; closet supplies; and laundry supplies such as hampers and detergent. Occasionally, colleges will give you the option of buying bundled "packages" of dorm room supplies from outside vendors. While that's convenient and can save you some money, you have to be careful. The quality of the merchandise might not be up to your standards.
Schupp suggests that you buy many of your dorm supplies after, not before, students move into their dorm rooms. That will circumvent overbuying.
"Buy as little as possible and coordinate with a roommate," Schupp advises.
Sometimes you can save on inexpensive items like books, paper, and writing supplies at dollar or office supply stores, which often offer seasonal coupons. Larger items such as mini refrigerators might be cheaper at garage sales, thrift, or resale stores. We asked our neighbors if they had a child coming home from college and got a mini refrigerator for free.
Smart shopping also extends to textbooks. New textbooks are incredibly expensive these days: Students typically spend $1,200 or more for books and supplies for four-year colleges, reports the College Board.
Fortunately, there are several ways to save. Buying used textbooks is one way, but make sure that the used editions match what a professor is teaching in any particular course, notes Schupp. You also may be able to rent textbooks, download them online or even take them out of a college library. Books used for current courses will usually be on reserve. Check out CheapestTextbooks.com, Textbookx.com, and Packback.com.
A Final Note
Other than securing a generous financial aid package (see my last column), the best way to be money-smart in college is to graduate on time. Going beyond four years can be incredibly costly, particularly if loans are involved.
The added expense of students needing more than four years to get a degree is daunting: An additional $16,000 annually for public colleges and $23,000 for private schools, according to Complete College America, a nonprofit group focused on college success. Unfortunately, though, less than 20% of those attending a four-year public college graduate on time.
By John F. Wasik
John F. Wasik is a freelance columnist for Morningstar.com and author of 14 books, including "Keynes's Way to Wealth: Timeless Lessons from the Great Economist." The views expressed in this article do not necessarily reflect the views of Morningstar.com.