14.4: Financial Literacy for College Students

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Introduction

Financial literacy is a critical component of financial wellness, particularly for college students navigating the complex interaction of academic life and personal finance. From tuition payments to personal expenses, students face a variety of costs that can significantly affect their mental health, academic performance, and future economic stability. Understanding how to manage these financial responsibilities not only reduces stress in the present but also lays the foundation for long-term well-being and success.

Financial Wellness for College Students

College students face a variety of expenses that can lead to significant financial stress and anxiety. The most obvious is tuition, which can vary widely based on whether a student attends an in-state or out-of-state public university or a private institution. Beyond tuition, students must consider fees for academic programs, technology, and campus services. Another major expense is housing, whether living on campus or off-campus, which includes rent, utilities, and meal plans. Books and supplies can also add up, sometimes exceeding $1,000 annually (Lamoreaux). Personal expenses, such as smartphones and data plans, are often underestimated (Lamoreaux).

Financial stress is a major source of anxiety for many students. According to the 2020 Study on Collegiate Financial Wellness (SCFW), 74% of students agreed or strongly agreed that they were stressed about their personal finances. This stress can be a distraction at work and school, impacting academic performance and productivity (CFPB, 2014). High debt is often linked to both physical and mental health issues, including severe depression, anxiety, and trouble concentrating (CFPB, 2014). A significant portion of students (33%) have considered dropping out of college due to financial concerns (SCFW, 2020). Despite high financial stress, 65% of students in the SCFW reported being optimistic about their financial futures, and 71% felt their college education was a good investment (SCFW, 2020).

Strategies for Reducing Expenses and Stress

Paying for College

A key first step is to complete the Free Application for Federal Student Aid (FAFSA) to be considered for grants, loans, and work-study programs. Scholarships and grants are the most common source of funding, with 81% of students using them for at least some of their education, although only 8.6% rely on them exclusively (SCFW, 2020). Other sources include money from family (61%) and money from a job (50%) (SCFW, 2020). Unlike loans, grants and scholarships are funds that do not need to be repaid. Students should also actively apply for scholarships that match their specific requirements because these do not need to be paid back (Lamoreaux).

Budgeting and Reducing Costs

Creating a budget and tracking expenses are essential strategies for maintaining financial wellness. By monitoring spending on personal expenses (such as food, transportation, and social activities), students can gain a clear understanding of their financial habits (Lamoreaux). A central part of budgeting is learning to distinguish between “needs” and “wants,” which can guide more intentional spending decisions. To reduce costs, students can explore low-cost textbook options such as Open Educational Resources (OER), used books, or rentals, and carefully evaluate housing and transportation choices for potential savings (Lamoreaux). Reviewing a college’s fee structure can also reveal services that are already included in tuition and fees, allowing students to make the most of what they’re paying for. In addition, setting aside even small amounts for an emergency fund is critical, especially given that 45% of students report they would be unlikely to come up with $400 for a financial emergency (SCFW, 2020).

Smart Borrowing

When loans are necessary, it is crucial to be a smart borrower. According to the SCFW, 53% of students have used student loans, with respondents at four-year private institutions being the most likely to do so (56%) (SCFW, 2020). Students must understand the difference between subsidized and unsubsidized loans. Subsidized loans do not accumulate interest while a student is in college at least half-time, while unsubsidized loans begin charging interest as soon as the loan is taken out (Lamoreaux). It is important to research interest rates and repayment terms to avoid unexpected debt growth, and it is a good idea to use a loan calculator to do the math and determine how much you can afford to pay monthly after graduation. The SCFW found that 49% of students with loans don't have a good idea of what their monthly payment will be after graduation (SCFW, 2020). Private loans from banks should be considered a last resort due to their less-favorable terms (Lamoreaux). It's important to remember that loans must be repaid even if a student doesn't complete their degree (Lamoreaux).

Strategic Financial Planning

A comprehensive approach to financial planning means students must understand all associated costs of their education, including tuition, fees, and living expenses (Lamoreaux). It also involves recognizing the opportunity cost of their time; the potential wages lost by focusing on studies instead of work (Lamoreaux). This means considering the trade-offs between working and studying. While a job can provide extra income, it can also limit time for academics and other beneficial activities like internships (Lamoreaux).

Future Career Planning

Financial wellness extends beyond graduation. When planning for a career, students should consider how much they could afford to pay back on a loan each month. A free loan calculator can estimate the annual salary needed to repay the loan (Lamoreaux). While a calculator cannot know a person's other financial commitments, it can help a student determine if they can afford the monthly expense. For a person with college debt, an economic hardship is considered when their debt requires them to use more than 15% of their discretionary income (Lamoreaux).

Managing Credit and Debt

Managing credit and debt is a significant responsibility for students. Building a credit history is important for future opportunities, like getting a car loan or mortgage, but it comes with risks (Lamoreaux). Credit cards can provide benefits like rewards or discounts, but they can also lead to overspending and accumulating high-interest debt (Lamoreaux). Students should aim to pay their credit card balance in full each month to avoid interest charges and debt.

If a student finds themselves struggling with debt, there are several resources available. Credit counselors can provide guidance on budgeting and debt solutions. It is crucial to research and choose a reputable counselor who doesn't charge excessive fees (Lamoreaux). Another option is a debt settlement plan, where a company works with creditors to arrange a lump-sum payment for less than the total debt owed, but students should also research these companies carefully to avoid scams (Lamoreaux). Bankruptcy is a last resort that should be considered only after exploring other options, as it severely damages a credit score and can be costly to file (Lamoreaux).

Conclusion

Developing financial literacy during college is an investment in both present stability and future success. By understanding their expenses, making informed borrowing decisions, practicing disciplined budgeting, and planning strategically for both their education and careers, students can reduce financial stress and position themselves for long-term financial wellness. In this way, financial literacy becomes not only a survival skill for navigating higher education but also a foundation for building a secure and fulfilling life after graduation.

References

CFPB. (2014). Financial Literacy Annual Report.
Redefining Success by Nico Diaz; Chelsee Rohmiller DeBolt; lindseycassidy; Isabelle Hermsmeier; and taylorgowdy is licensed CC BY-NC.
Study on Collegiate Financial Wellness. (2020). A holistic portrait of student financial experiences. The Ohio State University.

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