Econ 101: College is Time to Budget
If you don't curb the urge to splurge on campus, you may be faced with a lifetime of financial woes
New college students may know how to ace the SATs, but many are flunking the most important math test of all--real-life budgeting and economizing. Some 79 percent say they've never even talked with their parents about a budget. Little wonder, then, that parents often have unrealistically spartan, and students unrealistically extravagant, expectations for the expenses of campus life. The ugly reality can lead to financial troubles that can have lifelong repercussions, such as debt loads that force students to drop out or declare bankruptcy.
"I don't think you can underestimate the potential for problems" caused by students' poor preparation for Dorm Economics 101, says Robert D. Manning, a Rochester Institute of Technology finance professor and author of Credit Card Nation. "For some of them, it can be a nasty, nasty situation."
Creating a realistic budget for discretionary items isn't hard, but it does require a little research. Parents often forget they attended college back in the days before laptops, cellphones, and $100 textbooks. What's more, some colleges--at times in an effort to lure students by making their cost of attendance look low--tell families to plan on spending as little as $1,200 a year on books and extras. In fact, nationwide surveys show the average student now pays about $900 a year for textbooks alone, triple the cost of the mid-1980s. Depending on factors like a school's location or whether the students eat in the cafeteria or keep a car, students also typically spend anywhere from $140 to $750 a month on nonacademic extras.
Parents and students who want an accurate estimate of the cost of campus living would do better to get the skinny from the folks who really know: upperclassmen and, if possible, their parents. Parents have to apply their own common sense as well, says June Walbert, a planner for the financial services firm USAA. Cars, although one of the most desirable extras on campus, are also the biggest budget busters, she says. Next are the spring-break adventures and ski and football weekends that many students hope to make part of their college life. "Driving the parents into deeper debt to satisfy those classic college experiences doesn't make sense," Walbert says.
Party on. Students who celebrate their new freedom from parental oversight by going on a spree can quickly get into real trouble. And many students arrive on campus primed to splurge. Banks hoping to snag lifetime customers early now send so many credit card solicitations out to high school students that an estimated 25 percent of college freshmen arrive with plastic in their wallets. Most of the rest get their cards on campus, where salespeople often set up booths offering free T-shirts or sandwiches to anyone who applies for a card.
One reason the demand for credit is great is that many students have big spending plans. A recent survey by USAA found that more than one fifth of students plan to lay out over $1,000 furnishing their dorm rooms. Students often try to buy social acceptance or the notice of the opposite sex, says Ty Kucera, an Arizona State University sophomore and peer financial counselor. He recalls one student who spent $400 on a big beanbag chair, mistakenly thinking it would draw the girls. And researcher Student Monitor reports that nearly half of all female undergraduates have bought something in a Victoria's Secret store in the past month.
The best way to rein in the urge to splurge is to make students responsible for earning their discretionary spending money, says Lewis Mandell, a finance professor at the University at Buffalo-SUNY. Studies show students who work up to 15 hours a week during the school year actually do better academically than students who don't work. Mandell recommends that some students, especially freshmen, be limited to no more than 10 hours of work a week to ensure plenty of time for study and to limit the amount of spare cash they have to spend. Even at minimum wage, that should put about $200 a month in the student's pocket, plenty for a cellphone, laundry, pizzas, and maybe even textbooks.
Sometimes, that actually works. Karl Sandberg, who runs a consumer credit counseling office near Dallas, insisted that both his daughters earn their own spending money at college. His oldest daughter, Rebecca, 23, took her budget to heart when she enrolled at Baylor University in Waco, Texas. "My friends would want to go out constantly, and I'm like: 'Let's go eat in the cafeteria and rent a movie.' "
But some students, such as Sandberg's younger daughter, Jennifer, 21, don't maintain that discipline. Within months of enrolling at Baylor, Jennifer signed up for a credit card and started "paying for other people's partying, picking up the bills, trying to impress people," says her father. It was only after the bills started piling up that Jennifer finally realized what her father had been trying to tell her about the dangers of splurging on credit. "It came as quite a shock that you actually have to pay for it," she says. And she's still adjusting. Now a senior, Jennifer recently called to ask her dad for $700 to cover bills, many of which were caused by several nights of celebrating her 21st birthday.
Sandberg decided to bail her out one last time to keep her focused on coursework that would allow her to graduate this winter, a semester early, cutting his tuition bill by almost $10,000. Sandberg is right to worry about graduation. Finances are the most common reason college students give for dropping out.
Though painful, bailouts can serve as important teachable moments for students. Manning, for example, recommends that parents dangle incentives in front of students, such as offering to pay off portions of debts for students who stay within an agreed-upon budget and get good grades.
However they do it, students should learn to live within a budget by the time they graduate, finance experts say, since overspending can hurt credit ratings, which employers are increasingly using in making hiring decisions. Those who learn too late discover that students who live like professionals while in college are often doomed to live like students when they are professionals.
This story appears in the December 12, 2005 print edition of U.S. News & World Report.