This is a guest post from Steve Sildon, Senior Editor for CreditCardAssist.com, who is a frequent contributor in the personal finance community on the subject of student loans, student credit cards, and financial responsibility for young people.
Personal Finance for College Students
The recent state of the economy has been a difficult lesson to learn for everyone on the importance of personal financial wellness. There are a lot of changes being made in many financial sectors, including credit cards, mortgages and bank loans, and the rules of the lending game have changed significantly. But as consumers, we need to do our part by making sure we are being responsible and staying on task with our debts and payments, plain and simple. That part hasn’t changed.
Financial Aid and the Credit Crunch
Parents of young adult children though also have the obligation to teach their young how to manage their own finances, particularly those who are already working and especially those going off to college. The credit crunch has already affected many aspects of a student’s finances, particularly with respect to student loans. Many who already have student loans have been cautioned that finding an alternative means of funding may be necessary.
Since qualification for financial aid depends largely on the financial means of a student’s parents, there is additional concern that students with parents who have lost a job or are facing their own financial crisis, will find it harder to make ends meet. Students who are relying totally on the income of their struggling parents will be forced to learn a “trial by fire” lesson in financial independence. But with all of the turmoil in the area of finance that everyone is experiencing, there is a valuable upside of the credit crunch for students in particular.
Students and Education Loans
So far, most of the credit crisis impact has been felt by students who have private or alternative loans to supplement the financial aid they already receive from federal and state student aid and grants. Students who have poor or no credit history established may find it incredibly difficult to obtain a student loan on their own. But this can be a great time for a student to learn how to stand independently and secure their own educational funding in addition to the limited assistance that they might receive from their parents.
Students can seek out and learn creative financing alternatives. For starters, earning an income by getting a part time job is highly recommended and not just for earning extra money at school. Taking responsibility for one’s own financial actions as a young adult can provide a lifetime of financial education, paying dividends well into adult life. Because many kids rely on their parents for 100% of their expenses during college, it can be a great time to change the rules and give college students, who might be just starting out, the insight and the tools to be partially or totally financially independent.
Students and Credit Cards
Unfortunately for students in years past, it was all too easy to secure a credit card. In fact, it is still very common for credit card companies to set up shop on college campuses across the nation. These credit kiosks are set up to entice students into signing up for a credit card through the use of free promotional items. Many students, without the benefit of a solid basic financial education, were signing up for any card that gave them free t-shirts, CD’s, or movie passes. These virtually instant applications turned over credit cards to young adults who were not completely knowledgeable about how credit really works. This led to many students overspending on credit with no legitimate plans for paying off their balances. Students racking up credit a decade ago might still be paying off those old credit card balances even today.
Now, because of the credit crunch that is affecting everyone, credit card companies have stepped up and made their application process more complicated and the rules have become more stringent for credit card applicants. Students are no longer able to get credit cards as freely as they once did. Credit scores and credit histories are being looked at more closely than ever before because banks have justifiably become much more risk averse that at any time in the last 30 years.
Banks and card issuers are in crisis mode and have been working overtime to reduce their own financial risks. Those students who get approved for a credit card these days will likely not have free reign when it comes to spending limits.
Students who want to obtain a line of credit for emergency purposes will need to maintain a high credit score. This means that a student must learn credit responsibility early and work on improving their credit, much like they will have to do after they graduate from college. In fact, there are many states across the nation pushing for financial education in middle schools and high schools. Students who learn the true value of money and get a basic education about the do’s and don’ts of credit will likely be better equipped to handle their own finances and deal with their own credit as a young adult entering college. This education and knowledge will help the student develop solid money habits at an early age that will carry over into adulthood.
Money Lessons and Family
Because so many families have been affected by the changes in the credit industry as a result of the economic crisis, many children have had to learn important money lessons they may not have otherwise learned. Parents who are dealing with their own financial difficulties, such as paying mortgages when jobs have been lost, have had to cut down their spending across the board. This directly affects the entire family and children typically will be asked to participate in living more frugally. Children young and old can be taught about basic family finances on an age appropriate level and there has never been a better time for young children and young adults to learn about the critical importance of financial responsibility.
While not every middle school child will need to grasp the concept of spending on credit, those of high school and college age need an early education in credit. Parents have reported that even young children are getting offers for pre-approved credit cards in the mail. Older teens of age can apply of their own accord for credit cards, but without knowledge of the severe consequences that may lie ahead from irresponsible use, a young adult can easily mismanage and become overwhelmed by the trapdoor of revolving credit card debt.
Using the current credit crunch to teach students lessons in finances can help children practice smart financial habits at an early age. Students who are taught how to manage their credit and debt responsibly from the very beginning will be more inclined to develop good personal financial habits, using credit sparingly, but above all, responsibly. Taking personal financial responsibility for their purchase activities as well as making regular, consistent, on-time payments with a credit card will start a teen off in the right direction financially which can be one of the most important financial lessons a child will learn in their lifetime.