A guide to financial literacy for college students

The GFLEC Personal Finance Index annually assesses financial literacy among American adults across 8 key “common financial situations”. Since its inception in 2017, the index has regularly found many Americans function with a poor level of financial literacy. In 2022, the average participant answered just 50% of the questions correctly.

This is a disturbing statistic when we consider the correlation between financial literacy and financial wellbeing. According to the same study, individuals with very low levels of financial literacy are 6 times more likely to struggle to make ends meet and 4 times as likely to spend over 10 hours a week solving their financial issues.

Why is financial literacy important for college students?

Among younger individuals, financial literacy is even poorer. The average Gen Z individual answered just 42% of questions correctly in the GFLEC survey. In some respects, this comes down to life experience – most people under 25 are not yet taxpayers, investors, or mortgagors.

It is crucial that college students learn to manage their personal finances to mitigate the risk of running into financial issues. In the long term, mismanaging college funds can lead to unnecessary debt and a lifetime of bad credit. In the short term, it can contribute to students dropping out. Fifty-one percent of those who quit college do so due to a lack of money, and 79% delay graduation as a result of financial issues.

The principles of financial literacy

According to the Financial Literacy and Education Commission there are 5 key principles of financial literacy. Understand these, and you will be on your way to successfully managing your personal finances.

1. Earning – know your rights and understand your paycheck

While at college, you might consider part-time work or a summer job to help cover your expenses. As a new employee, it is important to understand your rights to prevent unethical or illegal treatment. Here are some key facts about earning:

• The minimum wage in the U.S. is $7.25, but in some states it can be higher. If you work over 40 hours a week the additional hours count as overtime, so you should receive at least time-and-a-half pay.
• Some employers offer additional benefits beyond their legal obligation. Whenever you begin a new position, ask about company benefits; for example they may offer a match policy for a 401k retirement account.
• On your paycheck, you will find 2 figures: gross income and net income. Gross income is your pay before deductions, while net income is your take-home amount. The main salary deductions are income, social security, and Medicare taxes.
• As a part-time and/or minimum wage employee, you most likely will not be paying income tax, but the IRS encourages everyone to use their Tax Withholding Estimator to ensure the right amount of tax is being withheld on your paycheck. Remember that income received from tips is usually taxable.

2. Spend – create a budget and track expenses

College is expensive, costing on average $35,720 a year. While some spending is unavoidable, there are areas where you can limit outgoings.

A good example is discretionary spending on items such as transport, personal care, and entertainment. The average on-campus student spends $3,493 annually on additional expenses, and off-campus students not living with family spend $4,253.

To help track these expenses and find where you can optimize your spending, create a student budget. When putting a budget together, try to find the sweet spot between the cutbacks you want to make and what is realistic, otherwise you may find it hard to reach your goal.

With other college students around you, it is easy to want to follow the crowd and match other peoples’ spending. A free money tracking app – (like Mint) can help avoid this by increasing your awareness of the money you’re spending as well as the money coming in.

3. Save and invest – even small amounts can compound over time

It is never too early to start saving to cushion yourself from unforeseen financial expenses. Open a savings account as well as a checking account and use the checking account for regular banking and the savings account to store funds for an emergency. If you’re working, set up regular payments to your savings account.

Currently, 56% of Americans have less than $1,000 in emergency savings, and 58% are uncomfortable with the amount of savings they have available. To avoid finding yourself in this stressful situation, consider creating an emergency fund that can cover 3-6 months of expenses. Finances can be tight at college, but put away even a small amount, and you will be grateful for this in future.

Another way to build your future wealth is to invest. Over the last 20 years this has become far more accessible to the general public and you don’t need to have a huge amount of money to begin.

4. Borrow – improve your understanding of loans and credit

When taking out any loan, it is important to understand the interest rate and repayment plan schedule. At college, this means understanding the different types of student loans available so you know exactly what you are signing up for. If you are ever unsure about the terms of a loan, seek advice from an impartial finance professional.

As a legal adult, you are not only eligible for loans, but will also likely be inundated with credit card offers. These can be a great opportunity to build the credit you need to get a good mortgage rate and qualify for large purchases. However, their misuse can saddle you in debt and bad credit that can affect your financial plans for years to come.

How your credit score can affect your future

Your credit score is a measure of your ability to pay back money you borrow. It reflects:

• your income
• how well you manage money you borrow
• how reliable you are at repaying loans on time

Credit card companies, banks, car dealers, and mortgage lenders use your credit score to evaluate whether or not you’re a good risk. A high score makes you a better risk and more likely to receive a credit card or loan, while a low score makes you less likely to receive consideration.

The trick to building a good credit score is to borrow and repay enough to establish a good track record that proves you’re responsible with money, without borrowing so much that you can’t afford to repay it.

Your score can go down if you:

• borrow too much for your income level
• spend too much of your credit limit
• don’t pay bills on time

It can also go down if someone steals your identity and spends money in your name. A bad credit score in college can keep you from getting credit cards, a car loan, or a mortgage loan after you graduate.

How to build and keep a good credit score

The trick to building a good credit score is to borrow and repay enough to establish a good track record that proves you’re responsible with money, without borrowing so much that you can’t afford to repay it.

One strategy to keep the amount credit you spend within manageable limits rather than maxing out your credit cards. Most credit card experts advise you not to spend more than 30% of your limit, but spending less will improve your score. Consumers with credit scores above 800 on the FICO scale, considered an excellent rating, generally spend only 7% of their available credit.

Consumers with credit scores above 800 on the FICO scale, considered an excellent rating, generally spend only 7% of their available credit.

You can also improve your score by taking out a loan and repaying it on time. This demonstrates that you’re responsible with debt management. Many banks offer small loans known as credit builder loans for this purpose – just be sure that you have the discipline to not spend the cash.

5. Protect – get insurance and safeguard yourself against fraud

It is important to protect yourself and your assets from financial difficulties in case the worst happens. For example, if you don’t have health insurance it can cause huge financial strain if you have an accident or are diagnosed with a serious health issue.

If you’re under 26, one option for healthcare insurance is to stay on your parents’ plan. If you take this route, you will need find out whether you need additional out-of-state coverage.

Alternatively, most colleges provide student coverage which can cover you for basic care. To find out more about this option, contact your school. If you live alone and are not a dependent, you may qualify for free coverage with Medicaid.

If you have a car, auto insurance is a legal obligation. Your parents may be able to add you to their policy, but it can be beneficial to get one of your own as a long clean record can reduce future premiums. Some providers offer a discount if you maintain a B average at college. Premiums can vary greatly so shop around for the best deal.

Protecting your finances from identity thieves

Follow these key tips to protect yourself from online identity theft:

• For online bank accounts, use a password manager instead of typing in your password manually.
• Keep your operating systems and apps current with the latest versions and security updates.
• Use a secure connection such as a VPN when going online.
• Avoid transmitting financial data over unsecured connections such as public Wi-Fi hotspots.

It is also important to protect physical documents that may contain sensitive data. Make sure you pick up your mail promptly, and shred any financial documents before throwing them away. Keep important paperwork, such as your social security card, stored securely in a safe location.

Monitoring your credit report will also help alert you if someone has stolen your identity. You can monitor your report automatically by signing up for an identity theft protection service. This type of service can notify you of suspicious use of your identity so that you can promptly alert credit bureaus to freeze your account. It can also help you recover your identity and limit your losses.

Top 10 student financial literacy resources on the web

The internet has made it far easier to educate yourself on managing your personal finances. Below are our picks of the best student financial literacy tools and resources on the web.

What financial goals should a college student have?

For most students, graduating debt free is an unrealistic expectation. However, by taking control of your college finances, you can minimize the debt accrued and set yourself up for a better financial future.

Ways to minimize debt include increasing earnings with part-time work and sticking to a budget. College students can also carefully manage credit cards to improve credit and put a little money aside to build an emergency fund.

These small habits can have a huge impact on your personal finances. The skills you learn along the way can put you on the road to becoming more financially literate.