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Freshman finance: Tips on managing your money

TODAY Financial editor Jean Chatzky shares advice to help parents and college first-years control their cash.
/ Source: TODAY contributor

If your teen is heading off to college for the first time this fall, by now you're probably acutely aware of what the next four years are going to cost — but are they? So whether you're a student about to start college (or a parent about to start trying to pay for it), TODAY's Financial editor Jean Chatzky wants to answers your questions and offer advice. Q: Why are things so bad, financially?

A: Largely because the cost of college has gone up so much. Tuition inflation has been running three times the rate of regular inflation for years now. Add to that the fact that only 40 percent of kids are able to get through college in four years (the five- and six-year plans are much more expensive). Then add that parents are trying to pay for their own retirements simultaneously, and you start to understand why kids are emerging from school with an average of $19,000 in student loan debt and another $3,000 to $4,000 in credit card debt —and why 65 percent end up moving back home to live with their parents.

Q: Do you need a credit card in college?

A: Personally, I think you do. Debit cards have the advantage of not allowing you to spend much more than you have. However, there are things you can't do with a debit card. You can't buy a plane ticket home in an emergency if you don't have the money then and there. You can't rent a car. Plus, when a college student graduates, having a good credit history — one where bills get paid on time — is helpful when it comes to getting a decent rate on a car loan and auto insurance, renting an apartment, sometimes even getting a job, because it's a sign that you're a responsible adult.

Q: Are there ways to avoid taking on so much student loan debt?

A: Yes, but they involve hard work and hard choices. First, there are many scholarship and grant programs out there, some of which go unapplied for. If you need money for college, you should tackle applications for grants and scholarships as if it were a full-time job. You may be surprised at how much money you're able to come up with. Second, you can opt for a less expensive school. There is a school of thought that says it matters much more where you go to graduate school than undergrad, and another that says you'll be a happier graduate if you're not spending your first ten years in the workforce stressed out about paying for your education. You can also go to school on an irregular schedule. You can take semesters — or even full years — off to work and earn some money. You can take a gap year before you even start college, like Princes William and Harry, and use the time to put away some money. And you may even find that the experience you have during your gap year makes you more attractive both to schools and to people who have money to give away.

Q: There has been a lot in the news recently about student loan scandals, about colleges handing out lists of preferred lenders that have — essentially — paid them off in one way or another to get their names on those lists. What do you need to know before you take out a student loan?

A: Firstly, that you should still begin with those preferred lists. Most colleges put a lot of work into developing lists of lenders that are actually the best for their students to work with. But you want to be sure you use the Internet as a backup resource to double-check that both the schools and the lenders are on the up and up. Also, know that although student debt has a reputation as being good debt — those loans that are not government subsidized (private loans, which are variable) can get quite expensive. You need to keep your credit rating in good shape in order to pay them off at the most attractive interest rates. And understand that, like in the world of credit cards, late payments can cause your interest rate to skyrocket.

Q: What's the thinking on students working and studying simultaneously?

A: That it's okay, as long as you're not working too many hours. Research has shown as long as you're not working more than 15 hours per week, there's no effect on schoolwork. And personally, I'm in favor of college students making a contribution to their education, or at least their expenses. Why? Because, as any parent knows, a child is likely to take the spending of their money more seriously and more carefully than they are your money or a bank’s money.

Q: How can you help your kids develop a budget per semester?

A: With pencil and paper or a computer. You and your children need to sit down and figure out how much is a reasonable amount of money to spend each semester. Will they be eating on a meal plan or need to pay for their own meals? How much for entertainment? Clothing? Transportation? Cell phone? Books? It will help to talk to another student from that particular school — most schools also offer sample budgets. But once you have the big number, break it down per week so that your child understands how much they can pull out of the ATM each week and still make the money last. And encourage them to raise the white flag early in the process if they find they’re going over week after week, so that you can help them figure out where the problems are.

Q: What else do children need to understand about money before they go to college?

A: If I could hammer home one lesson, it’s that there is a huge difference between student loan debt and credit card debt. There has been research that shows students are leery of their credit cards in their freshmen year. But once student loan debt starts to mount, they figure a little more debt isn't going to make that big a difference. It will, though, because credit card debt is much more costly — in general — to pay back.

Jean Chatzky is an editor-at-large at “Money” magazine and serves as AOL's official Money Coach. She is the personal finance editor for NBC's "Today” show and is also a columnist for Life magazine. She is the author of four books, including “Pay It Down! From Debt to Wealth on $10 a Day” (Portfolio, 2004). To find out more, visit her Web site, .