What Students Need to Know About Their Finances

Illustration by Timothy Goodman; (source photo): Emrah Turudu / Getty Images

Right now, some 2.1 million students are packing off to college. By the time they graduate, they'll be well versed in Faulkner, microbiology, or Mandarin—but chances are, they won't have even a basic command of financial tasks like, say, living on a budget.

"So many students start college with no real idea how much it will [cost them to live], how much they have available to pay for it, or how to make up the difference between the two," says Oklahoma State University administrator Lance Mills. As a result, this year's freshmen will likely emerge with average debt well above even the staggering tab for 2011 grads: $4,138 in credit-card debt atop their $22,900 in student loans.

We have a financial-literacy crisis in America. Plenty of smart people are trying to combat it, unfortunately to grim results. In 2007, researchers at the University of Arizona launched a large-scale study of the financial attitudes and behaviors of college students by surveying one third of the freshman class. In 2009, they went back and resurveyed those students still enrolled. Nearly 20 percent of the students said they actually felt less knowledgeable the second time around. And while some students were coping with the recession appropriately, trimming entertainment and communication expenses, many more resorted to risky coping strategies like dropping classes, putting off health-care expenditures, and using one credit card to pay off another.

What are the parents of the class of 2015 to do? In the words of Crosby, Stills, Nash, and Young: teach your children well.

Last year's Credit Card Accountability, Responsibility and Disclosure (CARD) Act encouraged financial-literacy courses on college campuses but didn't mandate them, says Mark Kantrowitz, founder of the website finaid.org. As a result, kids who aren't getting this knowledge in high school (only four states require a class in financial education, according to Jumpstart, a coalition for fi nan-cial literacy) aren't getting it in college. That means parents are the only hope. Here are a few key lessons:

Wants and needs are different things. Having an unlimited texting plan is a want. Having the ability to go to the doctor is a need. As the University of Arizona study showed, sometimes college students don't know the difference. "Prioritizing is a weakness for students," says OSU's Mills. "They often leave their tuition bill unpaid, not feeling as though they have the money for it, but spend like they have plenty of money." Again, communication is key here. Help your kids understand which bills have to be paid first and that if they want extras, they'll have to work to make up the difference.

These are your means, and they are limited. If your child has never had to budget before—and by budget I mean take a sum of money and make it last over a finite period of time—he or she is going to need help. Explain how much money there is for the month or semester, then divide that period into weeks. Using pencil and paper, show how quickly a week's allotment can fly by when used at random for coffee, pizza, and a run to the drugstore. Insist that your child track his or her spending (whether paying by cash or debit) so he or she can see where the money is going. And schedule a call two weeks in to see how it's going.

Put some skin in the game.If you want your kids to respect money, they have to earn it. And if you want them to respect the opportunity they've been given to go to college, make them contribute. It doesn't have to be tuition or room and board (and I'm not suggesting student loans when they're not needed). Money for expenses will do. The number of college students on the five- or six-year plan has been steadily rising. If they were paying their own way, perhaps that number would start heading down.

Be cautious with credit cards. "Some issuers are treating student aid as a resource sufficient for repayment," says Kantrowitz. If you're concerned your kids need to build a decent credit history before graduation, add them to your card as an authorized user while simultaneously telling the card company to keep the limit on their charging privileges artificially low. If you're not concerned, tell them: no job, no card. Then hope they've at least learned enough to listen.