CHAPTER THREE
CHOOSING, AFFORDING, AND OWNING COLLEGE (AND GRAD SCHOOL)
Congratulations, young Millennial. You sat through Saturday morning test prep courses for six months, took the exam twice, and received a score you could live with. You spent the other weekends visiting campuses, likely with your parents, roaming through student unions and buying T-shirts you will most certainly give away if things don’t work out. You worked grueling late nights on your 500-word essay about that time you faced a challenge in your life, overcame it, and ended up better for the experience. And one sunny afternoon, you opened your inbox and received the news—you’re in. No matter how monotonous it all seemed before, there’s no better feeling in the world.
That’s how Heather describes her college application process. She applied to a dozen undergraduate universities and schlepped up and down the East Coast visiting them all, writing countless stories of overcoming adversity, and taking the SATs (three times in her case). Same went for the LSATs and applying to law school.
Things work a little differently in the state of Florida, where the state lottery system underwrites large scholarships for qualifying residents to enroll in its public universities. This means many Floridians like me stay put because the deal is just too good to pass up. I applied early admission to one school, the University of Florida, because my brother was already there and because it is the best school in the state, according to me and everyone else who ever went there. As someone who now preaches investment diversification, I will admit that my strategy was anything but diversified. What if I didn’t get into my one and only choice? I guess I would have had to apply to that other Florida state school in Tallahassee, heaven forbid.
I recognize these were craft beer problems in a world of Bud Light—I was very lucky. If I had to select my school like a “choose your own adventure” book, the way so many people do, I would not have had a single clue which direction to go. Like many impressionable young people, I probably would have been persuaded by the flash and awe, and believed that attending any college that made me feel good was my right instead of a privilege. It’s very difficult to possess the maturity, let alone the foresight to make such a huge decision alone. Without a no-brainer option like Florida, I admittedly would have fallen into the same problem other Millennials did. I just wasn’t equipped to act otherwise.
People say that getting admitted is the hardest part. I beg to differ.
Now that you’ve been admitted, this chapter will teach you about your selection process. The methods by which you select and afford college or graduate school could prevent you from making the first—and potentially the largest—financial misstep of your life.
The place to start your selection process is by understanding the potential cost as best you can. It’s time to put your thinking caps on because class is about to begin.
THE COST OF EDUCATION IS TOO DAMN HIGH!
People need a college degree to compete in today’s marketplace. Aside from a couple of Zuckerberg-level tech savants, people hoping to compete and live prosperously today are attending college. Sure, “prosperity” is relative, but without a doubt, one thing is true: college degrees command greater earning power.
According to a 2014 report, Millennial college graduates ages 25 to 32 earn an average estimated $17,500 more per year than individuals with just a high school diploma.1 In today’s dollars, that amounts to an additional $525,000 through a 30-year career.
Graduate degrees widen the income gap even further. According to “The Economic Value of College Majors,” a 2015 study by Georgetown University, individuals with a graduate degree earn on average $17,000 more annually during the course of a career than those with just a bachelor’s degree. In today’s dollars, that amounts to another $510,000 through a 30-year career.2
On its face, the equation seems simple: invest in your education and make more money. Assume the risk and obtain the reward.
But educating yourself costs a lot of money. Not popping bottles on the weekend money or even Louis Vuitton luggage money. I am talking down payment on a house money. For four-year programs, the average published undergraduate charges for the 2016–2017 school year were $33,480 at private nonprofit colleges, $9,650 for in-state residents at public colleges, and $24,930 for out-of-state residents at public colleges.3 The average annual cost of tuition for a graduate degree totals nearly $11,000 at public schools and $23,000 at private schools.4
Using some loose math, the average price of a four-year college program can cost nearly $90,750, and a two-to-three-year graduate program can cost between $22,000 and $69,000. This doesn’t even include living expenses, which warrant a whole separate discussion. Now that’s some fancy learning!
The issue is not only the price tag itself, but also the rate in which it’s skyrocketing. College tuition and fees have gone up by approximately 500 percent since 1985.5
Here’s some perspective on how insane that is. The Consumer Price Index (“CPI”), which measures the change in price of consumer goods and services, rose 115 percent during the same period. Meaning, the cost of education increased almost five times more than the cost of everyday things you buy. Taken at its simplest level, students are paying much more to receive the same (if not less) value for their college education than their car, groceries, and haircuts—all which cost more with time, but have not inflated nearly to this extent.
But why has the cost of education ballooned?
The answer depends on who you ask.
Institutions say that a widespread decrease in public funding has forced their hand to push essential operating costs onto their students. They argue that they need to raise tuition to recruit and retain tenured professors with competitive salaries. However, full-time faculty is barely making more money than in the 70s, and that’s not even considering inflation. College administrators, on the other hand, have managed to achieve seven-figure-salary status, and there are more administrative positions today than ever before. Overall, the funding itself seems to be doing all right; certainly, better than decades ago. State funding reached an inflation-adjusted high of $86.6 billion in 2009. And the federal Pell Grant program has grown to an adjusted $34.3 billion per year, up from $10.3 billion in 2000.6
The institutions could state more accurately that funding hasn’t decreased—it just hasn’t kept up with student enrollment. According to the National Center for Education Statistics, total fall enrollment numbers peaked in 2010 at a little more than 21 million.7 That was right in the initial recovery stages of the Recession. At a core time for the Millennial demographic to be entering college or graduate programs, enrollment was at its highest. Even if public funding increased at a reasonable rate, the subsidies could not keep up with this demand to attend. Therefore, funding per student dropped as the class sizes grew.
The money would have to come from somewhere else. So, the cost of education rose for Millennials because more of them wanted—or needed—to be educated.
And we are barely shoveling into the topsoil here. We need to dig deeper.
Let’s return to the idea about Millennials receiving a return on their investment. In theory, the more expensive it is, the harder it will be to receive that positive return. And we all know it’s not that simple. Different colleges work for different people for different reasons. Indeed, higher education is not a “one size fits all” tank top: just because you’re wearing one doesn’t mean you should be.
In other words, what makes sense for some people may not make sense for others. Each institution has its pros and cons. Evaluating them is one of the hardest things for young Millennials to do, especially if they aren’t enabled with financial knowledge.
Let’s go over what some of those pros and cons might be.
Receiving your education at an in-state public university is cost-effective. Their tuitions are often the most affordable, and state residents might be able to benefit from exclusive financial aid and scholarship programs. In some cases, attending a public university as an out-of-state student could still be cheaper than going private. If the school is close to home and commuting is an option, you can save another boatload on housing costs, as well.
But public universities most clearly showcase the issue with high student enrollment and dollars invested per student. As of the fall of 2015, out of the 10 universities with the highest undergraduate enrollment numbers, nine are public. None of them ranked within the top 50 of the U.S. News & World Report’s 2017 Best Colleges. University of Central Florida topped the list with 54,513 students.8 That’s a ton of seats in each classroom and caps to compete with at graduation. Professor-student relationships are tougher to foster if you can’t get near the lecture podium. Even with large alumni networks, they are often impersonal and hard to leverage in the workforce unless you make extraordinary efforts to stay involved (I can attest to this firsthand). In other words, there is a greater probability of you being a number than a name.
Then, there are the elite private institutions: the Ivies and even the baby Ivies. Their names carry such great weight that some would argue they provide you with an “insurance policy” for your future. More intimate classroom sizes can facilitate important contact with top professors, many of whom are leaders in their fields and can offer valuable mentorship before and after graduation.
But the expense of going private can be overwhelming. Columbia University and Vassar College top the list of most expensive private colleges for the 2016–2017 school year at approximately $55,000 and $53,000 per year, respectively. Even if the names carry incredible prestige, a student without direction can easily squander that opportunity. Exploring a loose topic of interest, diving down a philosophic rabbit hole, or pondering the meaning of life won’t support even the brightest student after graduation. Imagine you borrowed more than $200,000 in student loans for these majors:
• Folklore and Mythology from Harvard University. It turns out this program provides the talent for all the UFO shows on The History Channel.
• Egyptology at Columbia University. Pyramids are cool and all, but the only larger waste of money was the actual construction of the Great Pyramids!
• Visual Studies: Art and Culture of Seeing Concentration at the University of Pennsylvania. Better get your eyes checked before enrolling.
You catch my drift. Attending an esteemed private university is something to be incredibly proud of, but if you’re footing the bill, you better make the most of it.
Finally, there are the lowest-tiered private colleges and universities, which I deem a trap. If the diluted training from an overenrolled public university had a baby with the extravagant cost of an elite private institution, you would be left with the redheaded stepchild of college education—the schools that, no matter how you cut it, are never the most financially responsible choice (unless they’re paying you to attend).
I will not name names, because I do not need to. Run your finger down the most recent U.S. News & World Report rankings and check out the exorbitant cost of some schools near the bottom. Those schools will not provide you the studies, resources, or recruiting clout that higher-tiered schools will, yet they charge just as much if not more. You are paying for a very expensive tank top, and years from now, that won’t be such a cool story, bro.
Now, I didn’t just throw shade at these colleges without good reason. I did it to illustrate how each institution has its own set of good and bad that you need to evaluate. Where the tipping point lies between the cost of a specific university’s degree and the actual return on your investment is complicated because it requires you to evaluate your honest, personal goals in life, and take ownership over them at a young age. It also requires you to be responsible. Not all Millennials were ready to do that before applying to college or graduate school.
I am not writing this to be a dream crusher. I believe that it would be great for everyone to have their chance to reach their highest degree of excellence, wherever they want, and be the best [insert your career here] that they can be. But unfortunately, a world where everyone could have that chance would be a sunshine and rainbows utopia—not the real world that we live in.
In 2015, President Barack Obama unveiled a proposal to make a two-year associate’s degree free and available to any American who wanted it. In announcing his plans, he said that college education should be “as free and universal as high school is today.”9 Of course, the plan would have been expensive, costing the federal government $60 billion, with a “b.” Without knowing President Donald Trump’s formal position on higher education issues, I have a feeling a proposal like this one won’t make it into the Oval Office or Mar-a-Lago.
This might not top the federal agenda anymore, but now, states like New York are pursuing the idea. Governor Andrew Cuomo with U.S. Senator Bernie Sanders announced a first-of-its-kind proposal for 2017 that would make college tuition free for more than 940,000 of New York’s middle-class at The State University of New York and The City University of New York. Governor Cuomo said, “[a] college degree is not a luxury—it is an absolute necessity for any chance at economic mobility . . . .”10 The Excelsior Scholarship, as it’s called, mandates that students must attend school full-time, which will support graduation rates and result in students incurring less student loan debt for living and other expenses. The City of San Francisco is planning to give tuition-free community college a shot, as well.
In a sense, governments win by holding our education out as a right. The more educated our nation becomes, the more competitive we will be with the world and with ourselves. We would stimulate our economy and everyone would win. Sunshine and rainbows, right?
Maybe in a country where there’s more Bernie Sanders(s). Until state or federal subsidies exist on a broader scale, we need to stop being so naïve.
The colleges and universities have their own reasons for wanting us educated. These institutions are businesses, many of which are privately held. Like any other brand, they compete for our money, often with a focus on how wonderful it feels to be a part of it all. Showcasing Division I sports, glistening new buildings, and student life on campus, they place much emphasis on community and the ease to fit into it. The community—above much else—is what fuels the collegiate brand. Why else would kids pay $160,000 to attend a less-prestigious university than the better state school 20 minutes from home?
Above all else in this chapter, let this point mean something to you. Institutions cannot sell you on their brand without selling you on the most crucial point of all: that attendance is affordable. Whether you are the son of a real estate tycoon in Manhattan or the daughter of a Wal-Mart employee in the Rust Belt, you should feel just as able to become a part of The University family. Because the entire enterprise fails unless these institutions can make their programs feel affordable to anyone.
The longer we get sold on viewing higher education as a right—not a privilege we must figure out how to pay for—the more we will get sold on how affordable it is to pursue it. And it isn’t affordable. The government’s starting to say it, but most schools aren’t.
The access to student loans makes it all possible: the ability to attend the college of your choice and the opportunity to be charged more to do so. Even you can become one with The University, for four easy installments of $27,000—with financing available for all!
There is a fundamental problem with the rising cost of education. But until the paradigm shifts, the costs are the Millennial’s reality. More critical than the cost alone, however, is that most young people must decide how to fund that cost without understanding the consequences.
THE COSTS TO CONSIDER
First, we will review the set costs. The largest set cost is your tuition per semester. This base number will not vary too much during your studies if you will be taking a similar number of credits per semester. Some schools charge tuition by credits, whereas others do not. As discussed earlier, tuition varies greatly from school to school and from student to student. But as a general rule, public universities cost less, especially for state residents.
There are other sneaky sister costs to consider here, which I consider sneaky because you can’t avoid paying most of them. These are the fees. Lots of them. These also vary greatly from school to school, and you may have a hard time figuring out what they all are. And don’t ask me, because as far as I’m concerned, many of these fees are probably just redirected away from tuition to keep those numbers looking steady. But some examples include: student activity fees, health fees, technology fees, energy fees, “fees” fees…. The moral of the story here is that the cost of tuition alone never represents the full picture. You must also consider fees. If you are not provided with a breakdown in your admissions materials, call or write the registrar’s office to obtain more information.
The second category of costs you will have while supporting yourself in school is room and board. Lodging can be really affordable or really expensive depending on a number of factors. Does the school offer on-campus housing, and how many students are accommodated there? For example, Heather’s law school technically offered on-campus housing in Manhattan, but it only could accommodate a small percentage of enrolled students at the time. If on-campus housing won’t be available to you, is the school within commuting distance to your home, or will you rent an apartment nearby? If you must rent an apartment, do some research on the average costs in that geographic area. There’s a disparity between the costs to live near campus in, say, Madison, Wisconsin (the University of Wisconsin) and Coral Gables, Florida (the University of Miami).
Nourishment is also considered part of your room and board costs. Does the school offer a student meal plan? This is often the most affordable way to dine. Ask yourself how much you like to eat and when, because some schools offer both unlimited meal plans and debit card style options. If your school does not offer a meal plan, understand the costs of dining and groceries in the area. Obviously, there’s a huge difference in food costs between small college towns and metropolitan areas. Just because you are a student in San Francisco doesn’t mean you get student pricing at the corner store. And don’t forget about transportation. Research whether you need to have a car to get around, or if there is reliable public or university-sponsored transportation available.
Another set of costs is books, supplies, and technology. The cost of these materials may depend less on the school and more on your coursework. For example, if you want to pursue graphic design, there might be a host of programs and applications you’ll want to purchase to help you get a leg up outside the classroom. The point here is that you shouldn’t dismiss these costs and must account for them in your evaluation process.
By investigating and compiling these numbers, you will take reasonable steps to understand how much your education could cost. But that’s just part one.
Now, you must ask yourself the toughest question of all: is it worth it?
As I touched on before, calculating the return on your education investment is not straightforward like a math equation. It’s a complicated interplay between knowing the financials and taking a good, solid look at yourself.
To help you figure this out, let’s start by examining your career goals. Do you have them? It’s okay if you don’t. Lots of people don’t have a clear path. But if you are struggling with what you want to pursue, that should absolutely factor into how much you spend. I’d argue you should spend less money to pursue the unknown. Expensive private educations are a luxury; this goes for undergraduate and graduate school degrees.
Take it from Heather, who spent a ton of money studying to become a lawyer when she didn’t know a thing about practicing law. Her first plan was to become Ari Gold from Entourage, then a Big Law associate, then a state prosecutor, then just about anything with health benefits. If she wasn’t certain what she wanted out of attending law school, she should have chosen a program that was more affordable because she was footing the bill. At the very least, this would have lightened the pressure after school while she figured it out (it being life).
If you do have specific career aspirations, it’s great that you have a profession to conduct your research around. Let’s say you want to pursue fashion merchandising. I know nothing about this field, but hey, it sounds cool. You have been accepted into two universities with comprehensive fashion merchandising programs—one at your resident state’s public university and one at a private institution in New York City.
The one closer to home would afford you in-state tuition at approximately a third of the cost; however, the private city school offers what you believe to be unparalleled access to design houses and real opportunities for internships and eventual employment. It also, undeniably, has a better name and reputation. But graduates rise or fall every day from even the most elite institutions, so you need to think with the end in mind. Attending the objectively better school doesn’t rubber-stamp your future for success. If you are going to pay a lot more money to attend that school, you need to become very familiar with your appetite for risk and what the real reward looks like on the other end.
Take your research to the next level. Think about the specific industry you would like to break into after your studies and look into the average starting salary for that industry, as well as where the jobs in that industry are located. Understanding these factors will go a long way when “calculating” the value that you can extract from a specific degree from a specific university.
The rising fashionista learned that she would most definitely want to move to New York City after studying fashion merchandising in college. However, the starting salary would not be very high and things would certainly be tight, given the cost of living. She decided it would be less risky to attend her in-state public university, so that she would not have to borrow as much money. Maybe she could pursue a summer internship in the city, which seems like more of an opportunity and less of a risk. She knows she would have to work a little harder to make industry contacts, but the payoff in savings would be huge and help her start her life after school. She is making an emotionally honest, well-reasoned decision. And I, as her financial advisor, agree with her.
Your career isn’t the only factor to consider when asking yourself, “Is it worth it?” Even though I’m a numbers guy, there are more soft factors at play, which come second in your value analysis but should not be disregarded. These include things such as geographic location, proximity to family, demographic, social programs, and even the accessibility to Division I sports. Was it always your dream to attend, or are family or friends just pressuring you? I am not here to tell you which of these things to care about, or that you should or shouldn’t care about them. Contemplate everything that is important to you—yes, even how the school just makes you feel—because regret is a terrible feeling to experience after shelling out thousands of dollars. That’s called buyer’s remorse, and it sucks.
So, congratulations again, young Millennial. You’ve decided to attend a college that is not Florida State University. You’re already off to a great start!
But really, you are off to a great start. You understand what the cost of your education will be, and you have carefully determined that you are comfortable because you are choosing the right program for you.
Yet, a big question remains.
HOW WILL YOU PAY FOR IT?
Here is a quick overview of your potential sources of funding.
Parental or family support is money provided by the ones who love you. Don’t ever take it for granted, and don’t spend it all in one place!
College savings of your own. Let the hustle flow through you. Good for you for saving money to fund your own education. Even if it’s not enough to pay for your entire tuition, it may help with your living expenses and discretionary purchases. You will read more about cash flow during college in the next chapter.
Private loans are another way to source money for your education. You borrow these loans from private banking institutions. The terms may be better than student loans offered by the federal government, but they could also be less flexible if you fall into financial hardship. It all depends on those terms. Read with caution.
Financial aid. This is money to assist you in paying for your education. There are many forms of financial aid afforded by public or private organizations, federal and state governments, and the college institutions themselves. Some must be repaid and some need not. To obtain any sort of federal student aid, you must fill out a Free Application for Federal Student Aid (“FAFSA”). Here are the options:11
Scholarships or grants. Free money for outsmarting people. Actually, academic achievement is only one way to obtain scholarships or grants. Showing leadership skills or performing social good may also get you recognized and land money in your pocket. There are hundreds of thousands of scholarships in this country, ranging from a couple of hundred bucks to full-tuition coverage. It’s amazing how many of these scholarships go unclaimed because students do not know they exist or do not believe they are competitive for them. Give it a shot and apply. You just might surprise yourself.12
Work-study. There are government-run programs that provide part-time employment to students. In return, these programs fund a portion of your education.
Student loans are the gasoline fueling the fire of the Millennial Problem. The William D. Ford Federal Direct Loan Program provides various types of loans under which the federal government is your lender. The most important to know are:
1. Direct Subsidized Loans are available to undergraduate students who demonstrate financial need. The federal government pays the interest on these loans during school (as long as you are enrolled at least part-time), for the first six months after graduation and during a period of deferment. Importantly, undergraduate federal student loans are capped at $57,500 per student. Only $23,000 of that capped amount may be subsidized.
2. Direct Unsubsidized Loans are available to undergraduate and graduate students. You don’t need to demonstrate financial need to get them, and interest accrues from the onset of when you borrow them, capitalizing—or adding—on top of the amount you originally borrowed. The amount you originally borrowed is called the principal.
3. Direct PLUS Loans can be taken out by graduate students (“Grad PLUS Loans”) or parents of dependent undergraduate students (“Parent PLUS Loans”). They have no aggregate or cumulative limit up to the school-designated “Cost of Attendance,” making these especially dangerous for naïve prospective students trying to pay for expensive graduate programs.
4. Direct Consolidation Loans is what your loan would be called if you consolidated all your federal loans into one giant loan. When you consolidate loans of varying amounts and interest rates, you are left with one consolidated interest rate somewhere in the middle.
We will discuss whether consolidation makes sense for you in the next chapter. But know this now: amassing student loan debt from the loan options just listed can be more dangerous than other types of debt. Please let these next few paragraphs sink in.
Unlike borrowing for a tangible thing like a home, a car, or a mattress, student loans and their interest rates are valued by collateralizing your future earning potential. If you can’t pay the piper, your brain can’t be seized or repossessed. This big difference drives the following perilous characteristics of student loans.
First, current interest rates for federal student loans are currently between 3.76 and 5.31 percent. But for many Millennial graduates who have already borrowed for their college education, those rates can be as high as 8 percent. In many cases that’s higher than current mortgage rates. For unsubsidized loans, interest accrues while the student is still learning, often underemployed, and unable to make payments during school. At graduation, the student receives a bill much higher than the cost of tuition, so high that most first payments on unsubsidized loans are interest only. The higher the interest rate, the more interest that must be paid across the life of the loan, and the longer it will curtail one’s ability to move forward in life.
This next point really bugs me. Student loan payments are not tax deductible if your adjusted gross income exceeds $80,000. Even if you do qualify, the amount you can deduct is capped at $2,500. Except for the very wealthy, people who take out business loans or mortgages can typically deduct substantial loan interest on their annual tax filings. These tax deductions are significant incentives that put money back in the borrowers’ pockets for ultimate savings. People seek education to earn more money. A salary of $80,000 or more may seem considerable, but not in the face of the six-figure student debt held by a doctor, lawyer, or other professional with an expensive graduate degree. When tax incentives exist for the purchase of million-dollar homes, it seems suspect that the benefit for student loan borrowers would be capped by an arbitrary salary amount, especially when many graduates who are earning that kind of salary had to amass significant debt to jumpstart their careers. How do you think Heather felt when her first job offered her $81,000, just barely more than the cap?
Federal student loans are also not dischargeable in bankruptcy, except for extreme circumstances. To get rid of them, you must either repay them or die. Although I do not view bankruptcy as a real vehicle to implement one’s financial goals, it is an option of last resort, and by taking that away from the student borrower, the government takes away that last resort. Rather than allow you to file for bankruptcy on your student debt, the government will garnish your wages, seize your tax refunds, intercept government benefits, sue you to access your assets, and destroy your credit. In other terms, there is no path they will not pursue to make sure you are diligently repaying your loan, or they will hold that large debt cloud over your head until it’s buried six feet underground.
But what about highly touted, super-flexible income-driven repayment plans, such as Income-Based Repayment (“IBR”)? Qualification for income-driven plans is based on a calculation of your debt-to-income ratio. Once you qualify, your required monthly payment would be significantly less than that under the 10-year or 30-year standard repayment plan. Sounds cushy, right?
I wouldn’t get too excited.
An extended repayment option may offer flexibility by easing your cash flow today, but you need to consider the long-term consequences. Paying just $60 per month on a $100,000 loan, when the interest on that $100,000 is accruing at 6.5 percent, sets up a situation where your monthly payment doesn’t even come close to touching the principal of the loan. And any plan that lets you pay less than the monthly interest amount is working you further into debt, rather than out of it.
It is true that income-driven plans offer complete loan forgiveness to some. Specifically, graduates who pursue jobs in the public sector and make timely payments for 10 years will have their loans completely forgiven, tax-free. Otherwise, qualifying graduates who make timely payments will have their loans forgiven in 20 or 25 years, but with a ginormous tax bill at the finish line.
Here is the real kicker. Income-driven plans require annual qualification. Technically, this means that you either must: (a) stay employed in the public sector for 10 years, which is a real commitment and requires you to lock in a decade of your life at all costs; or (b) never earn too much money during the course of those 20 or 25 years, or you will no longer qualify. Should you not fully submit to the income-driven process in one of these two ways, you will eventually lose your qualification status and be stuck with thousands of more dollars in interest from paying so little for so long. Sure, income-driven plans provide helpful short-term solutions to borrowers in need. But perhaps an unintended consequence is that it disincentivizes borrowers from ever reaching too high, or they will be in even more trouble just when they thought they got out of the red. That’s the opposite of the American dream.
You may have thought your admission letter sealed the deal, but it was just the first step. You should take careful consideration of the costs and returns of your prospective program before pulling the trigger. Your older self will thank you.
CASH FLOW AND EASY MAC
You’ve gotten admitted, selected your school, and figured out how to pay for it. Amazing. Once your bright eyes and bushy tail show up on campus, though, here is how you truly own it.
The most important financial theme to embrace in your collegiate years is cash management. Intimately understanding how money flows in and out of your life is the foundation for making good decisions, whether you’re a student or not.
Managing your money starts with cash flow. You will work up your cash flow all the time (remember: it’s fluid). The way to approach cash flow as a full-time student is a little different than how to approach it during your working years, but the principles remain the same. The basic cash flow equation is:
Income − Expenses = Savings (or Deficit)
Let’s examine each piece.
Income is money coming in. Typically, you earn income from being employed. During college and graduate school, however, you can also fundamentally consider as “income” what you receive in the form of student loans, financial aid, scholarships, work-study programs, and support from your parents.
Expenses are money going out. You incur expenses to support yourself. They are either fixed, meaning they stay the same each month or year (such as rent or tuition), or they are variable, meaning they change each month or year (such as clothing or food).
Savings are whatever is left over when your income is greater than your expenses. Savings help to fund your financial goals and Great Things in Life.
A deficit occurs when your expenses are greater than your income. Cash flow deficits result in you mounting debt or losing your savings.
While in school, cash flow is very expense-focused because students usually are not working full-time jobs or focused on saving money. The main priority is to do well academically and get by while doing it. By looking at expenses first, it’s easiest for a student to back into what he or she needs to earn as income to support a desirable lifestyle. Later on, I will modify this lesson for when you are earning a salary.
Start by listing all your fixed expenses, such as your room and board, tuition, fees, cell phone bill, and so on. I suggest reflecting each expense as a monthly one.
After you’ve listed them, determine how much money you need each month to live a lifestyle comfortable enough to focus on your education. These make up your variable expenses.
What is comfortable enough? Only you can answer that, but I urge you to be honest with yourself about what’s reasonable and what’s excessive. Sure, you need to clothe yourself, but a wardrobe that’s diverse in price goes a long way. Ladies, for what it’s worth, Heather has always been a huge believer in the notion that designer bags make cheap shirts look expensive. Try it and save yourself a boatload on tops that will only get beer spilled on them anyway. Don’t forget jeans at the Gap, because they’re always on sale. And sure, you need to eat, but making use of the school meal plan—no matter how gnarly the salad bar looks—is sure cheaper than spending $12 per quinoa bowl down the block. Oh, and Easy Mac. Lots of Easy Mac.
How you choose to spend money on variable expenses directly affects how to finance your education, especially when you’re borrowing money to do it. That money may feel free today, but trust me, it won’t tomorrow.
Examples of Fixed and Variable Expenses
Fixed
Student loan repayments
Mortgage or rent payments
Utilities (for example: water, gas, electric, cell phone, cable, and Internet)
Property taxes
Insurance premiums
Car lease payments
Variable
Food
ATM withdrawals
Transportation and fuel
Subscriptions and memberships (for example: fitness classes, magazines, and streaming services)
Personal care (for example: grooming, glasses, and contacts)
Medical costs
Child care
Clothing
Entertainment
Hobbies
Travel
Gifts/donations
Once you have all your variable expenses written down, add them up to calculate your monthly living expense. This is an important number because it dictates how much money you will need to bring in each month from your sources of income.
For example, if you figure your expenses are $2,500 per month, and you receive $500 per month from your parents and another $500 per month from financial aid and part-time work, you’re going to need another $1,500 each month to support yourself. You might decide to borrow the extra money, feeling confident your grades will land you a great job in your field. Perhaps you’d rather pick up some additional work and reduce your variable expenses so you don’t have to borrow at all.
On that note, if you needed to take out student loans to jumpstart your college education, you can use your cash flow analysis to figure out how much you need to borrow each semester. Maybe with proper planning, it’s less than you thought.
And with that, you’ve introduced yourself to the basic art of cash flow. Well done, grasshopper. Now, I want to touch on an important opportunity afforded to young motivated students.
Even for those fortunate enough to study without borrowing money, you can improve your quality of life by working. Paid internships or part-time work can supplement your cost of living and give you financial flexibility to have a little more fun or save for later. Alternatively, internships for college credit can be thought of as deferred income. They are a wonderful investment in your training and experience for a future field of study.
In college, I spent a considerable amount of time outside the classroom learning about the financial services industry by working with my dad. And I have to give the guy some credit. Truth be told, I didn’t just wake up one day and think it would be an awesome idea to spend 20 hours a week working in his satellite office learning the finer points of small business ownership. In fact, I distinctly remember spending at least one dehydrated Friday morning sleeping under my desk with my head in a trashcan, only to do it again later that night. Alas, I wish I appreciated the opportunity more at the time, and I thank my dad for gently nudging me through it. What I learned from him in that job provided me the necessary leverage to afford—all by myself—to move to New York City at 24 to start building a financial planning business of my own.
Had I been financially empowered from the start, I wouldn’t have needed his gentle nudging. By understanding something as fundamental as cash flow, I would have known better what I’d need to live my life after school, which would have dictated how I spent my time and energy during school. Would I have studied harder and partied lighter? Debatable. But I would have had my eyes wide open while doing it.
In addition to mastering cash flow and seizing good opportunities, you should use your college years to build credit. Credit provides you access to financing for homes, cars, businesses, and more. The better your credit, the better terms you receive when borrowing money for these things. To start building your own credit, try applying for a credit card at your local bank. It might be easier to gain approval if you already have an account there. If you are unable to obtain a credit card of your own, find out if you can become an authorized user on a parent’s credit card. Be sure to pay off your balance in full each month and on time. It’s important that you don’t open or close too many lines of credit at once, or let your first card sit idle in your sock drawer. The point is to regularly use it to demonstrate your creditworthiness.
When I was a freshman, I opened a Blue for Students American Express Card. I was offered a whopping $600 line of credit, enough to only do a little bit of damage. I used it frequently and treated it almost like a debit card, making sure that I paid my bill in full each month. At the end of each year, I would request an increase in my credit line, having demonstrated to the credit card company that I was disciplined and responsible enough to wield a higher amount. By the time I graduated, I had a $20,000 line of credit and the beginnings of a solid credit history. Boom.
As you read earlier, I did some things right and some things wrong during those crazy years. Everyone does. Injected with our first dose of liberation, we are so pliable, so impressionable, and bound to make mistakes. But if you do the homework just outlined, don’t squander your open doors, and don’t get arrested, you’ll be able to limit those mistakes to the little ones that can be removed with a pair of scissors.