College is the first time most people experience true independence. While there are certainly perks, such as staying up as late as you want and getting to set your own schedule, this increased independence also comes with added responsibility. And one of the most serious of these responsibilities is managing your money.
College is a financial crossroads in many ways. You have the opportunity to get on a financially responsible path and set yourself up for success as you enter adulthood. But you also risk wandering down the path to financial ruin if you’re not careful.
To help you stay on the right track, we’ve put together this list of common financial mistakes people make in college. Some of these are fairly easy to avoid, while others can be more insidious. But if you steer clear of these mistakes, you’ll be way ahead of your peers upon graduation.
Using Credit Cards Irresponsibly
Credit cards are often misunderstood. If you use them responsibly, they can be a great way to build a good credit history. This can make things much easier (and often cheaper) down the line when you want to, for example, buy a house or car.
However, credit cards are very much a case of “with great power comes great responsibility.” Credit card companies exist to make money. Therefore, they want to encourage you to spend as much as possible, get in debt, and pay exorbitant interest charges.
So how do you avoid this? First, if you don’t think you can handle the responsibility of having a credit card, then don’t get one. Better that than actively damaging your finances with tons of high-interest debt (or worse, missing credit card payments because you can’t afford them). There are other ways to build credit.
If you do think you’re up for the responsibility, then you should still be cautious. Credit card companies are pros at making people overspend, and you shouldn’t assume you’re immune. To protect yourself from the temptation, we recommend this approach:
- Get a credit card with a low spending limit ($500 is plenty)
- Put a couple of small, recurring charges on the card. Spotify, Netflix, it doesn’t really matter as long as you know you can pay the amount each month
- Set the card on autopay, put it in a drawer, and forget about it
To learn more about how credit cards work, as well as how to use them responsibly, check out this guide.
Overspending
Even without a credit card, it’s possible to overspend. Being broke isn’t as bad as being in debt, but it’s still financially irresponsible. And it’s a constant feature of many people’s college lives.
This does make sense. After all, you (probably) don’t make a lot of money as a college student. At the same time, there are many new opportunities to spend money, especially as you make friends who want to go out to eat or do other activities. And that’s not to mention the cost of going on dates.
There’s nothing wrong with spending money on fun activities, but you need to prioritize how you spend your limited income. Part of this involves making a budget, which you can learn more about here.
But beyond that, you need to develop the ability to say “no” to certain expensive activities. Instead, suggest one of the many free (and generally awesome) events or activities available around campus.
Paying for College with Private Student Loans
Ideally, you won’t take out any loans to pay for college. I recognize this isn’t always possible (it certainly wasn’t in my case). But whatever you do, don’t take out private student loans.
Federal student loans, while still not ideal, are overall superior. Mainly, this is because they offer a variety of protections in the event you can’t repay them. You can opt for smaller monthly payments based on your income or pause payments in some circumstances. And in specific cases, you can even get your federal student loans forgiven (i.e., the remaining amount you owe goes away forever).
Private loans offer none of these protections. You certainly can’t get them forgiven, and lowering your monthly payment can be difficult if not impossible (even if you have little to no income). Plus, the interest rates on private loans are often variable and in many cases higher than federal student loans (which have a maximum, fixed interest rate).
To learn more about federal vs. private student loans, check out this resource from Federal Student Aid.
Not Filling Out the FAFSA
Since we just talked about student loans, let’s briefly discuss the Free Application for Federal Student Aid (FAFSA).
If you’re trying to get any kind of financial aid for college, then filling out the FAFSA is a must. And while you will need to gather some paperwork to fill it out, it’s really not that hard (especially after you’ve filled it out once).
You might assume that you only need to fill out the FAFSA if you plan to get federal student loans. And while filling out the FAFSA will help determine if you’re eligible for loans, there’s so much more to it than that.
Depending on your financial need, the FAFSA could even qualify you for grants that you don’t have to repay. And it can also determine if you’re eligible for Federal Work Study, a program that can help you get priority when applying for campus jobs.
No matter how much or little financial aid you think you’re eligible for, you won’t really know until you fill out the FAFSA. It’s free, and it could save you lots of money. So take the time and fill it out!
Not Applying for as Many Scholarships as Possible
Loans can help pay for college, but they come with an obvious cost. Grants are amazing if you can get them, but many people’s income will be too high for them to qualify.
Scholarships, however, offer the best of both worlds. They’re free money that’s available to pretty much anyone willing to put in some effort.
Given this, it’s absurd not to apply for as many scholarships as you can. You really have no excuse.
Think you’re not smart enough? That’s probably not true. And even if it is, many scholarships have nothing to do with academics.
Think you’re not athletic enough? While there are some superb scholarships available for athletic ability, the majority of them relate to other areas of life.
Think you’re not a good enough writer? There are plenty of scholarships that don’t require an essay.
Think you don’t have enough time? Since scholarships are literally free money, the return on the time you invest applying for them can be massive. For example, if you spend 4 hours applying for a $1,000 scholarship and get it, then you just “earned” $250/hour.
Convinced of the benefits but not sure where to start? Here’s how to get the scholarships you need to avoid debt.
Assuming You Have to Pay College Costs in a Lump Sum
Typically, the “default” option for paying tuition, room, and board is in a lump sum each semester. This is understandably impractical for most students paying for college out of pocket, and it’s what drives many to take out loans. (This was the case for Thomas, the founder of this site).
However, most universities can work out alternate payment options to better fit your budget.
For instance, you might be able to pay for your room and board each month instead of each semester. You’re still paying the same amount overall, but spreading the payments out means you can pay out of pocket instead of taking out loans to pay the amount all at once.
Not every university will let you do this, but it’s worth inquiring. You won’t know unless you ask.
Thinking Hourly Jobs Are Your Only Way to Make Money
When it comes to earning money as a student, you may assume that hourly jobs on campus or around town are your only option. There’s certainly nothing wrong with such jobs — they can be a great way to earn money, make friends, and even gain valuable experience.
However, you have other options. Mainly, these will involve some kind of freelancing or entrepreneurship. You could start a local business shoveling snow or mowing lawns. Or you could do some kind of internet-based freelancing such as web design. You could even do what one of my classmates did and offer “in-dorm” haircuts in exchange for cash.
Not only do these types of work have the potential for higher pay and more flexible hours, but they also look great on your resume.
For a giant list of ways to make money in college, check out this article. If you’re specifically interested in work you can do remotely, these are the best online jobs for students.
Living on Campus Every Year
Living in the dorms during your freshman year is a great way to make friends and become part of the college community. However, living on campus also tends to be the most expensive way to get food, housing, and other survival necessities.
Therefore, I recommend looking for a place to live off-campus after your freshman year. Your rent will typically be lower than the cost of college housing, and you can save lots of money by cooking your own meals. You should still do the math to ensure this is the case, but it will usually work out in your favor.
If you plan to do this, of course, then you’ll need to start looking and applying early. Off-campus student housing can be very competitive in college towns. So be sure you (and any prospective roommates) don’t delay your housing search.
Never lived on your own before? Here are some things you should know.
Not Applying for Jobs Before Graduation
The months leading up to graduation are already stressful enough with capstone projects, theses, and final exams. Not to mention the logistics of planning graduation parties, inviting friends and family to the ceremony, and trying not to lose your cap and gown.
So do yourself a favor and start hunting for jobs before you graduate. Ideally, start as early as the fall semester of your senior year, and certainly no later than the beginning of the spring semester. (If you’re graduating in the fall, feel free to adjust these times accordingly).
So what should you do to ensure you can find a job? Try these tips:
- Go to career fairs, including any specific to your major or department.
- Learn to network, in-person and remotely
- Reach out to companies that interest you and set up informational interviews
- Apply for a set number of jobs each week (being consistent is more important than applying for as many jobs as possible).
None of this will guarantee you’ll have a job lined up before you graduate. But at the very least, you’ll have built the momentum and made the connections to help you find a job ASAP.
I know job hunting is easy to brush aside in all the chaos and excitement leading up to graduation, but don’t neglect it. This is your future livelihood at stake, after all.
Not Investing Your Extra Cash
If you have extra money left over after paying for all of your education and living expenses, then you should consider investing it.
The younger you start investing, the longer your money has to grow. Due to the power of compound interest, a head start of even a few years can lead to massive additional gains over the long run.
As a simple example, let’s say you start with $100. You then invest $100 per month into an account that earns an average annual return of 7%. If you do that for 40 years, you can expect to end up with $241,059.58.
Now, let’s assume that you do everything the same but start two years later (meaning you only invest for 38 years). With just this one small change, your final amount drops to $208,381.15 (a decrease of $32,678.43). This is the power of compound interest, and why you should start investing as early as you can.
(If you don’t believe me, feel free to play with the compound interest calculator I used for the above calculations).
Not sure how to get started investing with a small amount of money? Read our investing guide to learn how.
Avoid Financial Mistakes for a Prosperous Future
There’s a lot more to successful personal finance than avoiding mistakes, but following the tips in this article will give you a great head start. As a recap, here are the top money mistakes to avoid in college:
- Using credit cards irresponsibly
- Overspending
- Taking out private student loans
- Not filling out the FAFSA
- Not applying for as many scholarships as you can
- Assuming you have to pay college expenses in a lump sum
- Thinking campus jobs are the only way to make money in college
- Living on campus every year
- Not applying for jobs before you graduate
- Not investing your extra cash
If you want this advice to stick, you need to make it a habit. For help building strong habits, financial and otherwise, check out our free course:
Building habits isn’t just about discipline; there are real-world steps you can take to set yourself up for success! In this course, you'll learn how to set realistic goals, handle failure without giving up, and get going on the habits you want in your life.
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