Financial management is one of the most crucial life skills that students need; however, it is usually not taught in traditional education. Knowing how to manage personal finances, as well as all about options for loans, may make or break financial stability for U.S. students after graduation.

This article will also put in perspective some of the most important financial management skills students need, student loans concerning their financial situation, and some amazing statistics about student debt in the United States.

The Importance of Financial Literacy among Students

A proper understanding of financial management provides the essential knowledge that enables one to make good and informed decisions concerning spending and savings for investment. This skill is needed for immediate needs, such as budgeting for school supplies or other living expenses, as well as to create a healthy long-term financial future. Unfortunately, most students start college with minimum knowledge about managing their finances.

According to a 2021 survey conducted by the National Financial Educators Council, 76% of American young adults reported that they wished they had received more personal finance education growing up. Lacking this foundation, students are making poor financial decisions and piling up thousands of dollars in debt; thus, understanding the basics of budgeting, saving, and managing debt is crucial for students. The basis of financial stability is budgeting.

Arguably, one of the most fundamental and necessary financial management skills a student will ever have is knowing how to construct and follow a budget. A budget helps students plan how to spend their money by continuously comparing real income and expenses to manage spending and make predictions about future financial requirements.

Common items that might show up in the average budget for students include:

• Tuition/fees: all students, even with those with financial aid or scholarships, will have some out-of-pocket expenses

• Housing expenses: either rent or dorm fees

• Food, meals, and groceries

• Books and supplies

• Transportation to and from school: public or commuting costs, car expenses

• Miscellaneous spending: entertainment, personal items

Learning how to put money toward savings, even a minimal amount, is another important area in budgeting. In fact, a 2023 Sallie Mae report also noted that 50% of college students rely on some type of financial aid to help finance living expenses. Without proper budgeting, this reliance on aid can quickly balloon after graduation into debt which becomes overwhelming to manage.

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Understanding Student Loans

For many U.S. students, student loans are an inevitable component of the financial equation. Understanding loan options is important for maintaining long-term financial health.

By Federal Reserve accounts, in 2022 the U.S. had $1.76 trillion total in student loan debt with 43.5 million borrowers owing an average of $37,338.

Understanding the student loan world starts by understanding what kinds of loans are available to students. These include:

• Federal Student Loans

  These loans, made through the U.S. Department of Education, have relatively lower interest rates and more favorable repayment options compared to other private loans. They include the following:

  • Direct Subsidized Loans:
    For undergraduate students demonstrating financial need, the government pays the interest while the student is in school.
  • Direct Unsubsidized Loans:
    For undergraduate and graduate students, but the student must pay all the interest that accrues while they are in school.
  • PLUS Loans:
    For parents or graduate students, to cover additional education expenses. This loan is popular due to the ability to refinance Parent PLUS loans for better rates and monthly installments in the future.

• Private Student Loans

  Private loans are issued through banks or other financial institutions and tend to have higher interest rates with less forgiving payment options. However, they can help cover the gap in times when students have maxed out their federal borrowing options. In 2023, private loans constitute approximately 8% of the total U.S. student loan debt.

• Income-Driven Repayment Plans

  These same federal loans offer very generous repayment plans that take account of income and family size; private loans are much less flexible so federal loans are the most popular for students.

Managing Debt: Balancing Payments After Graduation

Students should also consider how they will manage their student debt upon graduation. According to the Federal Reserve, almost one in six Americans has student loan debt, and failure to pay on time will drastically reduce an individual's credit score. Here is what students can do to avoid finding themselves in that situation:

• Understand Your Repayment Options:

  There are different types of repayment plans available for federal loans, standard, graduated, and income-driven repayment. It is very important to choose the plan that best fits your financial situation.

• Pay on Time:

  Delinquency may result in penalties and can have a negative effect on credit. Setting up automatic payments will help students stay on track.

• Loan Forgiveness Programs:

  Students working in some of the public service areas may be eligible for their loan forgiveness, typically through PSLF, which cancels outstanding debt after 10 years of payments.

Poor Financial Management

Poor financial decisions made in school can have long-lasting consequences. According to the Consumer Financial Protection Bureau, students who do not manage their loans properly could face increased debt burdens and extended repayment periods, even resulting in defaults. A 2022 survey by TIAA Institute found that only a quarter of the college students surveyed correctly answered basic questions about loans, budgeting, and savings.

Because most students do not understand how interest accrues or the importance of paying down debt quickly, they easily fall into a pattern of minimum payments that grossly extend the life of loans and increase the amount paid. Students should instead take the front end in financial education and seek out those resources that will best prepare them to manage their money. This is the path to financial empowerment.

Considering that higher education for students in developing countries, especially the United States, often necessitates that they take up loans, a basic understating of appropriate financial management skills becomes imperative. For that reason, studying to create budgets, comprehend how loans operate, and prepare themselves for debt management upon graduation will help students set up their financially stable future.

Learning such skills earlier in life can help students not only survive but also thrive financially. By learning how to take responsibility for their finances, U.S. students will be more capable of facing challenges connected with student debt and post-graduation life and thus securing long-term financial success.

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