Sending your baby to college for the first time can be a nerve wracking experience. What if there is too much partying? What if the roommates don’t get along? Will the food be all right?
There is another, less visible menace: the financial pitfalls that await college students.
From living on a budget to opening a checking account and planning a trip over spring break, college students are navigating new financial territory. And most college students are ill prepared for the challenge.
“They’re in that transition from under Mom and Dad’s wing to independence,” said Patricia Seaman of the National Endowment for Financial Education.
Seaman should know: Her older daughter is a junior in college, and she has a high school senior.
The problem isn’t just one of dollars and cents. Students who feel unduly burdened by their finances often wind up dropping out of school.
A Harvard analysis of OECD data found that the U.S. has the highest dropout rate in the industrialized world. And a 2011 report by the Pew Research Center found for people ages 18 to 34 without college degrees, two thirds said they left to support their family, and 48 percent said they could not afford college.
One cause of students’ money woes is that by and large, college students are financially illiterate. A recent survey by the Financial Industry Regulatory Authority found that “young individuals display much lower financial literacy than older individuals,” and while financial literacy seemed to increase with age, overall, 61 percent of respondents to a simple quiz on financial concepts could not answer more than three out of the five questions correctly.
(Read more: Financial literacy education efforts get failing grade)
In addition, students are faced with simultaneous financial challenges. They may be contending with loan obligations and financial aid refunds, a food budget for meals not on the meal plan, textbook purchases and a checking account, with or without a debit card.
(Read more: Textbook prices soar, students try to cope)
Financial service providers are often eager to work with students, but they don’t always make it simple. For example, many banks offer students accounts with low or no minimum balance requirements, but they may charge a lot for overdrafts. And often, a school will have an agreement with a company to disburse financial aid payments via a debit card on the back of a student’s ID card. That can create a whole new set of temptations—and of course, companies in that business can charge hefty fees for services like balance inquiries.
The upshot is that students are often graduating with hefty debt—and not just from financial aid. A recent study by Fidelity Investments found that 70 percent of the class of 2013 graduated with debt. The average amount of $ 35,200 included an $ 3,000 in credit card debt.
(Read more: 80 percent of college students chipping in for education)
What can students and their parents do to avoid these financial pitfalls?