Money Matter$ 9
Financial Literacy for life beyond high school The purpose of this work book is to provide you with some financial knowledge as you prepare to embark on life beyond high school. According to a recent study conducted by the Jump $tart Coalition, a group of high school seniors were asked basic financial questions and only 48% answered the questions correctly. This may not seem significant, but making just a few poor financial decisions early on can cause major headaches later that could have been avoided with just a little knowledge. I. Paying for college What you will find in this booklet: 1. FAFSA and the financial aid process 2. Student Loans a. Government vs. Private 3. Tuition: In-State, Out of State, and W.U.E. II. Budget what s a budget? Living within your means and keeping your head above water III. Credit Cards avoid traps and stay out of debt 10
PART I: Paying for College This section will provide an overview of: FAFSA and the financial aid process Students loans when and how to use them wisely 11 FAFSA the Free Application for Federal Student Aid & the financial aid process What is it? The FAFSA is a form made available to you by the federal government that asks questions about yours and your family s financial information. You will complete the FAFSA each year before February 15 th. Most students complete the application online (easiest) and sign it electronically. Financial aid is awarded on a first come, first serve basis so you must submit your FAFSA by the Feb. 15 th deadline. After you submit the FAFSA and the Federal Govt. processes the information, you will receive a SAR (Student Aid Report) in the mail, or via email. Your SAR summarizes the data from your FAFSA and indicates your Expected Family Contribution (EFC). The Expected Family Contribution (EFC) is how much money the Federal Govt. determines that your family is expected to contribute to your education in one year (Factors such as family size, number of family members in college, family savings, and current earnings are used to calculate this figure). The EFC is the Expected Family Contribution, not just your parents' contribution. You and your parents share the responsibility for paying for college. How is the EFC is used? You re not the only one who receives your EFC information. The same information is also sent to the colleges/universities you listed on the FAFSA. The financial aid office at each school will use your EFC (and all of the information on the FAFSA) to determine your financial need. Need is defined as the difference between the cost of attending college and your EFC: Cost of Attendance (COA) Expected Family Contribution (EFC) = Financial Need
Based on your Financial Need, the financial aid office will prepare a financial aid package and craft a financial award letter Next, you will need to create your online account at each school you have sent your information to in order to view your Financial Aid Award online. Do this about 2 weeks after you have submitted your FAFSA and check it regularly to make sure that the school isn t requesting any additional paperwork from you that might hold up your financial aid award. Your financial aid award will detail how much financial support the school can offer you in terms of grants, scholarships, work-study, and student loans. Grants and Scholarships are also known as Gift Aid Financial Aid Vocabulary: Grant free money that you do not have to pay back Scholarship free money that you do not have to pay back. Scholarships can be institutional, meaning that the scholarship is awarded by college or university you plan to attend and is only valid at that institution. Private scholarships are awarded by private organizations and may be good at any institution, or may have some requirements as to where it may be used. Work-study money that you earn at a job (usually on campus) that gets paid directly to you to use toward your tuition, books, living expenses, etc. If you are awarded work study, you do not have to accept it you can get a job off campus. However, one of the biggest benefits of an on campus work study job is that you will only be expected to work around your class schedule Student Loan money that you borrow from a bank (either government or private) that you must pay back regardless of whether you graduate or not. LOANS There are two types of loans: Federal student loans, and private loans Federal Government loans: There are two types of loans that fall under this category: Subsidized and Unsubsidized, and students are qualified for these loans based on income eligibility. 12
Subsidized loans: These loans are subsidized by the government, meaning that interest on the amount borrowed does not begin to accrue until the loan goes into repayment. There is typically a limit on the amount a student can borrow each year, and it usually increases as the student nears graduation. These loans also have a lower interest rate than private loans. This loan does not require a credit check. Unsubsidized loans: these loans do accrue interest while the student is still in school. Everything else is similar to a subsidized loan. Private loans: this is money lent to the student by a private lending institution (a bank). The bank reviews the borrower s credit history and determines whether to lend money or not. Usually a student will require a co-signer (a qualified applicant to sign off on the loan as well in case the student does not repay the loan the co-signer is responsible). These loans have a much higher interest rate than Federal government loans, and thus will cost the student much more over the life of the loan. Question: When do you need to take out a student loan? Answer: As a last resort! Only turn to a student loan after you have exhausted all of your other resources for aid (grants, scholarships, family savings), and if there is still a gap between what you have and how much school is going to cost. If available to you, the first borrowing option you should take advantage of is always a government loan (first subsidized, then unsubsidized). If you still need to borrow money after that, you can look into your private loan options. ONLY BORROW WHAT YOU NEED you must repay it. It might sound like a good idea now to borrow an extra $500-$1000 each semester to have some fun with, but this is the worst possible thing you could do and you will be kicking yourself for it when it is time to repay. *Your decision about which school you are going to attend may rely heavily upon your financial situation. You may find yourself with acceptance letters to several schools, and the financial aid award package could be the decision maker for you, because it will determine how much (if any) that you will have to borrow. In the next section, we ll talk about tuition to give you an idea of how much it is going to cost you to go to college. 13
14 Tuition Tuition varies from institution to institution and depends on some factors such as whether the school is public or private, and the state in which you reside. However each college/university often has their own policies and procedures, so this is something you will need to research for your schools of choice. Below are some examples of several colleges and universities cost of attendance for In-state students, out of state students, and with the Western Undergraduate Exchange. The Western Undergraduate Exchange is a reduced tuition program that the following states participate in: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington, and Wyoming. If you are a resident of, and wish to attend college in one of these states, you may be eligible for reduced tuition rather than pay full out of state tuition rates. For a full list of institutions that participate in the WUE and their requirements, follow this link to the website: http://wue.wiche.edu/search_results.jsp?searchtype=all School Tuition, Room & Board (Cost of attendance) Out of In State state WUE Public or Private Fort Lewis College $15,063.00 $22,593.00 $21,094.00 Public University of Colorado, Colorado Springs $23,132.00 $22,852.00 $19,698.00 Public CU Boulder $17,362.00 $38,342.00 NO Public University of New Mexico $18,292.00 $28,000.00 $25,938.00 Public University of Texas at Austin $12,642.00 $22,503.00 NO Public University of Hawaii $21,483.00 $33,531.00 $24,867.00 Public Colorado College $48,860.00 $49,700.00 NO Private San Juan College* $7,764.00 $8,149.00 NO Public Harvard University $48,868 $48,868 NO Private This is a very small sample of all of the colleges and Universities in the country, but it is designed to give you an idea of what a State school (University of Colorado or Fort Lewis), Community college (San Juan College), and a Private school (Colorado College, Harvard) would cost to attend. These numbers may seem very large to you (that s because they are!), but keep in mind that they include tuition, fees, a place to live, and a meal plan. *San Juan College have reciprocal agreements with Colorado under which it is possible to receive instate tuition rates.
Scholarships Now that you have an idea of how much it will cost you to go to college, let s talk about finding some free money to pay for it!!! Scholarships are the best way to avoid borrowing money to go to college because it is money that is given to you that you do not ever have to repay. There are two main types of scholarships: Institutional and private Institutional: scholarships specific to, and awarded by the institution you will be attending in the fall. Private: these scholarships are often awarded by organizations within the community such as the Elks Lodge, Banks, and other private foundations. These scholarships often have specific requirements such as belonging to a certain minority ethnic group, athletics, clubs, and many others. Many times these scholarships can be used at any college. The bigger the scholarship, usually the more time intensive it will be. Whether a scholarship is for $500 or $50,000 it is always worth it to apply! Look at it this way: If you had a job at which you made $8/hour, how long would it take you to earn $500? Answer: 62.5 hours (and that s not even accounting for taxes!) Is it worth it to spend 1 hour applying for a $500 scholarship? If you are awarded the scholarship you just made $500/hour! Another example: If you are applying for a full ride scholarship (Let s say an $80,000 value), is it worth it to spend 40 hours on the application? Hint YES!!! Most scholarship applications would not take you nearly as long as 40 hours to fill out, but if you were awarded the scholarship, you would have made the equivalent of $2,000/hour for your efforts. Do you know anyone that makes $2,000/hour? The guidance/counseling office or career center at your school is a good place to find scholarship applications www.fastweb.com is a good website to search for scholarships Also talk to Erin about other scholarship opportunities 15
PART II: Budget what s a budget? Living within your means and keeping your head above water One of the best strategies you can use to keep yourself out of financial trouble and avoid debt in college is to live within your means. The definition of Living within your means is that your expenses (the money you pay out) are less than or equal to the money you earn or bring in. If your expenses (this can be rent, food, car, entertainment anything you spend money on) are greater than what you earn, you will either not have the money to pay your bills, or you will have to borrow it from somewhere like a credit card = NOT GOOD. Budget: your budget is your financial plan to use the money you will make each month to pay your expenses. It is very easy to construct a budget plan for yourself it is not as easy to stick to it. Here are a couple examples of two different college students budget plans: Example 1: Jane Student - Jane is a freshman who lives, works, and eats most of her meals on campus. With financial aid and scholarships, she was able to cover most of the $18,000 cost of attendance at her college. However, she did end up borrowing $3,000 to make up the difference. She must also use a portion of her work study job to pay for books and a parking pass. Jane works about 8 hours/week. Income: On campus job Expenses: On Campus housing Food Toilettries/personal items Parking pass Books $1250 semester included in her tuition bill meal plan included in tuition $100/semester $50/semester $500/semester Total income-expenses = $600 Jane has $600 in disposable income to spend on whatever she wants each semester. If she were to break it down by month, she has $150/month to spend. Jane can spend this money however she chooses, but she must beware: if she eats out in a restaurant once per week, she could easily spend $30 each time = $120 per month. Or, if she buys a new pair of running shoes for $100, most of her disposable income is already gone for the month. If Jane gets paid twice per month, she knows she can spend $75 of each paycheck on whatever she wants. If she spends more than that, she will not be able to pay her bills. 16
Example 2: Joe Student - Joe is attending his local college and living with his parents. With financial aid and scholarships, Joe is able to cover most of the cost of attendance at his college. However, he still owes $1,000 per semester. Joe is trying not to borrow student loans, so he is working more hours to try to make up the difference in tuition. Even though he does not pay rent, he must contribute each month at home to help out with groceries, pay for gas to commute to campus and work, his car insurance, and a parking pass. He must also pay for his own books. Joe works about 18 hours/week. Income: Off campus job Expenses: Housing Food Toilettries/personal items Parking Pass Books Tuition Car insurance $3,000/semester lives with parents $300/semester $100/semester $50/semester $500/semester $1000/semester $600/semester Total income-expenses $450 Joe has $450 in disposable income to spend on whatever he wants each semester. You may have noticed that Joe works many more hours than Jane, yet has less money to spend each semester this is because Joe has not taken out any student loans and is working to pay his tuition as he goes. If Joe were to break it down by month, he has about $112 in disposable income each month. If he gets paid twice per month, he can spend $56 of each paycheck on whatever he wants eating out, movies, clothes, etc. If Joe spends more than $56 of each paycheck, he will not be able to pay his bills. Note: between work and studying, Joe is really, really busy he may decide to take out a $1,000 loan next semester so that he can work less and put more time into his studies and have a little more time for himself. NEEDS vs. WANTS: It is important to understand that there is a difference between what you NEED, and what you just want. Concert tickets might be something you want, but you they are not something you NEED in order to survive. Things that are wants should only come out of your disposable income not the money that is allocated to pay your bills. 17
Make your own budget Think about the things you spend money on right now (cell phone, clothes, sports equipment, video games, gas). Your parents might pay for most of these things right now, but what if you had to pay for them? Income: (do you work or get an allowance?) Expenses: Cell phone: Gas: Car insurance: Clothes: Entertainment: Other: Other: Total expenses: Total Income-expenses = Minimum wage is currently $7.28/hour. If you don t have an income, how long would it take you to earn enough money to pay for all of your expenses? Also, which of the things above are Needs, and which are Wants? If you had to, what could you give up in order to live within your budget? 18
PART III: Credit Cards Avoid traps and stay out of debt What is a credit card? -A credit card is a small plastic card that contains your personal identifying information and is linked to an account. You can charge purchases to the card, and you are billed for those purchases at a later time (within one month). -when your bill for that purchase comes in the mail, you are expected to pay at least a portion of the bill, but you do not have to pay it all. If you do not pay the entire bill, the balance is carried over to the next month and you are charged interest on that balance that is then added onto the bill. Why can credit cards be bad? -Credit cards can hurt you financially in many ways: Credit card companies usually only require a minimum payment. Sounds good, right? VERY wrong. Charging purchases to a credit card is exactly like taking out a loan. If you do not pay the balance in full each month, it will begin accruing interest just like any other loan. Before you know it, your balance can be out of control. Interest rates are often very high, especially for college students like you. Not only are you taking out a loan when you use your credit card, but you are taking out a loan at a very high interest rate one much higher usually than those student loans you are seeking to avoid. People are very good at lying to themselves. We tell ourselves that we will pay the balance on the credit card when the bill comes, but when the bill actually comes, the minimum payment looks a lot more attractive because there is already something else we want to spend our money on. This is how it is very easy to get into trouble because we just keep adding more and more to what we owe on the card while only making the minimum payment and getting charged more interest all the while. Why do so many people have Credit cards and get into trouble? -People most often get into trouble with credit cards because they did not stick to their budget. Remember the examples of the two college students budgets from before? If Jane Student or Joe Student decide to spend more money than they have it is likely they will use a credit card to do so. They would be living beyond their means and using credit cards to do it. If Joe spent $50 on a credit card each month beyond what he earned from his job, it would not take long for him to accumulate $1000 in credit card debt. If Joe had a credit card with a $1,000 balance and made a minimum payment of $20/month at 10.99% interest, it would take Joe 67 months (over five years!) to pay off and he would pay $344.08 in interest! 19
Credit Card Quiz Time to test your knowledge about credit cards 1. Getting free stuff when you sign up for a credit card is: A. A nice perk B. A trap to entice you to sign up 2. Can credit card companies change your APR (Annual Percentage Interest Rate)? A. Yes, it is their right B. No, what they offer me is what I get. They can t change it unless I give them permission. 3. Choosing your own personal design for the look of your credit card is: A. Fun and free of charge B. Will probably cost a fee 4. Some credit cards require a monthly purchase A. True B. False 5. If you are late on a scheduled monthly payment your credit card company will: A. Let you know and request payment immediately B. Charge you a late fee 6. Those credit card offers in the mail are great, right? A. No, but it looked good until my first bill arrived B. Yes! They chose the perfect plan for me 7. Those credit card offers in the mail are great, right? A. No, but it looked good until my first bill arrived B. Yes! They chose the perfect plan for me 20
Credit Card Quiz Answers 1. B A trap giving away free stuff like a t-shirt is just a gimmick that companies use. Credit card companies earn so much money from card holders in interest and fees it is worth it for them to give stuff away. 2. A - They can change it and they will for a variety of reasons. If you're late on a payment, it can shift from the nice introductory rate of 7% to the increasingly high standard of 15% or 19%. And, some companies will automatically change it after your first year. 3. A - Sure, it's fun and free, but it's another way to lure you in to sign up. By personalizing the card, it feels like you are creating a gift or keepsake for yourself. It's also fun. However, this is one "gift" you'll want to return as soon as the bill comes. 4. A - True. Some credit card companies require a minimum monthly purchase. Sounds fun? Try expensive. This tactic makes you spend more than you would normally. 5. B - Once you're late on a payment, they are going to charge you a late fee. In fact, some companies will even charge you last month's interest on your statement or raise your interest rate. To top it off, some companies have shortened the time period between when the bill goes out and when it's due. 6. A - Sorry, but those offers are often misleading, or not actually applicable to the people they send them too. Most of the time it's a ploy to get you to sign up, but then the fine print says they can switch you to a different plan with higher interest rates and a lower spending limit. 7. B - Most minimum monthly payment amounts are not set for your convenience. Many are set so you will have to pay more interest over time. Each month you pay for interest on the balance and a portion of your total balance. The lower your monthly payment, the less money that goes to the credit card balance - leaving you with a larger balance longer. Typically, minimum monthly payments are around 2% of the total balance. 21