THE BASICS OF BUDGETING

The basics of budgeting are to form good financial habits and develop an awareness of spending. 

THE BENEFITS OF BUDGETING

Budgeting is important because:

• it helps students meet their expenses and create plans to reach their financial goals;
• short-term and/or long-term financial goals help create a framework conducive to financial success;
• it helps students develop a sense of control over their money;
• it reduces students’ anxiety levels regarding financial and academic matters;
• it can contribute to students’ creditworthiness;
• it improves students’ understanding of their school’s Cost of Attendance (COA); and
• it identifies where funds should be going versus where they were actually spent, and demonstrates the importance of maintaining a balance between earning and spending.

COST OF ATTENDANCE

Cost of attendance (COA) plays a large role in forming students’ budgets. The COA is what it will cost students to attend school based on their enrollment status. Here are some examples of items that can be included in COA:

• Tuition
• Non-tuition-related fees (registration fee, graduation fee, lab fee, etc.)
• Textbooks (buy, rent, access online)
• Supplies (computer, printer, ink cartridges, etc.)
• Housing fee or rent
• Transportation expenses (fuel, general vehicle upkeep, etc. - not to be used for purchase of a vehicle)
• Food and/or meal plans
• Living expenses and costs related to a disability

EXPECTED FAMILY CONTRIBUTION (EFC)

The information students report on their Free Application for Federal Student Aid (FAFSA®) (income, savings, number of people in household, number of household members in college, etc.) is used to calculate their Expected Family Contribution (EFC). The EFC isn’t the amount of money students and families will have to pay for college, nor is it the amount of federal student aid awarded. It is a number used to determine the types of and calculate the amounts of financial aid students are eligible to receive. EFC is not used to determine eligibility for non-need based aid such as unsubsidized loans or PLUS loans. To learn more about EFC and how aid is calculated go to StudentAid.gov. The amount of aid a student receives is a key component of a student’s budget.

SETTING GOALS

Establishing academic, financial, and personal goals is a good way to start the budgeting process. Goals can provide students a context that allows them to better understand the benefits of saving and the long-term impacts of poor money management.

ACADEMIC GOALS

• Graduating on time (the length of time spent in school has significant financial impacts)
• Getting good grades while in school (these can lead to financial merit awards)
• Obtaining a certificate, degree, or degrees
• Publishing one’s work
• Becoming a leader in one’s field

FINANCIAL GOALS

• Short-term savings goals (placing a percentage of every paycheck in a savings account or accumulating minimal debt prior to graduation)
• Long-term savings goals (e.g., paying off a car within five years or saving for a down payment to purchase a house)

PERSONAL GOALS

• Establishing a Career
• Choosing place of residence

Federal Student Aid offers additional budgeting tips at StudentAid.gov/budgetingtips.

TRACKING EARNINGS AND SPENDING

Tracking daily spending provides students with an understanding of where their money is going. To fully appreciate the impact of routine expenditures, students can calculate the total amounts of such purchases over the course of a year. For instance, a $2 coffee each morning would cost a student $730 annually. The ability to visualize the long-term costs of daily expenditure choices can provide a powerful motivation to curb discretionary spending.

UNDERSTANDING INCOME 

Students need to understand their income in order to create a functional budget. Some aspects of income, such as personal income and family contributions, are easy to grasp. Other forms, such as scholarships, loans, and grants, require students to understand their responsibilities as aid recipients or borrowers. Many scholarships and grants require students to maintain a defined grade point average in order to remain eligible to receive them. Students should also understand the money management concepts that correspond to the ways in which they receive their grants or loan funds, such as via a monthly stipend versus a lump sum.

Sources of funding and income include:

• Grants
• Scholarships/fellowships
• Loans
• Federal Work-Study
• Teaching assistantships
• Universities and colleges
• Savings
• Family contributions
• Personal income

NEEDS VS. WANTS

It is a good idea for students to create a needs versus wants checklist. Doing so, in combination with creating a budget, is a good starting point for students to reach their short- and long-term goals. Needs are required for survival (food, clothing, shelter), and wants are things that might not be as necessary as students think. The goals that students identify should be used as a basic framework for deciding which expenses are necessary and which
are optional.

Creating a budget requires making compromises, such as:

• eating in instead of eating out;
• keeping a current phone instead of buying a new one; and
• making coffee at home instead of buying it already made.

BANKING

Many students may be opening bank accounts for the first time, or, if relocating for college, they may need to open accounts with new, local institutions. Local credit unions can be a good first stop as a banking option as many offer low-cost features that are well suited for students.
Financial aid and other income will likely be deposited into a student’s bank account. Students should be encouraged to use the “pay yourself first” method when creating their budgets. To pay yourself first means simply this: Before paying bills, buying groceries, or spending money on anything else, set aside a portion of your income to save. Doing so (easily accomplished via an automatic transfer from a bank account) is an important step toward creating financial security and personal wealth.

Students should aspire to have at least the amount needed for three months’ worth of expenses in their savings account at any given time. These funds will help students weather unexpected financial circumstances, such as auto repairs, health-related expenses, or periods
of unemployment.

BUILDING AND MAINTAINING CREDIT

Building and maintaining credit should be important financial goals for college students. On-time bill payment, as well as avoiding bounced checks or overdrafts, will help build a student’s credit. A good credit history will open up financial options to students after they graduate, such as obtaining auto or home loans with favorable interest rates. Student loan payments will impact a borrower’s credit history. Credit reports and credit scores provide students with the capability of monitoring their credit. Free credit reports (not credit scores) are available at www.annualcreditreport.com.

IMPORTANCE OF RECORD KEEPING

Students can set themselves up for success by maintaining comprehensive records of their financial transactions. Good record keeping can help prevent financial discrepancies by providing a reference for past interactions and agreements. This helps protect students in the event of a mistake by their financial institution or loan servicer that could adversely affect them.

BORROWING FUNDAMENTALS

Most students use federal loans to help finance their studies and some may turn to private loans. Taking out a loan is an important financial decision that can affect a student for years to come. It is critical for students to understand their loan options and associated responsibilities in order to make good borrowing decisions.

Before taking out a loan, students should be encouraged to use all available grants and scholarships since they do not need to be paid back. After accepting all grants and scholarships, students should consider if they are eligible to participate in the Federal Work-Study Program. Many work-study job opportunities are on or near campus and earnings from this program do not reduce eligibility for grants in the future. Students should consider the time commitment when working and weigh this with the need to focus on academic studies.

If all of these options are not sufficient to pay tuition and other education-related expenses, students should consider the William D. Ford Federal Direct Loan Program. This federal program offers more repayment options and critical protections for students than private loans.

Federal Loans

William D. Ford Federal Direct Loan Program

Direct Subsidized Loans

• Direct Subsidized Loans are available to undergraduate students who demonstrate financial need.
• Generally, no interest is charged when the student is enrolled at least half-time, during the grace period, or during deferment periods.

Direct Unsubsidized Loans

• Direct Unsubsidized Loans are available to undergraduate, graduate, and professional students.
• Students do not need to demonstrate financial need.
• Interest is charged during all periods.

Direct PLUS Loans

• Direct PLUS Loans are available to graduate and professional students, and to parents of dependent undergraduate students to pay for their children’s education.
• Borrower must not have an adverse credit history.
• Interest is charged during all periods.
• Parent borrowers may request deferment while the student is enrolled at least half-time, and for an additional six months after the student ceases to be enrolled half-time.

Direct Consolidation Loans

• Direct Consolidation Loans combine eligible federal student loans into a single loan with a single servicer.
• Borrowers should check to see if they qualify for this option at StudentAid.gov/consolidation. 

Private Loans

Private loans should be the last financing option to be considered and used. Private student loans are nonfederal loans made by a lender, such as a bank, credit union, state agency, or a school. They do not typically offer many of the benefits of federal student loans, such as fixed interest rates and income-based repayment plans.

Borrowers of private loans also have fewer options for forbearance or deferment, and may have more difficulty getting back into good standing after default. Students should be encouraged to seek financial counseling before taking out private loans.

Borrower Responsibilities and Options

Whether using federal or private student loans, students should be aware of the details of their loan(s), as well as their responsibilities and options as borrowers. Some questions to ask are:

• Is it necessary to accept the full loan amount that is offered?
• When does the repayment period begin?
• Does interest accrue while the student is enrolled in school?
• How long is the repayment period?
• When will a loan be considered delinquent?
• If a loan becomes delinquent, when will it enter default?
• Can a defaulted loan be rehabilitated?
• What are the repayment options and when is it necessary to select one (e.g., at time of origination versus upon graduation)?
• What can be done to reduce debt burden (e.g., pay interest or a small amount of loan principal) while in school? 

UNDERSTANDING REPAYMENT

Students should be encouraged to explore their repayment plan options, including income-based repayment plans. Federal Student Aid’s Repayment Estimator is a useful tool which can help borrowers get an early look at which plans they might be eligible for and see estimates for how much they would pay monthly and overall. It is available at StudentAid.gov/repayment-estimator. Exercising basic money management skills will reduce students’ chances of making repayment mistakes that may adversely impact their credit scores.

Establishing contact with their loan servicer(s) prior to beginning repayment will help avoid misunderstandings about the payment amount and schedule. Students should be mindful of keeping the school and loan servicer updated on any changes in their contact information, such as their mailing address, that could lead to missing important notices or correspondence.

As a reminder, private loans have different repayment options and requirements than federal loans. Borrowers of private loans should be encouraged to contact their loan holders for relevant repayment information.

Borrowers experiencing difficulty meeting their repayment obligations may have options, including loan consolidation, changing repayment plans, deferment, or forbearance. Educated borrowers are more likely to appropriately use these options to avoid delinquency or default. Schools should strive to educate students about these options, as borrowers lacking the ability to repay their loans often let them lapse into default or delinquency when they could benefit from those options available to them.

Students can contact their loan servicers with any questions regarding repayment at StudentAid.gov/servicer. 

Federal Direct Loan Repayment Options

Standard Repayment Plan

• Time borrower has to repay: Up to 10 years.(10- to 30-year repayment period for Direct Consolidation Loans)
• Payments remain constant throughout the repayment period.
• Borrower will pay less interest for the loan over time under this plan than he or she would under the other plans.
• The loan will be paid in full by the end of the repayment period.

Graduated Repayment Plan

• Time borrower has to repay: Up to 10 years. (10- to 30-year repayment period for Direct Consolidation Loans)
• Payments start low and gradually increase every two years over life of loan.
• The loan will be paid in full by the end of the repayment period.

• Time borrower has to repay: Up to 25 years.
• Payments will be an amount that ensures the loan will be paid in full in 25 years. Borrower can choose to make either fixed or graduated payments.
• Borrower must have more than $30,000 in Federal Direct Loans to qualify.
• The loan will be paid in full by the end of the repayment period.

Income-Driven Repayment Plans (Income-Based Repayment Plan, Pay as You Earn Repayment Plan, and Income-Contingent Repayment Plan)

• Time borrower has to repay: Up to 20 or 25 years depending on the repayment plan.
• Monthly payment amount tied to borrower’s income and adjusted annually.
• Any outstanding balance remaining at end of loan repayment period will be forgiven.
• Learn more about income-driven repayment plans at StudentAid.gov/idr.

For more information about federal student loan repayment plans, visit StudentAid.gov/plans.

Public Service Loan Forgiveness

The Public Service Loan Forgiveness (PSLF) Program is intended to encourage individuals to enter and continue to work full-time in public service jobs. PSLF allows certain borrowers who work in public service to qualify for forgiveness of the remaining balance of their Direct Loans after they have made 120 qualifying payments on those loans while employed full-time by certain public service employers.

Details on qualifying loans and employment sectors can be found at StudentAid.gov/publicservice.

Making choices about paying for college is often one of the first major financial decisions that young adults make. We are dedicated in assisting students gain the knowledge and access necessary resources to make the best financial decisions for themselves and to make obtaining their degree a reality.

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