November 18th, 2010
A lot of recent college graduates complain that their degree doesn't include a set of guidelines or tips for conquering the real world once they leave school. Tax forms, credit cards and grocery budgets pose a whole new set of challenges even more daunting than astrophysics or Tolstoy theses. So we've compiled a little glossary and study guide containing the most basic financial terms you should know as a college student and recent graduate, whether you're into business or art history.
Financial Aid and Loans
You'll need to understand these terms as you review financial aid forms and get ready to pay off loans upon graduation.
- Ability-to-Benefit: You'll see this term on forms and websites before you apply for financial aid. It refers to your eligibility to receive Title IV financial aid.
- Accrued interest: This refers to the amount of interest on your college loans that's adding up, or accruing, while you go to school, and before you start paying off your loan.
- Capitalization of interest: Similarly, this term refers to the accrued interest that is being added to the principal amount of the total loan. If you're paying off this interest after you graduate, instead of as you go, you'll call this capitalized interest, and it will appear as a lump sum on the total invoice or balance sheet.
- Cost of Attendance: Also shortened to COA, this means the total cost to you and your family to attend college for one year. That includes tuition, fees, dorm payments, meal plans, books, and more.
- Financial Need Equation: Directly calculated as COA – EFC = Need, the Financial Need Equation means the Expected Family Contribution — what your family expects to pay for your college education, and what mostly determines eligibility for federal student aid — subtracted from the Cost of Attendance.
- Default: You never want to default on your loans. If you drop out, change schools, or just decide that you can't start repaying your college loans within 270-360 days without contacting the bank and coming up with an alternative plan, then you will default on your loans. As a result, you could be hounded by collections agencies, be taken to court, be sued, have trouble with the IRS, have your income or wages slashed, become ineligible for federal subsidized benefits or financial aid, and worse.
- Consolidation: After graduating, you might find that it makes more financial sense to consolidate loans, or combine loans so that you have one payment and one interest rate to cover.
Credit and Banking
Avoid credit card scams and extra fees by reviewing these terms.
- Annual Percentage Rate: Often abbreviated to APR, this term is calculated as the monthly effective interest rate multiplied by the number of periods in a year. Credit card offers for college students often have high APRs and can lead to a lot of added interest and debt, so do your research before signing up.
- Creditworthy: When you apply for a loan, your bank or lender will first determine how creditworthy you are by researching your credit history.
- Assets: This general term refers to everything that you own that amounts to anything financially. That could mean cash, stocks, IOUs, intellectual property, and more, and can sometimes be used as leverage for securing loans or other agreements.
- Additional cardholder: If your parents are tied to your credit card account, they'll be additional cardholders. It's not necessarily a bad thing: they can review your purchases, but they can also make payments or — if you have a debit card — add money more easily in an emergency.
- Credit Score: Credit bureaus develop credit reports based on your credit history: how much credit you're allowed, if you make payments on time, amount of debt, etc. You get a free credit report each year to make sure there aren't any mistakes or problems that you can easily fix. This number can affect your ability to secure a loan, get an apartment, and get a credit card, so don't ruin it when you're young: it can take years and years to improve.
- Balance transfer: When you want to transfer funds from one account to another, it's called a balance transfer. It seems straightforward, but some banks charge fees, while others will slap you with a fee or penalty if a certain kind of account is emptied out or falls below a set amount. You may also be limited to the number of times you can transfer money out of savings accounts.
- Co-signer: Before getting an apartment, car or even a credit card for the first time, you might need a parent or other stable individual to co-sign for you, proving to the company or bank that they'll get paid even if you're not particularly financially viable. If you have a parent with good credit and is willing to co-sign on a loan, it's an easy way for you to build credit, too.
- Pre-approved: This term is a trick that credit card companies like to throw around to people with bad credit or no credit, including college students. Just because you're pre-approved to have a card doesn't mean you still can't get ripped off with high APRs or that you could be rejected once you fill in the actual forms. You can even opt out of receiving this junk mail by contacting a credit bureau.
- Teaser rate: Lots of companies use this ploy, not just credit card companies, to lure you away from your current agreement so that you'll sign up with them. They might offer you a much lower APR, but check the fine print: they could spike your rates after a rewards period or other fixed period once you're locked in.
- Pre-paid card: Working like a stored value card, this could be a sensible option for you when you first move away from home and while you get used to paying with a credit card.
- Principal: Principal means the amount of money that you're borrowing before interest accrues or is applied. Make your payments on time to avoid principal.
- Minimum payment: This is the minimum amount of money that you have to pay each billing cycle. Always pay at least this amount to avoid late charges, but it's a good idea to get in the habit to pay the full amount each month to avoid accruing debt.
Budgeting, Income and Spending
From bills to everyday budgets, here's what you need to know before you spend.
- Billing cycle: The time between bills, quite simply. It's usually a month, so make sure you pay your balance and your bills regularly: setting up a certain day each month for different bills should keep you organized.
- Bankruptcy: You'll want to avoid this at all costs, because it can wreck your credit score and future financial health. Chapters 7 and 13 are typically used by individuals versus businesses.
- Cost of Living: When you start looking for jobs after college, consider the cost of living in different parts of the country. This term refers to the average amount of money you'll need to pay rent, go food shopping, pay utilities, your taxes, and more. There are several cost of living calculators online to help you figure out how much you'll need to make if you live in one city versus another.
- Time Value of Money If you hear someone mention the time value of money, they're referring to the principle that your money today is worth more than it is tomorrow, because today it has investment potential. Don't get carried away with planning investments, but it's an important concept to understand early on and should actually inspire you to save more.
- Checking account: This is the money that you can spend via cash withdrawals, a debit card or check. There's usually no limit on the number of checking account transactions you can make, and it's the safest way to use your money since you can't spend what isn't there; however, it also carries no risk and isn't a good way to build credit.
- Investment: You probably know what an investment is, but do you think about your money that way? Start researching the opportunities you'll soon have to start investing and using your money for investments, like property, certain retirement plans, and stocks.
Learn about the different types of savings accounts you'll encounter once you get a job.
- 401(k): You'll often hear about 401(k)s in the news: it's a common type of savings and retirement plan usually set up by employers to help employees save for big expenses in the future.
- Roth IRA: Even if you haven't started working, you should still understand what you'll need to do in order to retire. Roth IRAs are Individual Retirement Accounts that require you to contribute after-tax dollars as your savings grow tax-deferred. These IRAs aren't tax-deductible, but you won't have to pay taxes on the money you withdraw later.
- Traditional IRA: Traditional IRAs work in pretty much the opposite way as Roths. Your contributions may be deductible in the future, but that also means that you'll have to pay taxes on them once you start withdrawing. (Your tax bracket at that time will determine how much is taken out). And depending on with whom you've set up your Traditional IRA, you might be able to deposit assets like stocks or certificates instead of just cash.
Pay your taxes on time, on the table and in full every year.
- 1040, 1040A, 1040EZ: These are the names that the IRS gives to different federal tax return forms, and which you and your employer must fill out each year. The 1040 that applies to you will depend on your employment status — if you're an independent contractor, you may have a different one, for example.
- Tax deduction: When doing your taxes — or getting someone to help you do them — look for tax deductions, or deductions that reflect expenses you need to spend for work, losses, some medical expenses, and other expenses. The IRS gets suspicious if you start deducting too many things, but a good tax software or accountant will help you sort out legit deductions that could save you a few thousand dollars, even as a student.
- 1099: In college, you might receive money for side projects and small gigs. The company paying you will have to fill out a 1099 form to report tax information to the IRS.
- Tax bracket: The amount of taxes you pay largely depends on what tax bracket you belong to. Those earning higher incomes usually pay more taxes, though it depends on what laws have most recently passed in Congress. Look at a table like this one to determine your taxable income and your tax bracket so that your taxes aren't a surprise, and you're a more educated voter when it's relevant.
These terms will keep your finances organized, from health insurance to taxes to your overall net worth.
- Net Worth: Your net worth is the total value of your assets, minus any debts or liabilities you have. That includes investments, property, etc.
- Fiscal year: In finance, the year doesn't follow the standard calendar months. The United States government actually starts its fiscal year October 1, 2010. There are four quarters, beginning October 1, January 1, April 1, and July 1.
- Deductible: Part finance and part health care, this term refers to the amount of money you have to pay out-of-pocket before getting benefits. If you have a $1,000 deductible on your health insurance plan, that means that you have to pay everything up to $1,000 before your insurance company jumps in to pay the rest. You may have a set amount for co-pays and prescriptions, but if you land in the hospital, everything up to your deductible is your problem.