College students should build an emergency fund into their budgeting for college costs. The emergency fund will help them cover unexpected expenses, reducing the likelihood that they will be forced to drop out of college because of a financial shortfall.
It’s a good idea for recent college graduates to build an emergency fund with half a year’s salary after graduation, to handle unanticipated expenses, such as might occur during a period of unemployment. Half a year’s salary is sufficient because the average time in unemployment is about five months.
But, perhaps college students also need an emergency fund while they are still enrolled in college.
College students, like most Americans, demonstrate a lot of financial fragility, where even a few hundred dollars in unanticipated expenses are enough to force a student to drop out of college.
According to the Federal Reserve’s 2018 Report on the Economic Well-Being of U.S. Households, published in May 2019, 40% of Americans can’t afford to pay $400 for an unexpected expense with cash. Instead, they would have to borrow or sell something to raise the money.
A similar result was reported by the Survey of Consumer Finances, which found that 20% of Americans have less than $400 in their checking or savings account. The difference in the percentages is likely due to the money in the bank having been earmarked for some other obligation, such as credit card bills.
An Emergency Fund for College Students
The purpose of an emergency fund for college students is to cover unexpected expenses that might otherwise derail the student’s progress to college graduation.
The emergency fund doesn’t need to involve a lot of money. An emergency fund of $250, $500 or $1,000 should provide enough of a contingency to cover unanticipated expenses and thereby increase the odds of the student staying in school.
Some colleges have started creating their own emergency student aid funds or emergency student loan funds. These emergency aid programs are designed to cover essential expenses, such as transportation, rent, utilities, food and medical care.
Emergency aid is no substitute for a lack of planning. Rather, the intent is to cover the costs of emergencies that might interfere with the student staying in school.
But, there’s no reason why a student can’t create their own emergency aid fund. They can save the money from the financial aid “refund” or student employment, holiday and birthday gifts, or from selling used textbooks back to the bookstore.