College students have piled up a lot of credit card debt in recent years. Seniors who used credit cards graduated with an average of $4,138 in debt in 2008, compared with $2,864 in 2004. That’s according to an analysis by Nellie Mae, a subsidiary of the student loan company Sallie Mae.
More than 82 percent of college kids carry over credit card debt from month to month. Nearly half of all students regularly feel anxious about paying their credit card bills, according to the analysis.
The risk is that students with easy access to plastic will charge more than they can afford, and get caught in the cycle of trying to keep up with high interest rates on the debt. Students who can’t keep up with payments take a hit on their credit score, which can limit their access to apartment rentals, car loans, etc., long after their college days are done.
New federal and state laws will aim to put some clamps on the kids.
Come January, credit card issuers in Illinois will be prohibited from offering free gifts to students as a marketing tool. No more setting up a tent on campus and handing out T-shirts, pizzas, Frisbees just for signing … right … here. Illinois will forbid schools to sell identifying information about students under 21 to card issuers. Any school that markets credit cards to undergraduates will have to offer consumer finance education to its freshmen.
Come February, federal law will bar banks from issuing cards to anyone under 21 without verifying an applicant’s ability to pay or requiring a co-signer.
We doubt that kids are in it for the Frisbee. A credit card can be useful for a college student who is away from home. The key is to have the sense to use credit without getting overextended. That requires some common sense and discipline.
Better that a student develop the discipline in college, rather than get in debt over their heads at 22 or 24 when the laws no longer protect them from their own bad decisions.
According to the Nellie Mae report, 60 percent of kids are surprised at the size of their credit card balances and 40 percent charge items knowing they don’t have the money to pay for them. Let’s be clear: Your credit card company didn’t twist your arm to buy a new 32GB iPod touch. You did that all by yourself. And if you’re now going to pay 12 percent because you don’t have the bucks to pay off the $399 purchase price, you made a dumb decision.
Not all debt, of course, is avoidable, especially when students and parents are struggling to pay for college. Kids heading off to college should map out precisely how they’ll cover the expenses. If you have to carry a balance, shop around for a card with the lowest interest and have a repayment timeline in place. (Hint: The faster, the better.)
The best protection against credit card trouble is financial literacy: 84 percent of undergraduates told Nellie Mae that they needed financial management education.
That’s something they should get long before they step on a college campus.
Chicago Public Schools CEO Ron Huberman calls financial literacy “a core skill.” He has partnered with city Treasurer Stephanie Neely to integrate money matters into kids’ education, starting in elementary school.
An economic recession fueled in part by home loan defaults has been a potent reminder of the perils of excessive borrowing. The best defense: 1) know your financial status, 2) live within it.
