Bulletin September 2006
THE
BULLETIN
Volume 74 | Issue 5
September 2006

Avoiding the Debt Trap: Programs and policies take a swipe at student credit card deb

Trisha Gresnick

For most college graduates, $20,402 would buy a decent automobile or be a sizable down payment for purchasing a home. But according to Nellie Mae (2002), the leading lender for student financial aid, that is the average loan debt of the final-year undergraduate student at a four-year institution. Of that loan debt, approximately 16 percent is due simply to credit cards (Nellie Mae, 2002). For students pursuing a master’s degree, the average debt jumps to $24,000, and more than $100,000 for post-law and medical students (O’Malley, 2006).

College students might graduate with a degree in hand, but also with an unwieldy amount of credit card debt. With such high credit card bills, it is likely that the students’ credit card payments will make up 8 percent of their monthly bills alone (King & Bannon, 2002). Caroline Fulmer, a certified financial planner, advised: “If students are paying more than 10 percent of their monthly incomes on credit cards, they are on their way to trouble” (Price, 1998, p. 18). This problem will only continue to escalate unless students are educated about credit and the risks involved with carrying debt.

Various factors contribute to the rising use of credit cards, but more pertinent are the negative consequences when credit cards are not used responsibly. In an effort to curtail student debt and its’ inherent problems, many college and universities have implemented educational programs and policies. These efforts strive to teach fiscal responsibility, not only during students’ college years, but also for their lives.

Causes

There are numerous factors contributing to students and their debt. One basic reason is that access to applications and credit cards is much easier than in previous years (Schor, 1998). Twenty years ago, most credit card companies required holders under age 21 to have a cosigner for their accounts (Kamenetz, 2006). If you had a card, the credit limit hovered around $300 (Kamenetz, 2006). Today, individuals are likely to have multiple credit cards with an average combined access to $19,000 (Fair Isaac Corporation, 2006). Students 18 years of age can apply for an array of credit cards without a cosigner, credit history, and with no form of disposable income (Fickenscher, 1994).

In his book, “Credit Card Nation,” Robert Manning (2000) discusses how credit card companies specifically market to college students and aim for 25 percent of their new customer base to come from that demographic. In fact, credit card companies seek out high-risk, low-income consumers who are likely to default on their loan, thus increasing their interest rates as high as 30 percent (Manning, 2000). In addition to the high interest rates, late and over-limit fees are at an all-time high, and grace periods, or time to repay the debt, are becoming shorter (Manning, 2000).

Students also feel a certain comfort level in relation to having debt (Lanzendorfer, 2003). They grew up watching purchases be financed. Parents used credit cards to buy school supplies for their children, or took out second mortgages to refinance their homes. Students see their peers using credit cards every day and feel they are not the only ones creeping into debt. The idea of using credit is not new to students, so they are more at ease with the process (Lanzendorfer, 2003).

Economic trends are yet another reason students are creeping into debt. In her book “Generation Debt,” Anya Kamenetz (2006) states: “The new economic realities are distorting the life paths and relationships of the young” (p. 8). Higher education tuition is rising two to three times faster than inflation, and it has been for the last three decades (Kamenetz, 2006). Many students are spending more time as an undergraduate, frequently taking five years to graduate as opposed to four. An additional year of college means one more year of not only tuition, but also living expenses and credit card use.

Many of today’s students use credit cards as a survival tool, often to pay for tuition, fees, books, supplies, rent, and even food. With the increased rate in college tuition, some students are forced to take out multiple loans to stay in school. When the loans run out, credit cards come in to pick up the lack of funding. In fact, nearly a quarter of college students are putting their tuition directly on plastic (O’Malley, 2006), which must be paid off immediately or the debt will incur high interest rates that are not tax-deductible.

While some students use their credit cards to finance their education, others use them for unnecessary purchases. Vacation trips for spring break, the newest clothes, upgraded cellular phone gadgets, iPods, Xboxes, nights out, and cash advances fuel rising credit card bills. In fact, credit cards even lend a level of prestige to products, subconsciously or consciously increasing students’ urge to purchase.

Feinberg (1986) found that college students who were exposed to a credit card logo were more likely to purchase, decide to purchase quicker, and spend more than students who were exposed to the same products without the presence of a credit card logo. Feinberg concluded that the students have been conditioned to associate credit cards and spending. (Roberts & Jones, 2001, p. 220)

Students want the best of everything, and credit cards are the easiest way to pay for material possessions.

Consequences

The most basic consequence of credit card debt is bad credit; students can easily end up with a bad credit report just for being late or missing one credit card payment. “With the default rate on student loans so low, credit card companies will send student accounts to credit agencies for collection as soon as the first payment is late” (Lanzendorfer, 2003). The bad credit rating will follow the student for seven years. In that time, it will be more difficult, if not impossible, for the students to purchase automobiles, a home, and sometimes even secure a job; and, if forced to take out a loan to make the purchases, the students will face a higher interest rate due to the bad credit report.

Worse yet, bad credit can have more than just a financial effect, it can also change social patterns. Some students are being forced to put off continuing education, some are moving back in with their parents until they can become more financially stable, and others are putting off marriage and starting families because of the debt they have accumulated. Some students are even declaring bankruptcy (though when filing a Chapter 7 bankruptcy, student loans are rarely forgiven). “With a rapid increase in credit card and student loan debt, it is perhaps not surprising that young adults age 20 to 24 comprise the largest growing group of persons declaring bankruptcy” (Thaden & Rookey, 2004, p. 2).

And, outside of all the future implications of debt, individuals already in debt are prone to compulsive buying, a trend that has been found to be elevated among college students (Roberts, 1998). Compulsive buying is used in response to negative events or feelings, yet can lead to depression, anxiety, and low self-esteem, creating a repetitive cycle (Roberts & Jones, 2001). With such emotional strains from the immediate stress of being in debt, students often work several jobs and fall behind with their studies. Linda Bear, senior vice chancellor for academic and student affairs at the Minnesota State Colleges and Universities, sees students working to pay off their credit cards and sees the toll it is taking on them and their energy levels (Voss, 2005). “As an educator, I can tell you this is not good news,” Bear said. “To receive the most educational value, students must have enough energy and time to apply themselves to their studies. I would not be surprised to learn that some students are getting B’s and C’s when they should be getting A’s and B’s” (Voss, 2005, ¶ 13).

Starting early

Some researchers conclude that programs about fiscal responsibility should start in junior high and high school (Roberts & Jones, 2001). College students with credit cards before entering college use them more responsibly than those who first begin carrying credit cards later (Munro & Jones, 1998). However, most students come to college both debt- and credit card-free, and by their senior year, 78 percent of students have a credit card and carry a balance of approximately $2,400; 95 percent of graduate students carry a credit card with a balance of at least $2,700; 32 percent of students have at least four credit cards; and 10 percent carry a balance of more than $7,000 (O’Malley, 2006). Klein (1999) explains that credit cards have been built into society’s recognition of an individual as an adult:

Consumer dependence on credit is an accepted part of everyday life. In fact, consumer credit has become significant in one’s ‘rite of passage.’ Consumer credit privileges awarded to a college student or person undertaking his or her first job are an indication of credentialed status. A person is almost a nonentity until he or she establishes an ongoing credit history. Receipt of an initial credit account is essentially a form of formal economic status recognition. (p. 1)

To help prevent the credit card epidemic, some campuses have incorporated credit card education into their orientation programs. Manning (2000) advises: “Every freshman orientation should include education about credit cards, and money earned from credit card solicitations should go toward further awareness” (p. 175). SUNY–Canton’s educational session during orientation is called, “Ultimate Money Skills: Scholars, Dollars, Budgets, and Bills,” aimed at teaching students fiscal responsibility and money management through budgeting before classes even begin. University of California–Irvine includes a workshop for transfer-student orientation specifically about credit card debt. Howard University’s (2006) orientation program guide tells students: “Avoid signing up for a credit card! It will have you in debt that you do not need” (¶ 19).

Along with credit card educational programs offered at colleges and universities, there are some other resources for students to learn the dangers of debt. U.S. Bankruptcy Court Judge John C. Ninfo II founded the Credit Abuse Resistance Education (C.A.R.E.) program to:

Alert middle school, high school, and college students to the many consequences of consumer credit abuse. It is the hope of the program that students will not go down the road of consumer credit abuse once they understand: the true cost of consumer credit; how difficult it is to repay consumer debt incurred to buy and do things that you really can’t afford and don’t need; the many consequences of financial problems, which are becoming more numerous and serious; the need to have savings and how to effectively budget with a view towards needs versus wants; that just maintaining debt is not being able to afford it, affording debt is being able to pay it back; and it is better to live consumer debt free. (Ninfo, n.d., ¶ 3)

The C.A.R.E. program has a Web site full of multimedia and programmatic resources to help teach students about the consequences of credit card debt.

Students are not taking the initiative on their own to understand the consequences associated with heavy credit card debt. With an average credit card debt of $2,400, paying only the minimum balance, it will take 15 years to pay off one credit card, using 8 percent of a student’s monthly income in addition to student loan payments and other financial obligations. Once students begin slipping into debt, what can be done?

At Frostburg State University (n.d.) in Maryland, a Web page on the university’s financial aid site is dedicated to debt management in relation to credit cards. The site has links that include information on managing debt, understanding financial aid, using credit, managing a budget, and understanding student loan repayment and consolidation. It also has access to helpful tools, calculators, and suggests everyone check their credit report at least yearly.

Similarly, Manning has a useful Web site that provides “calculators that help you calculate the true cost of credit, finance charges and fees, and helps demonstrate how paying more than the minimums and finding cards with lower annual percentage rates can significantly lower costs” (Manning, 2006, ¶ 18).

Anti-solicitation policies

To secure students as customers, credit card companies are becoming savvier. Companies offer students the chance to win the latest iPod, computer, or vacation in exchange for filling out an application. Students can also earn frequent flyer miles, cash back, or an initial low or zero-percent interest rate at times. In fact, many students do not initially get credit cards due to need, but because of the incentives; however, when the card arrives, it is used because it is convenient. It may seem like a convenience now, but in the future, their debt will be a big inconvenience with many unknown consequences. As Kamenetz (2006) says, “[Students] are living in the present at the expense of their future” (p. 13).

While the credit card companies may find their way on campus, many colleges and universities are restricting the power of the companies. According to Hystad and Heavner (2004), authors of the report “Graduating into Debt,” Towson University in Maryland allows credit card companies to vend on their campus, but limits them to only handing out applications, not accepting them, and the vendors are required to hand out educational materials along with the application.

Beyond limits, some institutions completely prohibit credit card companies from soliciting on campus. Missouri State University (2006) prohibits credit card solicitation within university facilities or on university grounds, including through campus mail, e-mail, pamphlets, or inserts into shopping bags and more. Evergreen Valley College (n.d.) in San Jose, Calif., also has a policy in place for off-campus vending organizations that states: “Absolutely no credit card vendors. Banks and other financial institutions are allowed on campus; however, they are not permitted to solicit students for credit card accounts” (p.1). Kings College (n.d.), a Catholic institution in Northeastern Pennsylvania, student handbook states: “Kings College prohibits credit card solicitation in any form by financial institutions or other companies, groups or individuals seeking to distribute credit card applications on the college campus” (p. 68). Similar policies are in place at Southern Illinois University–Carbondale; Hollins University in Roanoke, Va.; Schreiner University in Kerrville, Texas; and Monroe Community College in Rochester, N.Y.

Multiple other institutions have anti-solicitation policies stemming from government bills and regulations. California Governor Gray Davis, in 2001, “adopted a policy to combat the aggressive marketing tactics of credit card companies and prohibit the distribution of free materials” (Moss, 2001, ¶ 2). In Kansas, the Board of Regents voted to “ban credit card solicitation on campus a minimum of the first two weeks of a semester and the last week of the semester” (Belt, 2002, ¶ 2). Pennsylvania State Sen. Jane Earll proposed and helped pass legislation that required all Pennsylvania colleges and universities to provide credit card information to students. As part of this initiative, Penn State University–Erie designed an online credit card game (www.cccr.psu.edu) to “stimulate students’ interest in credit management, encourage students to translate this knowledge into behavior, and promote word-of-mouth among students about credit issues” (U.S. Department of Agriculture, 2006, ¶ 15).

What you can do

While is seems as though colleges are not taking a passive approach to credit card solicitation on campus, credit card companies are simply modifying their marketing strategies and locations. They advertise in textbooks and e-mails, set up information tables across the street from campuses, and send mail to students’ campus boxes. It is almost impossible to keep credit card solicitation from our students, but it is less difficult to educate students about debt and credit cards.

First and foremost, debt needs to be discussed. As educators we cannot shy away from the topic, or we are doing a disservice to our students. The most common way of disseminating information to college students about credit card debt is during new student orientation programs. The aim is to include parents in the discussion because they can be influential educators of today’s students.

Additional ideas to help your union or campus educate students and to help them from falling further into debt include establishing specific written policies with the input of students, parents, and administrators on credit card marketing to students. Ban credit card marketing tables on campus; and, if you do allow tables, marketing tactics such as giving away “freebies” to students who apply for cards should be prohibited as should taking applications. Remove credit card solicitation from all textbooks sold in your bookstores and shopping bags; but, if a university does allow book bag inserts, it should require the bookstore to include an educational brochure about credit card use. Crack down on unauthorized marketing on campuses and in unions. Activity boards in your college or universities unions can promote speakers and presentations about credit card debt.

If a university does not have a policy toward credit card solicitation and marketing, the union can be the agent for change. Seek out programs from other colleges or adopt policies similar to those presented in this article. Also, it is important to keep track of your programs and assess your policies to see if you are having any positive affect toward your current students and graduated students’ financial lives. It seems not much assessment has been conducted to determine if the new policies and educational sessions are helping. While it may be a few more years before the problem turns around, without assessment we will never know the effectiveness of our work.

College unions need to ask if they want students to start out their post-college careers with significant debt much related to credit cards. With the answer presumably being no, professionals can take action to assure that credit card marketing to college students is limited, resources and information about credit cards is widely available to students, and most importantly, that students have the knowledge to use credit wisely and responsibly. Curbing credit card debt among college students will require work and dedication from the campus community. But, until students learn the real consequences of credit cards, the best four years of their life might also be the most costly.

References

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Evergreen Valley College. (n.d.). Campus vendors & information tables: Policies & procedures for off-campus organizations. Retrieved August 12, 2006, from http://www.evc.edu/ss/Offcampus_vendor_and_information_tables.pdf

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