Student Credit Card Debt:

The Emerging Crisis in EducationDebt Management

Agenda

• The problems and emerging issues• The risks for students• 60 Minutes II video segment• Ways to address the issues• Question & answer

Emerging Issue• Student credit card debt is getting a lot

of attention and “press” lately– Consumer Federation of America press release

(2/27/01) and report June 1999– Representative Duncan’s Remarks from the

Congressional Record 3/28/01– General Accounting Office report June 2001– National Public Radio Morning Edition segments

Winter ‘02– Numerous print and online articles over the last year– Comprehensive book examining America’s credit card

crisis: Credit Card Nation: The Consequences of America’s Addiction to Credit by Robert D. Manning

Source: Student Aid Transcript Summer 1999 and Institute for Higher Education Policy Survey

Student Credit Card Debt• Is this a problem?

– Majority of students use credit cards responsibly

– For some, card use is putting them at risk• this number is increasing, rapidly

– Credit card debt is not closely monitored by colleges

– Over the past ten years, the industry has aggressively marketed to students

• So, let’s look at some of the details . . .

Student Credit Card Debt

• Why is this a problem?– Most students aren’t experienced with

dealing with debt• don’t understand the basics of credit debt• don’t understand that low intro rates change• quickly “max out” limit; often $1,500 or more• take out new cards to pay for existing debt• don’t practice delayed gratification very well• don’t understand how a bad credit start can

impact their lives for many, many years to come

Student Credit Card Debt• Credit card usage is becoming a big

problem for many more college students– 83% of undergraduates have at least one card

• a 24% increase since 1998

– Average credit card balance is $2,327– 21% of undergraduates who have cards, have

high-level balances between $3,000 & $7,000– Students double their average credit card debt

and triple the number of credit cards from when they arrive on campus until graduation

Source: Undergraduate Students and Credit Cards: An Analysis of Usage Rates and Trends-Nellie Mae April 2002

Source: Institute for Higher Education Policy Survey

Student Credit Card Debt

• Characteristics of high-risk use– Average credit card balances over $1,000– Owning four or more credit cards

• transferring balances, getting new ones to pay off existing cards

– Carrying a balance each month– Using credit cards to charge tuition or fees

• many college do not allow anymore

The Other Pieces to This Puzzle

• Estimated 39 percent of all students graduate with unmanageable debt (payments more than 8% of monthly income)*

– 55 percent of African-American students– 58 percent of Hispanic students

• Alternative debt levels are rising– at all institution types, including two and

four year public schools

*From state PIRGs' study.

Emerging Issue• Proposed legislation and resolutions

were introduced in at least 24 states from 1999 through mid-May 2001– banning incentives to entice students– requiring written parental consent– protect parents from debt collection– requiring credit vendors to register

GAO Report to Congress• College Students and Credit Cards

– requested by Congress– conducted about 100 interviews at 12

universities and colleges– reviewed and quoted three studies

• TERI/IHEP, Student Monitor, & Nellie Mae

– Report released July 17, 2001 by three Congressional representatives

• Louise Slaughter (D-NY), John Duncan (R-TN), and Paul Kanjorski (D-PA)

http://www.gao.gov/

GAO Report to Congress• Looked at four objectives

– advantages/disadvantages– results of key studies– university policies– business strategies/educational

efforts of credit card issuers

http://www.gao.gov/

GAO Report to Congress• College Students and Credit Cards

– provide convenience and security– allow students to establish credit

histories– found that students are more likely than

other types of credit card users to run up debts they could not pay

– college students (with limited or no credit history and income) are charged higher interest rates

GAO Report to Congress• College Students and Credit Cards

– many students do not understand the consequences of incurring excessive debt and making payments late

• impaired credit rating• more difficult and costly to obtain credit

– for students who do not manage credit the disadvantages outweigh the advantages

– many students pay only the minimum amount due each month, not aware of how much this will cost them in interest and time

GAO Report to CongressTable 1: Minimum Repayment Schedule on a $2,000Credit Card Loan at 19 PercentMonthly minimumpayment amount

Number of monthsto repay

Total interestpayment

$40 100 $1,994

$50 64 $1,193

$75 35 $619

$100 25 $424

Source: Credit Card Minimum Payment Interest Calculator, Daniel C. Peterson,www.webwinder.com

Interest savings between lowest/highest payment = $1,570;time saved = 75 months or 6.25 years!

GAO Report to Congress• University/college policies

– two of the twelve had relatively restrictive policies based on state law

– nine had decentralized policies• one area might restrict solicitation, while

another area would allow it

GAO Report to Congress• University/college policies

– both university officials and students cited the personal solicitation of college students as causing the most controversy

– few universities collected data on why students leave college, but financial concerns are believed to be a big reason

GAO Report to Congress• Business strategies of credit card

issuers– students viewed as good customers,

heavily marketed to as a group– use a variety of strategies

• on campus soliciting, Internet, direct mail

– some have arrangements with school• alumni or athletic dept assoc, logo use

– customize risk management/underwriting standards for college students

• sometimes adjust terms and conditions

Legislation• Legislation was pending in Congress

– H.R. 184, The college student credit card protection act, 107th Congress

• amends Truth in Lending Act• limit the total credit extended to full-time, traditional-

aged college students• prohibits increasing the credit limit without

parent/guardian consent (when co-signer)• Prohibits opening a credit card for a student with no

annual gross income or an existing card

– 58 co-sponsors• six from CA, five from Ohio, one from FL

– Expired when 107th Congress ended• no new legislation currently pending in 108th

Legislation• Senate bill 891, introduced by Sen. Dodd,

called “Underage Consumer Credit Protection Act of 2001'’– similar to H. R. 184– would amend the Truth in Lending Act– would require application requirements to

issue credit cards to those under the age of 21• co-signer or proof of financial means to pay• require completion of financial counseling course

– Expired with the close of the 107th Congress

Source: Institute for Higher Education Policy Survey

The Risks

• Between 10 - 20% of students are risking unacceptably high levels of debt

• 33% of students have both student loans and credit cards

• Many must take on additional jobs to pay debt

• Many cut back on the number of classes or drop out of school all together

Student Credit Card Debt

In 1998, Indiana University reported that it lost more

students to credit card debt than to academic failure.*

*As quoted in a study by the Consumer Federation of America & Georgetown University

The Risks

• Career choices can be limited• Some are forced to file bankruptcy• A few students, so overwhelmed with

debt, have committed suicide

60 Minutes II Video

Believe It or Not...• Recently, all credit card companies were kicked

off the University of Louisville campus because one company was giving away racially offensive T-shirts to students who completed credit card applications

• Some students, so far in debt, have resorted to “cyberbegging” to help pay off their debts

• Many young people are filing bankruptcy right out of college due to high credit card and student loan debt (federal and private)– In 1999 over 100,000 persons under the age of 25

filed for bankruptcy

Student Credit Card Debt

• What can be done?– Control credit card vendors and their

access to students or ban them altogether – Work with parents to limit student use– Education, offer “life skills” courses on

personal finance management topics– Allow use of “starter” card, ban others– Provide credit counseling and/or peer

counseling for students who get in too deep

Student Credit Card Debt• What can be done?

– Explain to other campus areas the relationship between high credit card debt and failure to graduate

• enrollment and retention issues• alumni issues

– Highlight your efforts to control credit card issues at your institution to parents and potential students

• many parents are becoming aware of this issue and are asking what schools are doing about it

Student Credit Card Debt• What can be done?

– Require credit card vendors to provide educational materials/sessions

– Establish a relationship with the local Consumer Credit Counseling Services (CCCS) office

• call 800.388.2227 to be connected to the office nearest you

• web site: National Foundation for Credit Counseling http://www.nfcc.org/

Other Recommendations• For colleges

– review current practices for allowing credit vendors, fee structure

– prohibit credit companies from offering trinkets to students for completing applications

– include credit card and debt education materials in brochures inserted in bags

– consider limiting the number of credit card tables allowed on campus

– conduct regular debt management sessions

Excerpted from: PIRG: Recommendations for Colleges, Students, and Congress

Other Recommendations• For students

– become informed consumers, know what you are getting into

– consider risks and benefits of credit card debt, before you apply

– one national credit card is all you need– if you must carry a balance, pay as much as

you can afford, every month– compare the fees, after intro interest rates,

charges, and other hidden costs • look beyond low intro rates• select the best value

Excerpted from: PIRG: Recommendations for Colleges, Students, and Congress

Other Recommendations• For Congress

– do not enact industry-supported legislation, that is unbalanced and puts the student consumer at a disadvantage

– require credit card bills to include a monthly calculation illustrating the time it will take to pay off the balance at the minimum amount

– prohibit the mailing of unsolicited credit cards, even cards that are not activated

Excerpted from: PIRG: Recommendations for Colleges, Students, and Congress

Helpful Web Sites• National Endowment for Financial

Education– http://www.nefe.org/

• National Institute for Consumer Education– (NICE) http://www.nice.emich.edu/

• Credit Card Calculator – http://www.calculatorweb.com/calculators/creditcardcalc.shtml

• The Savvy Student– http://www.savvystudent.com/

• Public Interest Research Group Tips– http://www.studentpirgs.org/– http://www.pirg.org/student/consumer/credit.htm

Helpful Web Sites• Credit Card Nation

– http://www.creditcardnation.com/Free/website/www/

• Federal Trade Commission; Consumer Protection Division– http://www.ftc.gov/ftc/consumer.htm

• Consumer Information

– http://www.ftc.gov/bcp/menu-jobs.htm• Scholarship, Employment, Job Placement

– http://www.ftc.gov/bcp/conline/edcams/scholarship/index.html• Scholarship Scams

Helpful Web Sites

• Misc Sites– http://www.cardweb.com/– http://www.bankrate.com– http://www.debtwizards.com/– http://www.webwinder.com/– http://www.mapping-your-uture.org/features/

dmbudget.htm– http://www.credit-edadministrator.com/– http://www.calculatorweb.com/calculators/budgetcalc/– http://www.wiredscholar.com/index.jsp

• http://www.wiredscholar.com/financing/lt_financial_planning/ltfp_monthbud.jsp (budget exercise)

• http://www.wiredscholar.com/financing/content/f_resp_cc.jsp (credit card tips)