NATIONAL NEWS ‘mdash; April is Financial Literacy Month, according to Gov. Arnold Schwarzenegger, but a new study suggests that college students are financially illiterate ‘mdash; prompting the need for schools to educate their students on finance fundamentals and debt management.
According to a report released by college financing company Sallie Mae, the average college student’s credit card debt in 2008 was estimated at $3,173 ‘mdash; 46 percent more than in 2004 and nearly $1,000 more than when the company began collecting such data in 1998. There isn’t a trend in improvement either ‘mdash; graduating seniors were shown to be even further in debt with an average balance of $4,100. Of the 1,200 undergraduates surveyed, 60 percent said they were unaware of their high credit card debts, and 40 percent knowingly charged items to their cards despite being unable to pay.
Unsurprisingly, this increase in student debt coincides with another trend: the rising cost of school. According to the College Board, the average tuition cost and fees of public four-year universities in the United States have risen 50 percent in the past decade to $6,585 a year, prompting more students to charge their educational expenses on credit cards. The Sallie Mae study concluded that students charged an average of $2,200 in educational expenses on credit cards alone.
It’s an alarming trend, and in the wake of a credit crunch that has made investors hesitant to back private student loans, many students have turned to credit cards, which are more accessible, as a last resort.
College students are an ideal demographic for credit-card companies to target ‘mdash; without credit histories or adequate understanding of credit and debt, many students are given a smooth introduction into the world of personal finance and responsibility with enticing low-interest teaser offers, only to find themselves stuck trying to pay off enormous debts with interest rates much higher than they expected.
Some credit-car
d contracts also contain hidden language such as universal default clauses, which change the terms of the contract if customers forgo payments with other lenders. Students who don’t read their contracts’ fine print can often spiral into large amounts of debt and quickly and severely damage their credit for defaulting on something as minor as a monthly utility bill. This in turn makes it increasingly difficult to obtain other types of loans, like student loans, as companies are reluctant to lend to those with bad credit.
With so many students digging their financial graves so early, many states have pushed to regulate the marketing of credit cards on college campuses in order to protect them from deceptive marketing practices.
Fortunately, California has taken such initiative with the passage of the College Student Credit Protection Act in 2007, which prohibits universities from giving material incentives to get students to sign up for credit cards.
Prominent consumer advocacy groups have also taken a stand against the aggressive marketing of credit cards to college students on campus. Such efforts include a counter-marketing campaign by public advocacy group CalPIRG at UC Davis that distributes educational materials to students on campus about the dangers of credit and excess spending.
Still, the trend of increasing credit card usage and accumulation of debt among students is cause for concern. As a rule of thumb, a person shouldn’t have more than one credit card. Perhaps the most alarming statistic in the Sallie Mae study was that the average American college student carries 4.6 credit cards, with over half of all students owning four credit cards or more ‘mdash; a strong indicator of overall mismanagement and, assuming that most students are not employed fulltime, a dangerous propensity for living well beyond their means.
Currently, the university does not accept credit-card payments on mandatory student fees, such as tuition and dormitory housing, a commendable countermeasure against what could otherwise be an inclination among many students to rely on credit to cover such high costs. Still it’s evident that students are unaware of how their spending habits now could adversely affect them later.
Director of Student Business Services James Myers said the American adult and student population does not know enough about credit-card debt and its consequences, and that a seminar or workshop on credit and debt education would help equip students with the knowledge to make better financial decisions.
But in light of recent budget cuts, the university would be hard-pressed to offer such instruction through any of the administrative offices ‘mdash; a big commitment considering that it is operating with reduced staffing. Currently, Student Business Services offers tips on how to develop sensible spending habits and avoid the pitfalls of credit-card debt. But the message hasn’t gotten out to everyone yet.
A good first step would be for the university to survey students, both incoming and current, on their knowledge of personal financing as well as their spending habits ‘mdash; in the same vein as the e-CHUG online survey used to gather data on student alcohol and drug use. Based on these results, the university could gauge the necessity and practicality of an educational program where students could develop a basic understanding of credit, debt and sensible spending habits. The university is notorious for its opposition to student alcohol use and enforcement of its zero-tolerance policy, but the problem of rising student debt warrants far more concern. A course in financial management fundamentals would go a long way in helping students develop financial security now and avoid years of debt later. Because, unlike alcohol, debt doesn’t leave the system ‘mdash; it only gets worse.