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Volume CXXXIII, Number 15 |
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Students trapped in credit card debt
ASHLEY HARVARD
STAFF WRITER
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| Credit card offers like these flood the SU mailboxes of students. Credit card debt among college students is rising at an all-time high. (Bobby Guerette, Bowdoin Orient) |
Chances are, as a college student, your mailbox has been continually inundated with applications for credit cards. Unversed in the responsibility and true meaning that using credit cards entail, students these days use plastic to pay for everything from new stereos and computers, to packs of beer and gum.
According to a new study from the student loan provider Nellie Mae, credit card debt among college students is rising at an all-time high, with nearly a third of college students carrying an average credit-card debt of $2,327 in 2001. However, financial institutions report that more and more students are carrying debt to the tune of $10,000.
"I don't know what I'm going to do when I graduate," senior John (not his real name) said. "When I came here, I remember I had five credit cards and maxed them all out by the end of my sophomore year. I haven't told my parents about my $6,000 debt yet."
John still doesn't have a job for next year and is planning on moving back home until he can pay off his debt. "I'm hoping that I can pay it off in a couple of years and then start my life in the real world," he said.
Although average credit card debt is down from $2,748 in 2000, Marie O'Malley, Vice President of Marketing at Nellie May, writes that while "statistics indicate a growing comfort level with credit card borrowing, being comfortable doesn't necessarily indicate knowledge about the ramifications of borrowing in general."
While students may be familiar with paying back student loans, credit card payments are very different. Student loans offer opportunities for low interest rates, gradual payments, and payment deferral for enrolling in the military or graduate school. Credit cards offer no such options. Most apparent, interest rates often become higher after the "introductory offer" rate time period is over. Payments are expected every month and missing a payment can have detrimental effects.
Nevertheless, credit card companies consider college students their best customers. Since many college students are so unfamiliar with credit card options, they remain extremely loyal to the first cards they receive, even if other companies offer better interest rates.
"I've had the same credit card since my freshman year," said one junior. "Even though my interest rate is close to 20 percent, I think its better just to deal with this card then try and find another credit card company. I mean, I still have to pay this one off; what difference does it make?"
Most importantly, typical college students make minimum payments, which is two to three percent of the monthly balance. According to an article in The Chronicle of Higher Education, "A student who makes the minimum monthly payments on a card with an 18 percentage annual rate and a balance of $2,748 will end up paying in as much in interest than she originally charged. It would take her about 15 years to pay off the balance."
What does all of this lead to? Bankruptcy. Unable to handle the pressure of making payments on not only the monthly balance but interest as well, students are all but forced to file personal bankruptcy to stay afloat. According to a recent study by Elizabeth Warren, a Harvard Law Professor, nearly 120,000 people under the age of 25 filed for bankruptcy in 2000. That is more than a 51 percent increase from 1991.
However, in light of the increasing number of Americans filing for bankruptcy, the Bankruptcy Reform Act of 2001, proposed by Senator Chuck Grassley (R-Iowa) would make it harder for Americans to file for Chapter 7 bankruptcy which erases most personal debt. Instead, Americans would have to file under Chapter 13, which requires repayment as quickly as five years. A general statement released by the Office of Management and Budget encourages the passage of this bill, stating that "these common sense reforms will curb many of the abuses of current bankruptcy protections."
Opponents however, feel that this law is unfairly harsh on indebted students. "Its crazy," said John, "because how can [students] expect to know about bankruptcy laws when we're in college?"
Travis Plunkett, legislative director of the Consumer Federation of America, also feels that the bankruptcy law is unfair for college students. "The companies that are supporting the bill are the same companies that are dumping credit-card applications all over campus without doing the basic tests to determine whether a student is ready to handle a credit card," he said.
What is a college student to do? Financial advisors David and Tom Garner of The Motley Fool Investment Guide for Teens advise two main ways to avoid the trap of possible trouble with credit card payments. First, instead of a credit card, opt for a debit card. Linked to your bank account, they only draw from funds that you actually have. They can be used just like credit cards and are accepted most places where major companies such as Visa, American Express, and MasterCard are accepted. However, be warned. If funds are not available in your account for a purchase, the transaction may still go through, but you will be faced to pay not only the cost of the purchase but a hefty overdraft fee.
A second option is to consider a credit card with a low limit of around $500. If you try to spend more than $500 your card will be declined. While you will still have to make monthly payments, managing a $500 balance is much easier than $5,000.
"I really wish colleges would teach students how to handle their finances," said John. "I got myself into a hole that will take a damn long time to get myself out of. Students and credit cards are not always the best mix."
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