College students receive a heavy dose of credit card marketing: On any given day throughout the school year, the nation’s 17 million college students come in contact with offers from credit card marketers. Sometimes the offer is a direct mail piece. In other instances, it will be an on-campus presentation, from a credit card company that has set up a display and is providing giveaways in the form of food or T-shirts in exchange for students’ signatures on credit card applications.
The present that keeps giving
And while many college students comprehend the responsibilities associated with having credit cards, others may not be so lucky. What begins as a lesson in credit management or as an emergency funding source all too soon can become a convenient way to pay for pizza or a night out with friends. Unknowingly, these students are setting the stage for a pattern of long-term debt, one that could resonate loudly when they find their chances of purchasing a home or securing student loans diminished.
It is this trend that led Nellie Mae, a leading originator of federal and private education loans, to begin studying credit card spending among college students in the late 1990s. After conducting six studies focusing on the undergraduate and graduate student populations, several common themes continue to emerge, including the easy availability of credit cards that leads large numbers of students to spend money they do not have.
“According to our research, direct mail solicitation is the primary source that undergraduates use when selecting a credit card vendor, with a referral from parents coming in second,” says Marie O'Malley, spokesperson of Nellie Mae. “What we don’t want to see happen is a student to begin his or her college career and immediately become immersed in credit card debt. The wisest course of action is to teach students to limit credit card usage and to borrow wisely,” she says.
Resources for students
Indeed, most colleges and universities post detailed information on the financial aid section of their websites on how to responsibly manage credit cards. Other schools provide credit card and financial literacy programs as part of freshmen and new student orientation.
Many student loan lenders, including Sallie Mae, offer resources and information to help students more fully understand the ramifications of credit cards. Last fall, Sallie Mae partnered with the Better Business Bureau, Inc. Serving Eastern Massachusetts, Maine & Vermont and the Massachusetts Educational Financing Authority (MEFA) in a public education campaign focusing on smart money management and the proper use of credit cards.
Taking action
Several states, including California, Tennessee, Texas, and Oklahoma, have taken up the issue of credit cards and college students, enacting laws that not only restrict the presence of credit card marketers on college and university campuses, but also forbid the use of special “prizes” or incentives that encourage students to sign credit card applications.
Earlier this summer, Rep. Louise M. Slaughter (D-N.Y.) introduced the Student Credit Card Protection Act, a bill designed to ensure that credit card companies alter their lending practices to college students. Slaughter first introduced the bill in October 1999, along with Rep. John Duncan (R-Tenn.).
Specifically, the Student Credit Card Protection Act would:
- limit credit lines to 20% of a student's annual income or $500 without a cosigner;
- permit students to receive starter credit cards, but with a lower credit limit that allows increases over time only if prompt payments have been made;
- require creditors to obtain a proof of income, income history, and credit history from college students before approving all credit card applications;
- require parents to agree in writing to all increases in the credit limit of cards that they have cosigned; and
- limit students with no income to one credit card at a time.
A similar bill was introduced in the Senate this past August.
Ongoing lessons in credit education
It’s not just first-time students who find themselves struggling with credit card debt. More graduate and professional men and woman are showing signs that they, too, need information on managing credit cards, financing graduate school, and budgeting their money in general.
According to a 2007 Nellie Mae study, Graduate Students and Credit Cards in 2006: An Analysis of Usage Rates and Trends, older graduate students carry nearly twice as much credit card debt as their younger counterparts, with just 20% of respondents paying off their credit card bills in full each month. Moreover, the average outstanding balance on credit cards held by graduate students has increased 10% since 2003 — to $8,612.
Of particular concern is that increasing numbers are using credit cards to finance their university education.
- An overwhelming majority — 94% — of graduate students who responded to the Nellie Mae survey said they used credit cards to pay for some portion of their direct education expenses, primarily textbooks.
- Twenty-eight percent admitted paying for some portion of their tuition with credit cards.
Such usage may be unwise in that variable interest rates on credit cards average more than 14% (September 2007, Bankrate.com).
“Student loans are a much wiser financing choice for qualified education expenses than credit cards, because they offer built-in deferment options, low (often subsidized) interest rates, and financial incentives for making on-time payments,” Nellie Mae’s O’Malley says.
Additional findings of Graduate Students and Credit Cards in 2006 include:
- Sixty-seven percent of graduate students said they took out their first credit card as undergraduate students.
- The more time spent in graduate school, the more likely a student is to increase his or her credit card debt level. On average, older graduate students (age 30–59) carry $12,593 in credit card debt, almost twice as much as their younger counterparts (age 22–29) who carry an average debt of $6,479.
- Eleven percent of first-year graduate students do not have credit cards, while only 4% of fourth-year graduate students do not have credit cards.
- The average number of cards that graduate students carry is 5.25.
- The percentage of students with balances exceeding $15,000 was 15%; and
- Students attending school in the Midwest tend to have the highest credit card debt.
“By and large, these are savvy students who have undoubtedly weighed the benefits and costs associated with a graduate education and have elected to attain an advanced degree to better themselves and increase their earning potential,” adds O’Malley. “But, their responses and behaviors indicate that many of them still a credit education lesson.”
Nellie Mae’s study, Graduate Students and Credit Cards in 2006: An Analysis of Usage Rates and Trends, as well as other resources on credit card and debt management, can be found at www.nelliemae.com/library/research.html.