Newly Indebted: Your Teen’s Use of Credit Cards in College
June 5, 2009 by admin
Filed under Transitioning
Money may make the world go around, but credit cards help make it spin a little faster. And the story is no different in college, where credit card companies compete to win over new customers (your kids!) with fancy giveaways, high limits and low introductory interest rates. The temptation to sign up for one of these cards is difficult to ignore; after all, your kids may have an emergency that requires some quick access to funds. However, owning a credit card in college is a major decision. The possibility of graduating with student loan debt and credit card debt is not an ideal scenario. So what do you need to know to help your children avoid ruining their credit before they graduate? Let’s take a look at the world of college credit cards.
The Cold Hard Facts
A 2001 study by student loan provider Nellie Mae found that 83 percent of undergraduates have at least one card and their average balance was $2,327. It also reported that students double their average credit card debt—and triple the number of credit cards in their wallets—from the time they arrive on campus until graduation. This is a good indicator that students are carrying balances month-to-month, and likely paying little more than the minimum required payment.
What to Know Before You Apply
Nowadays, colleges have opened up their campuses to credit card companies who offer school-branded credit cards. Though school spirit might lead some to apply, there are things kids need to know before they sign on the dotted line. We recommend you have a discussion with your child about the dangers of credit cards. You may want to add your child to your credit card as a way of monitoring usage, or perhaps you can ease them into their own card over the course of their time at college. If you do decide that you want your child to have their own card, give them some tips on how to handle this new responsibility.
Before they apply, have them check the card’s Annual Percentage Rate, or the rate of interest they’ll be charged. If the company is offering a low introductory APR, find out how long it will last and what it will rise to once the introductory period is over. Often, companies will give you an APR to entice sign ups, but six months later the APR skyrockets to over 20% and the balances the holder has been carrying suddenly get a lot more expensive to pay down.
Tell your kids to find out if there’s an annual fee attached to the card. Some companies may offer to waive the fee for a year, but if card holders plan on keeping the card for longer they’ll want to know what they’re getting into. Also, both you and your kids should know about the card’s limit. According to a study by the Smith College Women & Financial Independence (WFI), half of the students surveyed reported charging their cards to the limit some or most of the time. If your kids keep their limits low, it’ll help control their potential for debt. Also, make sure they ask about late charges and the consequences of making a late payment. Companies will not only charge a late fee, often $30 or higher, they may increase the APR.
Using a Credit Card
“Students are not just paying for late-night pizza with their credit cards, they are paying for college,” said Mahnaz Mahdavi, Smith College professor of economics, director of WFI and lead author of their credit card study. WFI reports that in addition to tuition, textbooks and school supplies, students used their credit cards to pay for personal items (58%); dining out (50%); entertainment (48%); groceries (47%); and travel (33%). A study by TERI/IHEP found that many students are using their credit cards to pay for education-related expenses such as tuition and fees (12%) and books and supplies (57%). Talk with your kids about using their card responsibly and, if possible, paying it off at the end of each month. Though carrying a balance is not recommended, if they do need to spread out their payments, make sure they make more than just the minimum payment. Minimum payments are often going to pay for interest only and will do little to bring down the balance and paying more than the minimum will also contribute to increasing credit scores so that future borrowing is at lower rates. Also, advise them to never take cash advances. These types of credit card transactions often have a very high interest rate.
In Debt = Indebted
The statistics show that most college students will get a credit card during their time at school, so it’s important they understand the kinds of risks that come with credit. Talk to your kids about budgeting –that way, when they graduate, they’re not left with a mountain of debt, along with their diploma. You may also want to review their credit report with them once or twice a year to catch any problems before they can do damage to their overall credit worthiness.
Fun with Government Loans and Credits
Parents are inundated with a myriad of choices for funding their child’s college education and how they approach this important investment will seriously impact their finances for years to come. From special plans to tax incentives and federally-subsidized loans, the number of options offered by the federal government can be overwhelming. In this article we’ll handle two major elements of government financial aid: student loans and special educational tax credits.
Hope and Lifetime Tax Credits
The federal government doesn’t want you to feel like you’re all alone in the struggle to fund your child’s education, so they’re providing some help. Part of their assistance comes in the form of tax credits. There are two credits available from the government that are intended to help offset college costs by reducing the amount of income tax. The Hope credit enables parents to claim a credit of up to $1,650 for qualified education expenses paid for each eligible student. Keep in mind, this is a tax credit not a deduction. That means it reduces the actual tax you have to pay, as opposed to a deduction that simply reduces the amount of income that’s taxable. The good news is it could potentially reduce your income tax to zero, but it won’t refund you any money if the credit is more than your tax.
Another tax credit called the Lifetime Learning Credit allows parents to claim a credit of up to $2,000 for qualified education expenses for all students enrolled in eligible educational institutions. Like the Hope credit, it reduces the amount of income tax you may have to pay.
The differences between these two credits are significant. For one, the Hope Credit can only be claimed for two years, while the Lifetime Learning Credit is available for an unlimited number of years. A student must be pursuing an undergraduate degree or other recognized credential in order to use the Hope, and students cannot have a felony drug conviction. The Lifetime Learning Credit can only be applied to all eligible students in your family. The Hope is calculated per eligible student and can therefore potentially be more advantageous.
As there are income limits and other qualifications that must be met to utilize education credits, we recommend talking with a tax professional or visiting the IRS Web site for more information.
Federal Loans
A great many students heading to college rely on loans to help pay for their education expenses. Once again, the federal government has taken some steps to make the prospect of taking out a loan for college more palatable. Stafford loans are federal student loans that are available to students, regardless of their credit history. There are two variations of Stafford loans: subsidized and unsubsidized. Subsidized Stafford loans are the more beneficial of the two, since the government pays the interest on the loan while the student is in school, as well as during any deferment or grace period. The unsubsidized version makes the student responsible for any interest that accrues. Qualifying for the subsidized type depends on a student’s household income. When your child applies for financial aid he or she will be informed about their eligibility for a particular type of Stafford loan.
PLUS Loans
If your son or daughter has maxed out on financial aid and Stafford loans, but still needs assistance, you may want to consider taking out a PLUS loan. This loan option allows parents to borrow money for education expenses at federally guaranteed low interest rates. Unlike Stafford loans, your credit will be factored in when deciding eligibility. The upside is that they are not need-based and the credit check is minimal. Parents can borrow up to the cost of attendance minus any other aid their child is receiving. There are fees for taking out this type of loan and repayment can start 60 days after disbursement or 6 months after the student’s graduation.
We suggest you talk with a financial aid officer for more information on the options available from the federal government that can help lessen the burden of skyrocketing education expenses. The best way to reduce the costs of college is to utilize as many of these federal programs as possible, whether it be tax credits, federal loans, or free financial aid.
