Newly Indebted: Your Teen’s Use of Credit Cards in College

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.

A Mountain of Debt: The Truth About Student Loans

The rising cost of tuition, housing, food and books has made student loans more prevalent in today’s society. In fact, according to Nellie Mae’s 2002 National Student Loan Survey, over 70% of students say that student loans were very or extremely important in allowing them access to education after high school. That same survey found the average undergraduate debt is $18,900. Students attending graduate school increase their debt even further to a whopping $31,700. And lawyers and medical students suffer from the most debt at $91,700. So it’s no surprise that the National Association for College Admission Counseling (NACAC) and the Project on Student Debt found that 63% of parents of current college students say students today graduate with too much debt. So what happens when your son or daughter graduates and you’re both faced with all that debt? How do you keep yourself or your children from defaulting on loans?

Pay the Piper
If your children are taking out student loans to supplement the amount you’re able to provide, they may want to consider paying some of it off while they’re still attending college. It may sound difficult, but even if they can make small payments, they’ll help bring down the total amount of debt they’ll be facing come graduation day. If they have difficulty finding a high-paying job after graduation, they could pursue a deferment of their student loans. This allows students to push off repayment for a few years, but keep in mind that interest will likely continue to accrue. The other alternative is to lower payments by extending the term of the loan, which may also result in additional interest. Like credit cards, you’ll want to recommend that your children pay more than the minimum payment whenever possible. This helps bring down the total cost of interest on the loan by shortening the term. Of course, all of this depends on your financial situation and to what extent you are contributing to the cost of their schooling.

Consolidation Nation
It is likely that students will have to take out multiple loans to pay for college and that results in a several different student loan bills after graduation. Keeping track of all of the loans can prove difficult, so you might want to talk to your kids about consolidation. Consolidating loans is not only a convenient way for repayment, it may also help lower payments. Depending on when your kids took out their student loans their interest rate may be higher than the current rate. By consolidating at a lower rate they can bring down the interest on the loans, which would then affect the size of the monthly or quarterly payment. Of course, this is a strategy you can consider as well if you decide to go with loans, like the federal PLUS loan program. Also, if you own a home, you may have the option of using equity in your home to help your child pay for college. There are advantages and disadvantages to both federal loans and home equity loans. Talk with financial professional for more information.

Forgiving Your Debt
There are a few ways the federal government helps minimize or eliminate student loan debt. The first method is to have the student in debt work in impoverished areas. This is an option often available for graduates in occupations like law and medicine. If their interested, have your kids check with the school’s career office for more information on these special programs. Another way to have debt forgiven is to perform volunteer work through organizations like AmeriCorps. Students can also have their debt significantly paid down by joining the military. For example, the U.S. Navy will pay for up to $65,000 of qualified loans acquired for a post-secondary education.

Budgeting Yourself
Once your kids are out of school and inundated with student loans budgeting becomes a major commitment. Now that they have their share of college debt they’ll want to consider any way they can save money, including lifestyle changes like sharing an apartment or biking to work. They should also avoid accumulating additional debt through the use of credit cards. Another crucial tip is to never miss a payment, since it can result in late fees and damage their credit rating. Talk with them about being responsible for their debt situation and contact the loan company if they fall on difficult times. And always remind them that although the thought of accruing debt can seem overwhelming, student loans give them the opportunity to attend college and secure their dream job…Hopefully, that makes