Consumer Comeback Blog

Is your Student Debt Undateable?

About two and a half years ago, the Credit Card Act was implemented, which made it considerably difficult for individuals under the age of 21 to get their hands on a credit card. Now, younger people looking to acquire a credit card must either have the plan co-signed or must be able to prove that they make a stable enough income to pay off their credit card debts. Some parents are more than willing to cosign for their children, with the fundamental belief that all young adults need to get a grasp on financial responsibility and begin building credit. It takes discipline to be able to juggle a credit card in the mix without spending beyond your means. Some students are able to obtain credit cards in college and pay them off religiously each month without any issues. However, there are a decent amount of students that have let their credit card debt spiral out of control, a problem that follows them far beyond the reaches of their undergraduate degree.

Why College Credit Cards Equate with Financial Ruin

If a student can’t prove that they make sufficient income to finance their credit card habits, a cosigner is the next option. Yet, if the student falls into debt, the cosigner will wind up responsible for paying it off and both parties will have damaged credit as a result. One way to avoid this mishap is to provide a credit card with a lower limit, such that the student cannot use the credit card to buy exorbitantly priced items. A student may also apply for a secure card, created using a prepaid deposit, which is a lower-risk item for a college student to have while still building credit. Of course, debit cards are an option if parents want to supply their children with a cash flow without worrying that they will drive them into debt, as they can easily keep an eye on any transactions that occur, but debit cards do not help the student to build credit. A parent cosigning for their child should consider how much education their child has received concerning money management and choose whether or not to give them access to a credit card carefully. Otherwise, their child could end up over their head in debt.

Sallie Mae, a financial services company specializing in education, conducted a study entitled, “How Undergraduate Students Use Credit Cards: Sallie Mae’s National Study of Usage Rates and Trends.” The study spanned between 1998 and 2009, and found that students were using their credit cards to fund not only major educational expenses such as their textbooks, but also the tuition. In fact, 30% of the students in the study put tuition on their credit card, while 92% charged textbooks, school supplies, and other expenses associated with their education. Students are overextending their credit cards to fund school when it should be funded by financial aid, which would be less of an expense to them. As a result, the average credit card debt for graduating seniors was $4,100.

The issue may arise because students don’t fully understand how credit cards work. If parents are cosigning for credit cards, they aren’t doing a very good job of explaining how to effectively use them and pay them off. Students use their cards readily, but allow their bills to go late or unpaid. According to TIME’s Moneyland, fewer than 10% pay their full balance every month. Only 15% understand what an interest rate is and what their own interest rate could be, and less than one in 10 students know their interest rate, late fee and over-limit fee amounts.

Unfortunately, the situation is made worse because the costs for colleges have risen over time. The average tuition at a four-year in-state public school for the 2011 to 2012 year is $8,244, according to College Board’s “Annual Survey of Colleges.” A quick look at previous College Board surveys confirm the worst. In the 2010 to 2011 year, that average was $7,605, and in 2008, the average was $6,585. That doesn’t even factor in the costs for room and board, textbooks, meal plans or sustenance, or any other activities that a college student engages in. If a student wishes to study out of state or at a private school, the costs are even worse. According to the Department of Education, if the trend of increasing tuition continues through 2016, the average cost of a public college will have more than doubled in just 15 years. All the while, the economic collapse is leaving families with a lower income or even jobless.

There’s a reason that tuitions continue to soar, though, and it isn’t the impetus of a greedy university staff. Legislators continue to cut state financing with the argument that state schools can raise money on their own, and when they can’t meet that demand, schools are forced to raise tuition. While a budget for higher education could be established by raising taxes, it’s an unpopular idea that is less likely to be embraced. Thus, students take out loans or rely on credit to quell the steep tuitions. Meanwhile, advocates of legislation will argue that college professors get paid too much and that they aren’t doing a good enough job educating students on how to get jobs upon graduating.

Student Loans

Grants, aids, and student loans can help make the college student’s financial journey more affordable, but not all choose to pursue them, and a student loan can be a double-edged sword as it is yet another debt that the student will eventually have to pay off. Furthermore, private loans are harder to find as lenders have become rare. The U.S. Department of Education notes that the average student loan debt is around $20,000 for public universities and $28,000 for private. If that number isn’t shocking enough, the Washington Post cites that the national student loan debt amounts to $870 billion collectively.

According to the New York Times, the balance of federal student loans has grown at an excess of 60% in the last five years due to the Obama administration’s aggressive goal of making the United States first among developed nations in college completion through grants and loans. Congress did what they could to keep interest rates on federal grants and loans low, but they may double in the upcoming months. Yet, because the students are still in school, many of them put off paying their loans or default on them after graduating — as many as one in 10 students. Another chunk of students drop out of college, are still paying off loans, and have no intention of returning once their finances are in order, making their loans a wasted effort. If the student loan system fails as a result of wholesale default, the already wounded economy will falter even more.

Part of the problem is that colleges and parents aren’t warning students about the prospects of relentless debt. Students are encouraged to follow their dreams, regardless of cost, but this isn’t a responsible way to think about education. The idea that a college education is one of the best investments you can make is well known, but there need to be some stipulations about which colleges are feasible for a student or their parent’s particular income. Colleges continually tout affordability in their brochures, but for many students, this simply isn’t the case. Many students are given the impression that going into college with outrageous debt is not only normal, but easily overcome. This misleading marketing makes students feel invincible, capable of anything. Armed with a shiny new degree, they believe they can take over the world, but loans will amount to a major setback.

An indebted student may graduate with such a large hole burnt into their pocket that they have to move in with their parents, work three jobs that they don’t enjoy, and still pay hundreds of dollars a month towards their monstrous student loan. It delays personal growth; a Rutgers University study showed that nearly 40% of the indebted graduates surveyed put major purchases like a car or house on hold because their debts will not permit them to spend.

How to Manage Money Better

Whether the student’s parents are involved in the mix or not, it can be helpful to sit down and make a budget plan. With a number in mind for monthly spending, the student can mentally calculate their expenses more efficiently. Unlike a debit card in which every transaction can be tabulated, a credit card bill can surprise you at the end of the month. If a student keeps notes of their spending, they may be able to have a better grasp on high-dollar items and how to factor them in. They need to not think of a credit card as an endless stream of money and realize that there is a finite amount they can spend every month. Usually, it’s the little things that add up. A student may think their morning Starbucks is just a minor expense, but over time, small charges can add up, especially if it’s a daily ritual.

A student should also become familiar with the concept of saving. Setting aside a small amount of money each month can give them an emergency fund to draw from in dire circumstances. It is a practice they should continue well into their post-graduate years, when saving is of most importance. Additionally, if the student has the time between studying for a part-time job, it can ease some of the strain on their finances to have a supplemental income. They may be financially backed by their parents, but work a part-time job to fund the amount that they spend on entertainment or clothes, per say. Such expenses might otherwise put them over their credit card limit if a parent hasn’t factored in a student’s luxury spending.

Dating with a Debt

Once the haze of college has passed, a post-graduate student in debt is faced with all kinds of trouble. A botched credit score makes it difficult to get car insurance, rent an apartment, or even get a job. If you have thousands of dollars in student loans, your credit score is the last thing on your mind, as you must find a source of income as quickly as possible to begin chipping away at your debt. An unforeseen circumstance of acquiring too much debt is the affect your financial woes have on your romantic life.

A college student in debt is common — everyone has been a broke college student at some point in their lives. Yet, once the student has graduated, he or she is perceived as an adult. Female graduates are looking to date men who have a mature sense of money, who can potentially support them if they get married. Likewise, a male graduate with a secure job may be hesitant to date a girl who overspent her credit card in college on clothes, shoes, and partying because he isn’t eager to date and financially support someone who might destroy his own credit with her overeager spending habits. Down the line, her debt could be his own. An American Institute of CPAs survey showed that money is one of the top issues that couples argue about; why even pursue a relationship with someone who will be bound to bring on financial tensions?

Even if a student’s parents help them eradicate their debt, nobody wants to date someone that needs their parents to come to the rescue because they couldn’t handle their finances in an adult way. A recent graduate with debt will likely be forced to live with their parents for a while so they can save money on rent, which is another trait most people consider a red flag when looking for potential partners. Quite simply, debt is a signal to the opposite sex that you can’t handle the added responsibility of a relationship at that time. Paying off your debt is your first priority, whether you like it or not.