Protecting Students From Credit Card Debt

It's that time of year, when we're sending our high school and college graduates off into the next phase of their lives with best wishes for a happy, successful future. But there's a serious threat to that secure future, brought to light by recent legislation, which has been overlooked.

Buried in the new law that regulates credit card companies are a couple of rules, called for by President Obama in a town hall meeting in Rio Rancho, New Mexico, "to protect students from getting stuck in debt before they even get started in life."

I say amen. Having just returned from a speaking tour of dozens of college campuses and youth-oriented media outlets, one thing is clear: From MIT to MTV, there is a prevailing mentality that debt is normal and okay.

Sallie Mae statistics show that college seniors polled last year graduated with an average credit card debt of more than $4,100, up from $2,900 in 2004. One in five seniors carries a balance greater than $7,000. And 62% of them have more than four cards! Think of it. That's four credit cards handed to someone who in all probability has no job and no income. Worse, it's four credit cards issued to a person who is chock full of misinformation. The most common myth I've heard parroted by students? You need to carry an unpaid balance from month to month on your credit card in order to improve your credit score.

Only 17% of all students said they regularly pay off their cards each month. So what does that mean? Figure this: A 21 year-old with $4,100 on a single credit card, paid off at the monthly minimum, will be 45 years old and $8,600 poorer by the time that original balance plus interest is paid off. And they will certainly have no memory of the pizzas or movies it bought way back when.

The bill President Obama signed calls for a ban on issuing credit cards to anyone under 21 unless they can provide proof that they have "independent means," such as a job or other assets, or if not, a parent or other adult to co-sign. This is a start, but hardly a perfect solution. Student employment could very well mean a low-paying job in the bookstore or dining hall--a job that will vanish upon graduation and that, considering the times, may not be easily replaced with another. And co-signing? Parents will, and should, say no. Credit card companies have long insisted that student default rates were no worse than the national default rates which, face it, at a current 20-year high, are nothing to sing about. I have long suspected that the industry assumed that, when push came to shove, parents would bail their kids out. But now the parental bailout doesn't seem probable--fewer parents have the good credit or the cash at hand to step up to the plate. And how many these days can afford to risk their own credit score by co-signing for their child?

I applaud the president for leading the charge for a solution, but we need to go farther than is mandated by the current legislation. So what else can be done? Should students be treated like any other adult when it comes to qualifying for a credit card? Nice idea, but although the credit crunch has made it tougher for everyone to get a card, you can bet that when the economy turns around, high-rate debt will once again be pitched to those who shouldn't have it.

One provision, cut from the bill before it was presented to Obama, would have called for accredited financial literacy classes as one option for credit card qualification. Though riddled with the potential for abuse (think Phillip Morris' court-mandated anti-smoking campaigns), the general idea of a mandatory educational effort is an appealing one. But it must be a comprehensive and unbiased effort--in other words, a program with the full backing of our federal government.

A number of states already include financial literacy courses in their curricula, and others have bills in the works. But without federal oversight and support, we could be heading down the same road we've traveled with sex education in this country, with local school districts free to fill their state-mandated teaching objectives any way they think is appropriate and affordable. And where has that left us? With the highest teen pregnancy rate in the industrialized world.

We need a commitment to federal funding that reaches down to the local level, and that includes teacher training and accountable benchmarks for success. And we've got to get to these kids as early as middle school, long before they reach college: Sallie Mae's data reveals that 39% of freshmen come to school with at least one card already in hand, thanks to the aggressive direct mail marketing efforts of the credit card companies.

Of course, the idea of a federal mandate for education reform is not a new one. It dates back to the late '50s, when Congress responded to the perceived threat posed by the launch of the Soviet Sputnik satellite with the National Defense Education Act. Sputnik was a wake up call to a long-overdue need for education reform that resulted in over one billion dollars--an astounding sum in those days--issued to back a new science curriculum, enabling a revolution of scientific education in our schools that eventually led to a huge increase of those pursuing advanced degrees in the field, ultimately fueling the high-tech growth that began in the 60's.

Today, the culture of debt our children have inherited, and embraced, should be regarded as a national crisis and reacted to accordingly. To this generation, debt is far from a dirty word. I've left more than one Q&A session at an Ivy League school shocked after hearing students tick off their savings account, checking account and credit card account all within one breath, having absolutely no concept that withdrawing from a credit card account means taking out a very, very expensive loan. And they've certainly faced no struggle getting cards. At every school I've visited I've posed the question: Who has had trouble over the past year getting a card, or has seen their credit lines cut? Not one hand has been raised.

Financial literacy education is not that complex. An in-school program, ideally complemented by a state and/or nonaligned non-profit backed public education effort, could easily encourage the culture shift we so desperately need. Our kids should be taught the simple facts with relentless, unbiased messaging along the lines of the seat belt safety and anti-smoking campaigns backed by MADD, the American Lung Society and the American Cancer Society.

Just as we thought we were doing half a century ago, let's give the next generation the tools they need for a secure future. Clearly, we shouldn't be blaming the kids. Rather, we should be investing in them. And who could argue that a full-blown, all out commitment to their financial literacy wouldn't be a wise investment?

Comments

[deepintheheartoftejas]

Once again we treat legal adults like they're still children. Maybe we should repeal the 26th amendment to, and move the age of consent to 21 like it was in many states in the early 20th century. Certainly, if we barred enlistment in the armed forces until people were in the 20s, it'd drastically cut down the available cannon fodder for wars of imperial aggression.

[quindy]

If parents would know what to do themselves financially they would be able to teach their children. Unfortunately most adults are clueless, most families don't have budgets and kids grow up thinking money comes from the ATM. I am all for teaching financial ed in schools. If we don't do that soon many more generations will use credit cards and loans to finance their needs instead of old fashioned savings.

[Aaror]

What is needed is an escape valve that will make the credit card companies less willing to risk giving credit to college students.
If you return the bankruptcy laws to the way they were before the credit card companies de-fanged them, people could escape their debt and start a new life the way the law was intended.
Also, consider reducing the credit black mark from the current 7 years to "7 years or 5 years if under 25," which again would raise the risk to credit card companies and make them less likely to issue these cards.
You just need a market based solution.

[metricfan]

Ultimately, you're right about credit cards. But at least those can be erased with ch 7, but these loans will never go away and the debt accumulation is on a much larger scale. It was smarter for me to pay my credit cards with my student loans, but I shouldn't have gotten myself in trouble. For as hard as I worked for scholarships and during the summers, I'm ending with just as much debt as any of my peers. But some kids do need that many loans legitimately, which is the saddest part. I don't want student loans to be harder to get, but school shouldn't cost so much in the first place! Not to mention the credit cards... Lack of financial maturity and education is destroying my generation. At this point I can't help but resent the great American myth that a college education will be a key to the middle class.

[metricfan]

I'M ONE OF THE LUCKY ONES! I currently have no credit card debt, and only 3000 grand from a private lender. I was also already planning on finding a non-profit job, which would now qualify me for forgiveness if I worked at one for 10 years. If I can pay on my loans for ten years, I'll have already paid what my principle in full. The forgiveness would essentially only pay for the interest I would earn over the course of 25 years. Without this option I could stand to pay 3 times the principle! I realize these loans are primarily my fault, but most people need actually need them. Besides, is it fair to punish me for splurging on pizza when I had thousands of dollars available to me and was incapable of imagining compound interest? I learned the formula in high school, but that didn't help me visualize the big picture. The LEAST the feds could do is forgive by ten years.

My parents bought their house in the 60's at my age for less than my total student loans. This year they will pay it off, and no fear of foreclosures. However, they have a HOUSE! For the same debt all I have to show for it is a masters and slightly higher earning potential someday. Of course I don’t have a job right now… My parents don't have degrees, but chances are I will be LESS financially secure when I’m their age.

[metricfan]

I turned 18, walked into my bank, and within minutes I had a bank issued Visa with a $1000 limit. My bank has been pretty ethical, but they still steadily increased my limit to $4000 over the span of 5 years. It's not that I begrudge Commerce, the problem is I was blowing money on pizza, racking the bill up, then paying it off each semester with student loans. I was lucky enough to have scholarships that covered my cheap tuition. Additionally, I killed myself every summer working long, overheated hours at a warehouse, earning my year’s rent. I only took out loans for living expenses, but slowly I had to start taking larger loans to cover the credit cards.

Some things I couldn't help, like when my car was totaled, and I decided to pay for the forced upgrade with student loans. The interest rate is cheaper and it keeps me from paying it off for the next five years on top of my student loans. Up until very recently I had no conception of how long it would take me to pay it back and how much it would end up costing. What 18 yr old does?! American students aren't that good at math anyway, let alone wrapping their mind around what 5 grand a year for four years will cost them...

[collegeloanconsultant]

I like the idea of financial literacy education, but if you don't want young people tuning out the message, it should be a nuanced, fairly sophisticated course. The message shouldn't just be "Debt is bad," but rather that it can be a useful tool for achieving a worthwhile goal and that the pros and cons (and the method of repayment) should be worked out in advance of taking action.

[grazzt]

oh, come on! Why not just cut to the chase and raise the legal age to be considered an adult to 21. That way no legally binding contracts could be made with these "kids". It's obvious 18 years of life experience just isn't enough for our citiizens to make sound decisions. If we can't expect 18-20 yr olds to have the knowledge on the proper use of credit cards, how in the heck do we expect them to cast informed votes on who their elected offiicials should be?
Also, have you ever sat down and read the contract for your wireless phone provider? Are you going to tell me you want a "ban on issuing cell phnoes (in lue of credit cards) to anyone under 21 unless they can provide proof that they have "independent means," such as a job or other assets, or if not, a parent or other adult to co-sign."? 'Cause if you don't think someone can't run up huge chunks of bills with a cell phone, you're sadly mistaken. So we'll need another class for this to teach the responsible use of communication services.
It is not my responsibility to pay for the rearing of everyone else's children. Ya know, potty training got a little intense for a while. Maybe I should have just rode the kid out in diapers until I could send him to school and let them deal with it.

[metricfan]

You have to be a bit more understanding. Lack of financial education is a major factor in generational poverty. If the parents don't get it, how are they supposed to teach their kids? If you don't want to bail these people out in chapter 7, the cheapest and best solution is to give them an education in it from middle school up. If you have any doubt, see the teen pregnancy rate resulting from abstinence education. I mean, the lack of transparency with loans, credit card companies, cell phone contracts, all of them mislead consumers and profit from it. We are taught to accept that we can't "understand" financial stuff by deliberately complicated jargon and policies. It's not like it is a surprise either. But that means it is unfair to act as if financial education is the parent's job solely. Let the parent's job be to teach the less technical things, like how to be a good person, but doing so without messing them emotionally. haha. I mean, how many people spend thousands on therapy for what their parents did to them, let alone not learning about money.

ps. 21 isn't that different from 18... It's not about age, it's about education.

[vagabondvet]

"But that means it is unfair to act as if financial education is the parent's job solely. Let the parent's job be to teach the less technical things, like how to be a good person, but doing so without messing them emotionall­y."

Right. Let the government teach financial responsibility.