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Back to School: Credit Concerns for College Students
College undergraduates are back in school and will soon be starting their credit “rite of passage” by applying for credit cards and student loans. These young adults are expected to become responsible managers of their own financial future. Are these college students ready?
No! Facts indicate that college student credit usage is out of control.
According to The Burden of Borrowing, thirty nine percent (39%) of student borrowers are graduating from college with unmanageable levels of debt.* After reviewing Undergraduate Students and Credit Cards, a 2001 study done on credit card usage among undergraduates, there’s no surprise. Nellie Mae found these startling credit card statistics among seniors in college:
- Percentage With Credit Cards – 96%
- Average Number of Credit Cards – 6.13
- Percentage with Balances Over $3,000 – 40%
In fact, the average college senior’s credit card debt is $3,262.** Add that to the average $17,140 federal subsidized loans, and many college borrowers graduate today with an average of $20,402 debt. This estimate may actually be higher, because over half of these college students will also owe unsubsidized student loans.
Average income for a recent college graduate is $32,101/year ($2,675/month).* With $20,402 in credit cards and student loans, a college graduate will have a monthly payment of approximately $288.** Based on those figures, college graduates will be paying 10.8% of their gross income towards credit cards and student loans, which even by the loan industry standards is way too much. Ideally, a college graduate should pay no more than 8% of gross income towards these credit obligations.*
Between expected salaries and debt burden, the average college senior is on the road towards major credit problems.
Credit Tips for College Students and Their Families
There are several things college students and their families can do to manage their debt burden and borrow responsibly. CreditGUARD of America, a non-profit credit counseling agency, offers these credit tips to help college students navigate this credit “rite of passage”:
Credit Tip #1: Learn How Credit Works
Be certain your college student understands how credit works. Teach them credit basics and what’s involved with taking a loan. Unlike a grant, student loans and credit cards do have to be repaid. It’s important to understand the terms of the loan before signing anything. When looking at a potential student loan, find out:
- Total Principal Amount Being Financed
- Payment Due Dates and Terms
- Total Finance Charges/Interest Payments
In most cases, student loan repayments will not begin until after the graduation; however, it’s important to understand these credit obligations before signing on the dotted line. When looking at a potential credit card, find out:
- Is there an introductory rate? If so, how much and how long does it stay in effect?
- What will the APR (annual percentage rate) be afterwards?
- Is that fixed or variable interest rate?
- Are there application or processing fees?
- Is there an annual membership fee?
- How long is the grace period (amount of time to get the payment in)?
- How much is charged for late and over-the-limit penalties?
- How will penalties affect the APR?
- Are there warnings when the account is about to go over-the-limit?
- When card policies change, what is the method of communicating these changes?
By asking these important questions, college students can find the credit card that best suits their needs. For more resources on how credit works, visit our credit management section at https://www.creditguard.org.org/financial-education/credit/
Credit Tip #2: Never Borrow More Than You Can Handle
Now that you know the questions to ask, shop around before signing up for credit cards and student loans. Find out what a college graduate’s potential salary is in your field and make sure that you don’t borrow more than you can pay back. If you don’t know what a college graduate makes in your field, go to Salary.com (http://www.salary.com) and do your research. The earning potential of a particular career may influence your decision on whether or not this is the right career for you.
Once you learn the potential salary for your field, multiply that number by eight percent (8%) and divide it by twelve (12). That will give you the maximum amount of debt you should be paying on a monthly basis. For example, John wants to be a high school teacher when he graduates. He goes to Salary.com and learns that teachers where he lives usually start at $34,000/year. After doing the math, John sees that the maximum debt load he will be comfortable repaying is $226.67/month. Using that number as a cap, John can make borrowing decisions to assure the maximum debt burden is not exceeded.
Credit Tip #3: Manage Your Credit Responsibly
Pay bills on time. Payment history makes up thirty five percent (35%) of your credit score. Failure to pay bills on time will result in a failing grade on your credit score.
Monitor and protect your credit against identity theft and fraud. Many college students live in dorms where people come and go as they please. If you leave your wallet or purse out in the open, someone could use your credit card for unauthorized purchases. A credit monitoring service, like the CreditGUARD Coach™ (http://creditguardcoach.com/), can help monitor your credit report for signs of identity theft and credit card fraud.
Communicate with your creditors if you’re having a bad month and expect to have trouble making the payment. Many of them will work with you. For example, if you leave college and experience difficulty finding a job, many student loans will defer payments while you are unemployed.
Lastly, if you’re a college student and having issues with debts, seek professional credit counseling. A certified credit counselor can help you look at your situation and help you to find the best solution to your credit problems.
* King, Tracey and Ellynne Bannon. The Burden of Borrowing: A Report on the Rising Rates of Student Loan Debt. State PIRGs’ Higher Education Project. March 2002. http://www.pirg.org/highered/BurdenofBorrowing.pdf.
** Undergraduate Students and Credit Cards: An Analysis of Usage Rates and Trends. Nellie Mae. April 2002. http://www.nelliemae.com/library/ccstudy_2001.pdf