Congressional Attention, and Private Student Loan Problems, Raise Profile of College Student’s Credit Card Debt
In these days of increasingly tight credit, credit card companies are still targeting college students and potential first time cardholders for credit card offers. One study found that 33% of 2007 college graduates had credit card debt from college exceeding $5000. It’s gotten so bad that even a 4 year old girl was recently preselected for a Capital One credit card.
Credit card companies argue that college students handle credit as well as the general population, but it may be simple economics. The costs of acquisition of new debtors while in college are low, there is often strong brand loyalty from college students toward the company that provides their first credit card, and parents often bail out their debt burdened children when they get in trouble.
It’s an issue that has gained increasing attention as Congress considers reforms for the credit card industry. Some colleges have sought to prohibit marketing to their college students. But other colleges have profited from the exploitation of their students by the credit card providers. In fact, some estimates are that colleges and universities in this nation receive more than $1 billion from deals with credit card providers. State representatives in Ohio have introduced legislation to prohibit credit card marketing on Ohio campuses and universities. It’s also been subject to examination by Congress.
Some experts argue that what is needed is more education about finances and credit cards for college students. But those that have studied prior education efforts to promote financial literacy doubt its effectiveness. This Chicago Tribune article argues that financial education classes are ineffective and potentially counterproductive by giving graduates a false sense of security when entering financial transactions. They say there’s simply no evidence that education works and are fearful that the Congressional response will be limited to more education.
One good aspect of the suggested Federal Reserve credit card reforms was that they began from the presumption that more disclosure wouldn’t help. It seems to be implicitly recognize that education on the policies of credit card companies wouldn’t work.
But the issue of credit cards and college students has gotten more important over the last year as the credit crisis has tightened the availability of private student loans by college students. The increasing cost of tuition and limits on public assistance has, in the past, forced many to turn to this source for additional money for college and graduate school. Private student loans typically account for 25% of student loans. But with tightening credit standards and banks ending their private student loan programs, as well as the difficulty that parents will have in tapping into what is left of their home equity through loans, college students may be forced to choose between charging some portion of their tuition to their credit card or halt their college education to earn more money. Already, 24% in a recent survey indicated that they had charged part of their tuition to a credit card. That percentage seems likely to grow. It will also probably increase the average credit card debt of graduating students, which is already averaging $2000 - $3000. And that debt will be at a higher interest rate than typical student loans, without the offering of deferment or forbearance for those in school or unemployed.
It will be interesting to see how these issues play out over the next six months as the first college students face the credit crunch - whether states, federal programs, and other lenders step up to fill in the gap - and how Congress addresses the issues of credit card marketing.
Read more about the student loan crisis:
