Your Financial Future:
Protect Your Students: Credit Card Debt 101
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. Read more from WISER Board Member Beth Kobliner.
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?
By Beth Kobliner, Personal Finance Expert, Magazine Columnist, and Commentator. First printed at The Huffington Post.