Students and Credit
WHAT YOU NEED TO KNOW
Today, more and more young people are faced with decisions of how to finance their higher education and their student lifestyles. Chances are the important lessons of how to budget and to manage credit and debt were covered inadequately during their school years.
Although there are some advantages to using credit judiciously and establishing a credit history, right away you as a student must make decisions about the different kinds and amounts of credit that may be available to you. Besides federal student loans, there are the many credit card offers that come in the mail, as well as the tables set up on campus to lure you into signing up for a card at what is often a high annual interest rate.
★ According to the Consumer Financial Protection Bureau (CFPB), student loan debt in the United States now exceeds $1.2 trillion.
★ There are currently over 7 million borrowers in default on a federal or private student loan.
★ In 2011, students borrowed $117 billion in federal student loans alone.
★ 71% of the class of 2012 had student loans and the average debt was $29,400. For student graduating in 2011, 66% had student loan debts averaging $26,600.
★ Federal student loan debt cannot be discharged in bankruptcy and there is no time limit on the collection of that outstanding debt.
★ Americans age 60 and older owe roughly $43 billion in student loans and more than 10% are 90 days or more delinquent.
★ While Social Security income in protected from most creditors, a part of your Social Security income can be taken to offset student loan debt. In 2000, 6 people had their Social Security check garnished to pay delinquent student debt; that number increased to 115,000 individuals during the first 8 months of 2012.
A federal student loan has many advantages, if you are sensible in how you use it. Remember ~
- Rule Number One: The acquisition of a student loan, and the manner in which you repay it, will impact credit your score (your personal financial track record.)
- Rule Number Two: At payback time, never default on a government-backed loan!
- Rule Number Three: Don’t use your loan for unnecessary or frivolous expenses that will cost you many times more, with compounded interest, when you start paying for them with your future earnings.
Before you even submit an application, consider this. To give you an idea of what it really costs to buy on credit, imagine for a moment you have a student loan that you do not have to pay off—with interest, of course—until after graduating from college. Each weekday morning year-round you purchase a $3 latté with a portion of your loan funds. After four years of school at an assumed interest rate of 8 1/4 percent, you will owe $2,609 in interest alone, on top of the original $3,120 you spent with borrowed money that must be paid back. You’ll have to come up with $48 every month of the year for the next ten years of your life, just to pay for all those lattés you financed with your future income.
On the other hand, there are obligatory expenses associated with your college education that may be more cost-effective to pay for with a student loan, if you are deciding between that and a credit card. If you must finance your books and transportation, tally up their cost in addition to fees and tuition. Applying for a student loan may seem more of a hassle in the beginning, but opting for the convenience of using a credit card for these unavoidable expenses could cost you a lot more in the long term.
Unlike a student loan, a credit card is designed for a person with income who can make regular payments each month. You may also be granted a higher credit limit than you can afford to spend. Many a student falls into the trap of excessive credit card use during school and is unwittingly setting himself or herself up for financial failure.
★ A survey of teens in 2007 revealed that only 26% understood credit-card interest and fees.
★ In 2009, 91% of college undergraduates had a credit card, up from 76% in 2004.
★ Half of these students carried 4 or more cards.
★ Undergraduates are carrying record-high credit card balances. The average outstanding balance in 2009 was $3,173, with 21% of the undergraduates carrying a balance of between $3,000 and $7,000.
★ 25% of students surveyed in 2008 report paying a late fee and 15% paid an "over the limit" fee.
Do you realize that, if you had a credit card balance of $7,000 and an interest rate of 18.9 percent, made no further charges to that account and paid the minimum balance every month, it would take you over 16 years to pay it off? With a $1,000 balance at 18 percent, you would still pay an additional $1,115 in interest over more than 12 years by paying only the minimum balance.
Learning how to borrow responsibly and build a positive credit history could help you later in getting a job, buying a car, renting an apartment or buying a house. Since having a credit card under your parents’ name does nothing to establish credit for you, what should you do?
Tips for Using Credit Cards Wisely
- First, decide whether you need and can afford a credit card right now. Understand the differences between a secured credit card, a prepaid crdit card and a conventional credit card.
- If you do sign up, get only one, a national credit card such as Visa or MasterCard.
- Shop around for the best deal. Visit Bankrate.com for excellent information about various credit cards. Compare offers and read all the fine print. Look for:
- A low interest rate or finance charge (APR);
- No annual fee;
- Reasonable late fees;
- A grace period for payment before finance charges accrue; and
- Cash back or other benefits.
- Watch for the hidden cost of cash advances.
- Politely decline offers to raise your credit limit.
- Try to charge to your account only what you can afford to repay within the monthly grace period. If occasionally you cannot do this, make at least the minimum payment, and on time (it must reach the company by the due date).
- Use your card for emergencies and not for entertainment.
- Consider always paying cash for items under $50.
- Stick to a budget and don’t buy what you can’t afford. Your monthly debt load should not be more than 10 to 15 percent of your monthly net income after taxes.
- Be on the alert for fraudulent accounts opened in your name through theft of your personal identifying information. (Read more at Student Loans Scams.)
- Study your bill every month and call the company immediately if you have questions, change your address, want to request a different billing date, or get behind in payments.
Consider joining a credit union to qualify for a lower-cost loan. If you are a graduating college senior or first-time car-buyer, auto manufacturers sometimes have subsidized loan programs tailored to you; but beware of an auto dealership that offers you a loan with an excessive rate of interest.
Counseling by and for Students like You
If you do find yourself getting over your head in money matters, or you just want more advice on handling all aspects of your finances, there is a program that can help that is designed just for young people. The Peer Financial Counseling Program, which has a base on the University of Georgia (UGA) campus and will help you set up a similar program on your own in-state campus, consists of fellow students sharing in a structured way through speaking opportunities, seminars and the distribution of educational materials.
You can find more about the program and download lots of excellent and informative seminar material (even PowerPoint presentations) direct from the web site of UGA’s Department of Family and Consumer Economics. To ask whether your campus currently has a Peer Financial Counseling Program, contact your school’s Office of Student Financial Aid.
Many other materials, were written especially for students. For more ideas on how to take charge of your financial future, visit www.fcs.uga.edu/extension/money.