—by Marie O'Malley, vice president marketing, Nellie Mae
Those of us in the student loan industry are particularly concerned about this trend; after all, students who owe substantial amounts of money on credit cards and student loans may not have the wherewithal to make payments on both after graduation.
A recent analysis of credit card debt from students who applied for credit-based loans with Nellie Mae in calendar year 2001 showed that 83% of undergraduate students attending four-year institutions (age 18–24) have at least one credit card. This is up from 67% of undergraduates holding a card in 1998, and 78% in 2000. Furthermore, 47% of students with credit cards have four or more cards, up from 27% in 1998 and 32% in 2000.
More undergraduate students have cards, and more of them appear to be using their cards regularly. The median credit card debt, which remained fairly steady between 1998 and 2000, increased by a startling 43% in 2001, from $1,236 to $1,770. This indicates that the 50% of students in the sample who carry the lowest balances have increased the debt level substantially.
| Credit card balances | 1998 | 2000 | 2001 |
|---|---|---|---|
| Average credit card debt per student | $1,879 | $2,748 | $2,327 |
| Median credit card debt per student | $1,222 | $1,236 | $1,770 |
| Percentage with balances from $3,000–$7,000 | 14% | 13% | 21% |
| Percentage with balances exceeding $7,000 | 10% | 9% | 6% |
The good news is that the average credit card debt has decreased by 15%, from $2,748 in 2000 to $2,327 in 2001. In addition, the number of students with excessive balances—greater than $7,000—has been steadily declining since 1998. Six percent of those sampled had balances greater than $7,000, down from 9% in 2000 and 10% in 1998. This decrease has contributed to the overall average balance decrease. Expanded availability of financial management programs on campus, increased publicity over the dangers of getting deeply in debt, and the economy no longer being at its peak 1998 level may be factors conducing some students to change their credit card habits.
Using small increments of available credit responsibly is a great way to learn about the pros and cons associated with borrowing and to establish a positive credit history. Unfortunately, without being educated on the possible pitfalls associated with amassing too much debt, some of those students may be learning lessons the hard way.
The above statistics indicate a growing comfort level with credit card borrowing. Being comfortable, though, doesn't necessarily indicate knowledge about the ramifications of borrowing in general; nor does it show that the student has evaluated the benefits and costs of borrowing with a credit card vs. other types of financing.
For example, it may be easier for a student to use a credit card to pay for some expenses associated with a college education, such as books and transportation—even tuition in some cases—but a federally guaranteed student loan is a much more cost-effective choice. But it takes planning to get a student loan; the student must file the appropriate forms and work through the financial aid and bursar's offices, and with the lender, to process the loan. A credit card is simply more convenient. Students may base their borrowing choice on that rationale, rather than long-term cost.
The cost to a student with a credit card balance of $7,000 can be alarming when one looks at the total interest paid by a user who makes only the minimum monthly payment (3% of the monthly balance, or $25—whichever is higher) at an interest rate of 18.9%. Without charging anything else to the account, it would take more than 16 years, and $7,173 in interest, to repay that sum.
Unlike student loans, which are designed for students, credit cards are designed for people with income. Credit card users are expected to make payments every month. Payment deferral, graduated payment plans, interest subsidy, and required counseling are not part of the credit card package. Interest rates can be deceptively high over time—particularly when one signs up at the "introductory offer" rate and doesn't understand the potential increase in the permanent rate. The purchasing power of credit cards can be irresistible to cash-strapped students who have not been taught about interest accrual, penalty fees, and rate increases.
Therefore, it is somewhat alarming to know that, on average, 16% of combined education and credit card debt owed ($20,402) when an undergraduate leaves school is credit card debt. As students progress through their four (or more) years in college, there is a steady increase in usage rates and balances. By graduation, most students have more than doubled their average debt and almost tripled the number of cards they hold. The increased levels of credit card debt as students progress through school are concurrent with increased student loan debt levels.
It is likely the student will pay a much higher price over time for the credit card borrowing than he will for the same amount in education loans. It is possible that credit card payments will make up 34% of the monthly payments students make upon graduation and 35% of the interest paid over time even though the credit card balance represents only 16% of total debt owed.
Although many students understand and manage the responsibilities of borrowing, there is some apprehension that some students are setting themselves up for financial failure even before graduation. Without assistance, these students may not have the know-how to borrow wisely on the front end nor the income to honor their credit obligations after they've borrowed.
It would be ideal if credit card companies agreed to take a more conservative lending approach to students to prevent them from getting too deeply into credit card debt while in school. It might even help to legislate limits for credit cards issued to students. But, more practically, students need to learn how to manage their finances. Credit cards and other borrowing options will continue to be available to them while they are in school and after they graduate. Credit card use and borrowing money have become common practices in American society and aren't going to cease. The wisest course is to teach students to limit credit card usage and to borrow wisely.