The Situation of College Debt

Business Week recently published an excellent collection of articles (by Jessica Silver-Greenberg) examining the increasing use of credit cards by college students. The series sheds light on some of the situational sources of the escalating debt loads of college graduates, one component of a wider debt and and bankruptcy epidemic. Over the next several weeks, The Situationist will offer a series of posts excerpting portions of the Business Week collection. This post begins with “Majoring in Credit Card Debt.”

Some 75% of college students have credit cards now, up from 67% in 1998. Just a generation earlier, a credit card on campus was a great rarity. For many of the students now, the cards they get will simply be an easier way to pay for groceries or books, with no long-term negative consequences. But for . . . a growing number like him, easy access to credit will lead to spending beyond their means and debts that will compromise their futures. . . .

Critics say that as the companies compete for this important growth market, they offer credit lines far out of proportion to students’ financial means, reaching $10,000 or more for youngsters without jobs. The cards often come with little or no financial education, leaving some unsophisticated students with no idea what their obligations will be. Then when students build up balances on their cards, they find themselves trapped in a maze of jargon and baffling fees, with annual interest rates shooting up to more than 30%.

The major credit-card companies take great issue with the criticisms. Bank of America (BAC), Citibank (C), JPMorgan Chase (JPM), American Express (AXP), and others say they are providing a valuable service to students and they work hard to ensure that their credit cards are used responsibly.

The banks also make the point that students have to be responsible for their own actions. They are the ones, after all, who sign up for cards and then choose to use them.

* * *

In most cases, an unemployed person would have a hard time getting a credit card, especially one with a five-figure credit line. Consumer advocates say that banks have modified their practices for college students, because they’re vulnerable and their parents will usually bail them out.

[B]anks often change the rates they charge cardholders as their credit scores change. Students’ credit scores can plunge particularly quickly, with one or two missed payments, because their track records are so short. One common practice is called “universal default.” Under universal default, a student who has two credit cards and faithfully makes timely payments on one, but misses a payment on the other, can find that the interest rate he’s being charged has been raised to 30% on both cards. . . .

All of this is disclosed in cardholder policies. But students, like many other people, don’t read the fine print. . . . The average credit-card contract can be 30 pages long, and it’s littered with legal jargon in tiny type. “You tell me how any college student can understand the terms of a card, and make rational choices when the agreements themselves are unreadable,” says Elizabeth Warren, a law professor at Harvard University. “It’s like selling toasters and handing a consumer wiring diagrams.”

[M]any college students have no fear about credit cards to temper their spending. They tend to be optimistic about the future, anticipating that once they get out of school they’ll have a good job and plenty of money. Credit-card ads often echo this optimism with some showing students smiling into the distance as if glimpsing the blissful days ahead.

Students also live in a culture of debt. Many of them are borrowing tens of thousands of dollars to go to school, tapping low-interest loans to pay tuition. “The primary way we help students pay for college is by telling them to take on more and more student loan debt,” says Tamara Draut, director of the Economic Opportunity Program at Demos. The message is clear, she says: “Debt is O.K., and you are going to have lots of it.” In that context, Woodworth and other students think little of charging another $50 for dinner or groceries.

Credit-card companies say that they put a heavy emphasis on financial literacy. They distribute materials and make information available online to help students become savvy consumers, while helping them to build a good credit score in the long term. “Each one of our new student account holders receives our Student Financial Handbook, an easy-to-use guide for understanding the basics of managing their finances, including how to balance a checkbook, how a credit card works, and so on,” said Bruce Hammond, president of card services for Bank of America . . . .

. . . . “Education alone isn’t going to solve the problem,” says [Travis] Plunkett, of the Consumer Federation of America. “Credit-card companies are subtly shifting the burden to students when they talk about credit education programs. The companies should not be targeting a population who are not in a position to handle credit wisely.”

The learning curve with credit cards is steep, and there is little room for trial and error. Mistakes made in college can haunt students long after graduation. Their credit scores can have an impact whether they get their job of choice, whether they qualify for an apartment, and even whether they have to pay more to get their utilities turned on.

For superb blogging on credit, bankruptcy, college expenses, and related challenges to middle-class Americans, be sure to visit Warren Reports. For previous Situationist posts on the popularity, but inefficacy, of much information-based regulation, check out “The Situation of Ethical Consumption,” and “FDA Wants Informed Choice.” For other posts discussing the role of “optimism bias,” read “Some (Interior) Situational Sources of War – Part II” and “Self-Serving Biases.”