The nation's college students finally may be absorbing a lesson
that won't count toward class credit but will improve their life
skills -- how to responsibly handle credit cards.
A national study from Sallie Mae finds that credit card
ownership by college students has dropped during the past two years
and that one-third of the surveyed college students carried no
monthly balance on their cards. Those students paid off their
credit card debt as it occurred, sometimes with parental assistance
-- but not always.
"I think it is good for students, their families and their
long-term financial health," said Jim Hawkins, an assistant
professor at the University of Houston Law Center who has closely
studied the nexus between college students and credit cards.
"Not only are students avoiding the debt they can rack up by
opening a credit card in college, they are learning other budgeting
techniques and payment patterns that can help them avoid the
seduction of over-indebtedness in the future," Hawkins said.
Adi Redzic, 25, a member of the college-age millennial
generation and managing director of the iOme Challenge, an annual
college competition intended to enhance retirement planning and
financial literacy on campus, called the results encouraging.
Many factors apparently are involved, he said, but the student
provisions of the Credit CARD Act of 2009, which seek to
diminish student indebtedness, appear to be having an impact.
"This is showcasing great progress in behavioral change among
college students and I feel very excited about it," Redzic said.
"But there's much work left to do."
Cards, no, student loans, yes
Evidence of one remaining challenge came July 20, with release by
federal officials of another study, "Private Student Loans," a
report measuring the mammoth mountain of debt still confronting
college students and their parents. The Consumer Financial
Protection Bureau and the U.S. Department of Education reported
that student loan debt in the United States exceeded $1 trillion in
2011.
About 15 percent of that debt -- $150 billion -- came as a
result of private student loans, granted outside the federal
government's student loan program. Such private loans often lack
the payment flexibility, fixed interest rates and other protections
provided by the federal program. The situation reminds experts of
the recent mortgage and foreclosure crises.
"Subprime-style lending went to college and now students are
paying the price," U.S. Education Secretary Arne Duncan said in a
statement. "We still have some work to do to ensure that students
who take out private student loans have the same kinds of
protections offered by federal loans. In the meantime, if you have
to take out a loan to pay for college, federal student aid should
be your first option."
Credit card ownership falls
Returning to the college student credit card report, those
conducting the survey found that 35 percent of college
undergraduate owned a credit card in 2012, down from 40 percent in
2011 and 42 percent in 2010 (see chart, "Credit card ownership by
grade level"). The study was conducted for Sallie Mae, the leading
college student loan company, by Ipsos Public Affairs, a market
research firm.
Other college-related findings:
- Thirty-three percent of students carried a zero balance on
their cards and a plurality (41 percent) carried balances under
$500. Only 3 percent shouldered balances greater than
$4,000.
- Students from higher income families were more likely to
carry cards (53 percent) than students from middle income (31
percent) and low income (29 percent) families.
- The average student made a payment of $81 per month toward
his or her credit card bill; the average parent paid $106 per
month toward the student's credit card bill.
- As has been the case in recent years, freshmen were least
likely to carry a card (21 percent in 2012), with card ownership
rising steadily as students moved toward their senior year, when
60 percent carried cards.
- Neither students nor their parents were likely to use credit
cards for tuition or the other fundamental costs of a college
education. Even when all costs of a college education were
considered, credit card use tended to be modest. The average
parents put about 1 percent of the family's college costs on
credit cards; the average student puts even less than that on his
or her cards.
- Still, as expected, some economically struggling families
reached for their cards when college bills came due. About 4
percent of the parents reported using credit cards to pay
significant college bills, with an average of $4,911 in
debt.
- Debit card ownership is far more prevalent among college
students than credit card ownership. Nearly one out of
every five college students carry a debit card, which works
as a pay-as-you-go, immediate-cash-out-the-door card.
When taken together, the statistics suggest a growing regard
among college students and their parents for thoughtful cash versus
credit management and responsible use of credit cards.
"College students, and young people as a whole, may be
impulsive, but not necessarily thoughtless," Redzic said. "The key
is in education and understanding. Once we understood the
implications of irresponsible credit card use, we naturally
diverted from using them and, if we did use them, we made the
effort to pay bills on time and use them in a responsible
manner."
He and other experts point to the CARD Act, which attempts
to sharply curtail the distribution of credit cards to college
students and requires them to demonstrate that they have sufficient
income to repay their debts or have a co-signer for the cards.
"I would equate credit card ownership to a buffet meal -- if it
is in front of me, the temptation is too difficult to pass," Redzic
said. "The CARD Act of 2009 has removed the frequency of this
temptation, thus certainly impacting students' impulsiveness."
But the act does not totally prohibit credit card issuers from
focusing their marketing efforts on college students, and many
firms are still active on campus.
Credit still seductive
Hawkins conducted a survey of 500 students at the University
of Houston and Baylor University in Waco, Texas, and found that
many were being seduced by credit card offers that showed up in
their mail boxes, by promotional gifts and by policies that allowed
them to include college loans as part of the income they cited to
qualify for a card.
"It is hard to disentangle the effects of the CARD Act with
other factors that could cause decreases in credit card use, such
as changing attitudes to credit, the rise of the popularity of
other payment devices like debit cards, and the constriction of
credit generally because of the recession," Hawkins said.
"Based on my own research, it appears the CARD Act is having
some effect on students' reports of credit card marketing, but it
is hard, without more data, to say how much each factor is
contributing," he said.
The latest survey from Sallie Mae and Ipsos was conducted by
telephone between April 2 and May 13, 2012. It involved interviews
with 801 undergraduate students, ages 18 to 24, and 800 parents of
undergrads. The margin of error was plus or minus 2.5 percentage
points.
Students paying more, making choices
The survey also found students are bearing more of their own
tuition bills, using savings, income and loans to handle 30 percent
of that cost compared to 24 percent four years ago. In addition,
incessantly rising tuition costs are having a major impact:
Sixty-nine percent of the surveyed families reported crossing some
college choices off their lists due to their high costs.
Returning to the use of cards by students and their parents, the
much higher percentage of debit cards on campus than credit cards
caught the eye of many experts, though the causes and implications
were not entirely clear.
"It is definitely a positive sign that students are using debit
cards instead of credit cards because, while debit cards are not as
good as cash, they have a greater tendency to promote fiscal
discipline than credit cards," Hawkins said.
Speaking on behalf of his counterparts in the millennial
generation and as one who has studied their financial attitudes,
Redzic saw other factors at work.
"I am not sure that students deliberately choose debit over
credit card ownership from the get-go because they prefer to pay
cash out of pocket right away or because they view it as more
responsible," he said. "Rather, I think that because debit cards
come with the first checking account a student opens, their greater
ownership and usage is probably more related to the habit and
convenience -- and logic, if you will -- than anything else."
Regardless of that, Redzic likes the trend. "One may argue that
instead of purely impulsive -- wanting it here and now -- we have
become thoughtfully or responsibly impulsive," he said.
Financial writer Martin Merzer has a particular interest in
on-campus financial literacy and serves as a judge of the annual
collegiate iOme Challenge.