Financially clueless students heading off to college

The Bakersfield Californian
June 20, 2013

Scrambling to recover from the financial losses they experienced during the Great Recession of 2009, many of my aging boomer clients now are waving goodbye to their college-bound children. Many fear they also may be waving goodbye to their retirement savings.

College students and their families are taking on an increasing amount of debt as tuition costs skyrocket and financial aid is cut back.

According to a recent Fidelity Investments study, college graduates in the class of 2013 owe an average of $26,000 in government loans, $19,000 in private loans, $18,000 in state loans, $13,000 in personal and family loans, and $3,000 in credit card debt.

Taking out loans to cover tuition and other expenses seems to be accepted by both students and their parents as the cost of getting an education. But what many of my boomer clients seem to fear most is the potential for looming credit card debt.

And the reason behind most of their fears is their children’s perceived financial ignorance, particularly when it comes to credit cards.

“Financial Literacy and Credit Cards: A Multi Campus Survey,” which was published last year, concluded American college students are laden with credit cards, use them frequently and have no idea what they are doing.

Although 70 percent of undergraduates and 96 percent of graduate students have credit cards, fewer than 10 percent pay their balance in full every month. Only 15 percent have any idea how much their interest rate is, and fewer than one in 10 students know their interest rate, late fee and over-limit fee amounts.

But cheer up. Things could be worse. In fact, the situation was worse before Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009. Before these protections were enacted, you could get a credit card if you could fog a mirror.

Things have improved. Now college students must have a co-signer on their credit cards or prove they have the income to afford them.

That has not eliminated high-pressure sales. And regrettably, many money-hungry colleges have partnered with financial companies to push credit and debit cards onto students.

But parents have more control today. The question is: Will they use it?

Before you co-sign on your college student’s credit cards, have the “money talk.” Explain how credit cards work and how it is important to use them sparingly and to pay off balances each month.

Also consider alternatives:

  • Credit card (solo) – The student has an income to qualify without parents’ help.
  • Credit card (co-signed) – Generally parents will be the co-signer. In some cases, a friend over 21 years of age will co-sign. This is risky for the friend.
  • Secured credit card – These cards are backed by prepaid deposits.
  • Debit card – These are linked to a checking account.
  • Prepaid card – Easily obtained in stores, they act like debit cards, but are not tied to a checking account.

Students and parents must understand the advantages and disadvantages of credit alternatives and select the one that fits their needs and abilities.