March 10, 2008

Looming Credit Debt Threatens Students

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Financial problems are now the number one reason for students dropping out of college, according to a recent study conducted by the company Duck9. The survey of 14,500 students at 15 colleges concluded that 38 percent of college dropouts left for financial reasons, as compared to the 28 percent who left because of academic disqualification and the 13 percent who left because college for social reasons.
The fact that more students currently leave college for financial reasons than for academic ones is a statistical landmark, said Larry Chiang, founder and CEO of Duck9. Chiang believes that the increase in financial pressures on students largely due to changes in student credit card spending.
Chiang pointed to the fact that more credit is currently available to students than in the past.
“The credit card situation faced by students today is very different from the one that faced their parents,” he said. “Whereas our parents may have been approved for $3,000 or $4,000 credit lines, students today are being approved for credit lines of tens of thousands of dollars.”
Chiang also said that the interest on credit card debt is especially harmful to students, often adding more to their debt than their original spending.
This increase in credit card spending is particularly relevant at universities similar to Cornell, where high tuition and constantly increasing costs of living create financial strain among students.
“There are so many expenses beyond tuition,” Christine Kim ’11 said. “You have to factor in the cost of textbooks and housing, dining and transportation. I can definitely see how it would be easy for students to slip into credit card debt and then have a hard time getting out of it.”
The Duck9 survey showed that many students with credit card debt begin working part or full-time. For example, while only 48 percent of students with no credit card debt work part-time, 65 percent of students with credit card debt do. Credit card debt thus affects students’ education, decreasing the amount of time they have to devote to their studies and other activities.
Prof. Thomas Gilovich, chairperson of Cornell’s psychology department, said that research has shed light on why it is relatively easy to acquire credit card debt.
“Spending money using a credit card is like spending money in a casino,” he said. “In both cases, the money involved is more abstract, and people are much more comfortable spending money when their spending is less tangible.”
Credit card companies have been strongly criticized for allowing students to acquire substantial debt at such an early age. Chiang described credit card companies’ student policies as “near malicious,” saying that they exploit students’ ignorance of interest debt and credit rating systems. Chiang and others believe that credit card companies operate with a corporate, “beat-last-quarter” philosophy that allows them to disregard the financial problems of students.
However, major credit card companies have marketed cards designed to better fit student financial needs. For example, Mastercard offers more than seven student card options boasting no annual fee, cash back and discount opportunities, and fairly limited credit lines in the range of $1,000 to $3,000.
Since these student cards still have interest rates of between 11 percent and 20 percent, though, it is clear that they have the potential to contribute to student credit card debt.
Some have argued that college and university administrations are partially culpable for the financial problems of their students. The American Council on Education and the National Association of College and University Business Officers have called for an end to credit card advertising on campuses.
Chiang said that he believes the solution to student credit card problems lies in consumer education. Duck9 offers free financial advice, arranges peer-to-peer loans, and reminds its members of payment due dates via text messages.
On a positive note, Chiang said that the credit card system works in two ways: It can create debt and destroy credit ratings, or it can be used to build favorable credit ratings that will, in turn, help to secure optimal loans in the future.
In this regard, Chiang advised students that the credit system ignores the size of payments, considering only whether they were received on time or not.
Duck9 also provides its members with information about a variety of other credit-building strategies and alternate borrowing options.
The goal for all college students, he said, should be to graduate from college with a strong credit rating that will help them build the rest of their lives.
“A credit card can be an awful liability or a wonderful financial tool depending on how it is used,” Chiang said. “College students should have the goal of graduating with credit ratings that will allow them to obtain strong mortgages and other loans in the future.”