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Credit Conundrum
Amid Economic Slump, Rising Debt Loads of Young People Worrisome

Catherine Valenti, June 20, 2003

Ashlea Skiles of Somerset, N.J., got her first credit card during her freshman year in college when she was 18 years old.

After charging enough on that card to reach the limit, she decided to apply for another one to get more buying power. When that card reached its limit, she applied for yet another.

"It was like, 'This is maxed out, so I'll apply for another one,'" she says. "It was definitely me on my own not knowing what was I doing; paying my minimums every month; sending them whatever peanuts they wanted."

Now 23, Skiles has six major credit cards, four different store credit cards and $10,000 in debt. She has had to turn to a debt counseling agency to consolidate her bills to help her pay them off.

Like Skiles, many college students are finding themselves deeper and deeper in debt, say experts. Higher tuition and less money available for financial aid are making many college students turn to credit cards as an easy alternative source for cash.

Coupled with a dismal job market, this increasing debt load could mean financial trouble for many young people before they've even gotten a full-time job.

Part of the problem is paying for school. U.S. college students borrowed almost $47 billion in student loans during the 2001-2002 school year, according to The College Board, a New York-based organization of colleges and universities.

For the average student, borrowing has been on the rise in recent years. Students borrowed an average of $16,100 for education at a public four-year institution and $18,000 for a private-four year school during the 1999-2000 school year, according to statistics compiled by Reston, Va.-based student loan provider Sallie Mae.

That's a dramatic increase from $11,950 borrowed for public school and $14,290 borrowed for private education during the 1995-1996 academic year.

Credit Card Debt on the Rise

More and more, credit cards are becoming a way for students to bridge gaps in their finances. The percentage of students holding at least one credit card in 2001 rose 24 percent since 1998, according to the latest figures from student loan provider Nellie Mae. The median debt level among card-carrying undergraduates rose to $1,770 in 2001 from $1,236 in 2000, an indicator that more students are using their cards regularly and may not be paying off the balances each month.

And credit counselors say they see no signs of that trend slowing.

"It's not uncommon to have a college student who already has five or seven credit cards, a part-time job and not enough money to make the payments," says Scott Dingwall, director of the Princeton, N.J.-based Consumer Credit Counseling Service.

Although the number of people under 25 declaring bankruptcy is actually relatively low compared with other age groups, experts say the high level of credit card debt that is prompting some in this demographic to file for bankruptcy is troubling.

"Last year, about 110,000 people under the age of 25 and younger filed for bankruptcy," says Elizabeth Warren, a professor of law at Harvard Law School who specializes in bankruptcy. "That's a really shocking number when you consider loans are not dischargeable in bankruptcy and almost none of these young people own a home. This is about credit cards."

Call for Education

Still, some critics say a lack of education that teens and college students receive about personal finances is a major factor behind the debt levels that are piling up among this age group. Many college professors and credit counselors say they're surprised at how little many young people understand about the terms of credit card agreements and repercussions of piling up so much debt.

Deborah Thorne, an assistant professor of sociology at Ohio University in Athens, Ohio, who specializes in bankruptcy, says she often tells her students that paying off a $2,000 credit card bill making only the minimum payments every month would take 30 years.

"Students go, 'Oh my God how come no one told us this?'" says Thorne. "More than anything it's a reflection of a society that has moved more from a cash-based society to a credit-based society and it's ahead of the education."

To combat that, some organizations, schools, and the credit card companies themselves are trying to develop courses to give students more information and skills to deal with their finances.

Robert Manning, a humanities professor at the Rochester Institute of Technology and author of Credit Card Nation: The Consequences of America's Addiction to Credit and an outspoken critic of the credit card industry, is developing a four-year program that will educate college students about everything from financial planning to credit cards and bankruptcy.

McLean, Va.-based financial services company Capital One is also offering non-credit educational programs at Washington State University, Texas A&M and the University of South Florida to teach students money management skills.

And the Jump$tart Coalition for Personal Financial Literacy, a Washington, D.C.-based nonprofit organization, is trying to reach students even younger by developing personal finance programs for students in kindergarten through 12th grade.

Skiles, who is finishing up school part-time so she can work full-time to pay off her bills, says she would have welcomed a financial education course during her freshman year. She says her situation has taught her to be more frugal, buy more "needs" and less "wants" and to use cash as much as possible.

"I was just spending, spending, spending and not really knowing anything about credit cards in general, payoff rates and percentages," she says now. "It's a lot of responsibility at 18 that you just don't have."

Marketing on Campus

June 20 The ready availability of credit cards on college campuses is one factor fueling the growth of credit card debt among college students, say some critics.

Many credit card companies set up tables on campus and at university events, giving out information and applications to students interested in getting cards. Others use affinity cards, which display a university's logo on the card and a small percentage of any charges goes to the school

Credit card companies, "have dramatically increased the amount of credit they offer to college students and others," says Travis Plunkett, legislative director at the Consumer Federation of America in Washington, D.C.

Indeed, Ashlea Skiles got her first credit card through an on-campus marketer and says she was lured by the draw of easy credit and free gifts. "These credit card companies are more than appealing," says the 23-year-old, who is now $10,000 in debt. "You get a free T-shirt Why not? It's an easy thing to do you instantly get credit."

Even though they have little or no income, marketing to college students is attractive because it can foster brand loyalty at a young age. "This is a highly profitable age segment," says Harvard Law School's Warren. "Soliciting me for a credit card is a very expensive process, because I have all the credit I need. But a 17-year old; that's fresh bait for credit card companies."

Most credit card purveyors will not release cardholder demographics or their default rates. But many companies defend marketing to college students as a way for young people to learn how to use credit. "It's important for them to have established credit," says Courtney Bartlett, spokesperson for Discover Financial Services in Riverwoods, Ill.

Discover markets heavily on college campuses, but Bartlett says the company also tries to stress responsible habits by providing information on its Web site about how credit cards work, and starting students out with low spending limits. "We sort of take baby steps with them until they realize how they work," she says.

Chicago-based Bank One has taken the affinity card route. Among the company's deals include a seven-year, $16.5 million contract for an affinity card with the University of Tennessee. "Most of our college cards are actually marketed to alumni and employees in large part because there are many more alumni," says Kelly. "They also have larger incomes and therefore can handle more credit."

ABCNEWS.com's Catherine Valenti

 

This story ran on ABC News on June 20, 2003.