College finance 101: students should keep debt under control
It was the fall of 1986, and she was entering her freshmen year at the University of California-Irvine. She was moving into her dorm room when she first saw them.
"Right there on my bed, in my room, there were applications for Visa and MasterCard. There wasn't a sheet on the bed. There wasn't something that told mc about the campus environment. There was something that told me about credit cards; everywhere I went there were things like that," she says. "When I paid for my books at the bookstore, they gave me my receipts and stuffed the bag with credit card applications. When we went to the African-American student union, it was posted on the walls, with those detachable take-off applications. They were everywhere."
Khalfani learned her lesson the hard way. Like many incoming college students, she jumped right in, applying for credit cards and student loans, and running up a high debt for both of them. Ultimately, she racked up about $ 100,000 in credit-card debt and $ 40,000 in student loans.
Many other college graduates face a similar debt burden. On average, a college grad leaves school with about $ 20,000 in student-loan debt. And if they've gone to grad school, the average debt jumps to $ 32,000. Professional specialty schools--such as law and medical school--can leave students with six figures in student-loan debt.
Soon after graduation, Khalfani, now 39, tackled her debt aggressively and paid off the entire load in three years. Today, she is a money coach who has authored step-by-step books, including Zero Debt for College Grads, which outlines ways to avoid or quickly get off the disastrous path that she once trod.
For many college students, getting a credit card--or two or three or more--is a rite of passage. It is a chance to spend excessively and without permission. And sadly, it is also a way to get into a lot of financial trouble, trouble that can take years to fix.
According to the Consumer Federation of America, a nonprofit organization that's based in Washington, D.C., credit card companies send out 5 to 6 billion credit card applications to Americans each year. When it comes to marketing, college students are a relatively easy group to target because many do not have credit and, as a group, they are financially vulnerable. For the most part, college campuses are lagging when it comes to educating students on financial literacy, says financial education specialist Patricia Stallworth.
"We need a commercial much like the ones they have for medicines, which warn you of the side effects," says Stallworth, who also is president of iWorth Inc. "Once I hear all that can go wrong, I don't want any part of those medicines,"
Kelly Tanabe, co-author of Sallie Mae's How to Pay for College: A Practical Guide For Families, says that even if colleges added consumer education to their curriculum, or as part of mandatory seminars, it likely wouldn't be enough to counter the onslaught of credit card applications that confront college students. "A lot of the colleges think that [financial literacy] is not something that a college should be teaching, but it's something that parents should be doing," Tanabe says. "But when parents are spending beyond their means, there's not much that you can expect" from the students.
Some universities have caught up and are taking a more progressive approach to helping students deal more effectively with debt. "We teach kids how to make money, but we don't teach them what to do when they make it," says Stallworth, who has given financial literacy seminars to incoming freshman at institutions, including Morehouse College. "People learn by trial and error. And for our kids, we really need to hunker down and get that done for them. They need to understand how important economic power is, not just now but for their future."
Administrators at other universities, including Texas A&M University, have started doling out sound financial advice to their students, offering tips to get--and keep--them on task when it comes to navigating potentially dangerous financial waters.
For one, students are cautioned to avoid loan offers received in the mail, especially those that boast relative case in borrowing, and they advise students to avoid the campus financial aid office. The problem, university officials tell students, is that those loans are not as good as federal loans, and they usually come with significantly higher interest rates and fees.
Other tips Texas A&M University offers include developing a spending plan and using only one credit card. Even then, Tanabe says, managing credit cards and money should be among students' priorities. She and other financial advisors agree that the temptations are numerous and sometimes overwhelming when students have credit cards.
"College students are using these cards for entertainment and clothes," Tanabe says. "It's so easy to swipe a card and have what you want immediately. That's one of the big dangers of credit cards--it's so easy. Do you really need more clothes, or can you make do with what you have? The key is figuring out how much money you have and not spending more than you have," Tanabe says. "That's where a lot of students get into danger. It's important to think about the future and not just think about now."
Stallworth says to help students get a better handle on money management, parents may have to go back to some of the more old-fashioned ways of doing things. "I worked my way through school, and I made it through," she says. "When I work with clients, I say, 'Yeah, you can take on part of that bill if you want to, but encourage the kids to take on some of that too.' It lets them appreciate what they're getting. If you just let them sail all the way through, they're saddled with this huge debt for student loans, and they don't know what to do. There isn't an easy answer for this. There really needs to be more education, and just letting people know how much education actually costs; and [letting them know exactly] what that means."
Financial counselors say the answer to student debt is not avoiding credit altogether. Establishing and building a healthy credit history can help to open doors in the future. The key is to be responsible. Paying student loans and credit cards on time is a surefire way to let future lenders know that you stand by your commitments. Most financial planners encourage clients to strive for a credit score of 760 to 850, which almost guarantees an easier path to financial stability.
"It is critically important to manage your finances and debt at an early age so that you do not trip yourself later down the road," Khalfani says. "The challenge for a lot of people is credit; I really fled that having great credit is better than cash in the bank. When you have fabulous credit, you can literally sign on the dotted line. You can get better rates and terms than if you have a significant amount of cash, just because you've proven yourself to be fiscally responsible."
And managing to navigate both credit-card debt and student-loan payments by getting them paid on time, puts the cherry on top of your credit worthiness.
How to Control Debt
Many students graduate from college with an astounding amount of credit-card and student-loan debts. Here are some tips to help you manage your credit-card debt.
* Use a debit card. The money comes from a checking or savings account and it ensures that a student won't spend more money than he or she actually has, unlike that of a credit card. Many parents set up accounts and, on a regular basis, put money into the account for their child.
* If you do get a credit card, pay the bill on time. This will better your FICO (Fair Isaac Corporation) score and open doors that otherwise would not be likely if your credit score is lower than it should be.
* Apply for low-limit credit cards. Many banks offer credit cards that have low spending limits, such as $ 500 or even $ 250, which makes repayments easier and helps to control spending.
* Pay more than the minimum amount. At the very least, send in a payment for what is listed as the minimum amount. If you can, pay more than the minimum to whittle down the entire credit-card balance more quickly.
* Ignore credit card offers. They may be tempting, but the reality is that credit-card companies send out 5 to 6 billion credit-card applications to Americans each year, banking on the fact that many consumers will say yes. Choose a card that has an annual percentage rate and stick with that one. If you have other cards already and find a lower rate, try moving other credit-card debt to the card with the lower rate, and pay off the balance.
COPYRIGHT 2007 Johnson Publishing Co.