In America, college is a time for study, self-expression and the
carefree party life, but all those pizzas, beers and trips to hip
clubs, not to mention text books and school supplies, come at a
cost.
In America, college is a time for study, self-expression and the carefree party life, but all those pizzas, beers and trips to hip clubs, not to mention text books and school supplies, come at a cost.
Today, as many as two-thirds of undergraduate students leave college with debt, according to the online student financial guide FinAid. And these aren’t small bills. The average student owes between $17,000 and $20,000 in Stafford, Perkins and PLUS federal student loans, according to “Good Morning America” financial analyst Mellody Hobson.
Moreover, nearly half of all graduates enter the work force with more than $3,000 in credit card debt, according to the student financial literacy education group Jump Start Coalition. These numbers jump precipitously if students enter graduate school, with credit card debt soaring to an average of more than $7,800, according to lending company Nellie Mae and with student loan debt continuing to mount.
These numbers are part of a trend as the cost of education rises around the world. American students faced a 2 percent federal interest rate jump on all new loans July 1. The hike brought rates to 5 percent, a rise that students who did not consolidate their loans by June 30 cannot avoid, said Deanna Gonzales, an assistant director for operations and customer service as San Jose State University.
Angela Basile, a Gilroy native, who is now working toward her teaching credential at SJSU, said most of her family’s debts for her education, which her mother consolidated earlier this year, fall under the old fixed rates on lower levels. Still, the expenses her parents incurred sending her and her brother to college seem daunting. He got accepted to Stanford University in 1996, and she is completing five-and-a-half years of study at SJSU.
“My parents – currently my mom since my dad passed away – are in debt about $163,000 for the two of us going to college, which is more money than the original price to purchase their home,” wrote Basile in an e-mail. “I know a lot of my friends have to pay off (their own) college loans. My friend will be 23 and in debt for about $25,000.”
In the past, students and those who had graduated in the last six months could often consolidate several individual loans into one debt with a very low interest rate through their loan providers, but future grads will face substantially higher rates on their long-term loans.
Debts outside federal student loans are the chief worry of college administrators, according to the National Association of Student Financial Aid Administrators and the nonprofit public benefit corporation EDFUND, the second largest student loan guarantee provider in the United States. In EDFUND’s 2004 report, “Borrowing Trouble: Examining Indebtedness of California Students,” the group found that the state’s students were borrowing at unmanageable levels from sources outside the federal system, namely loan agencies that promised better rates than credit card companies, according to EDFUND President Becky Stilling.
Installment debt – that incurred when buying a financed item such as a car – was significantly higher than in 1998, the report found. Researchers postulated that the difference was due to students finding better interest rates on borrowed money through installment plans, rather than credit cards.
Students attending two-year institutions such as Gavilan College, demonstrated the highest level of risk with higher past-due amounts and higher rates of delinquency and default than four-year students, often because the two-year-institution students were autonomous and did not have the same financial cushion as their four-year-institution peers, according to the EDFUND report.
However, the most vicious debt students face comes from credit card abuse, said Carmella Vignocchi, director of outreach and education for Consumer Credit Counseling Service, which operates offices in Watsonville and San Jose.
“Credit card companies target college students because they are a good credit risk, despite the fact that they don’t have jobs or credit or meaningful income,” said Vignocchi. “Fifty-five percent of college students acquire their first credit card during their freshman year and 83 percent have at least one. Credit card companies have figured out that these students are loyal to their first credit card, and they continue to make purchases for many years to come. Once they’re in debt, they know these kids will be paying interest for years.”
Credit card advertisers stake out college campuses with offers for free T-shirts, water bottles, Frisbees and hats – even restaurant vouchers for free appetizers – in exchange for signing up, and few students bother to read the fine print. Many cards offer interest rates of 18.5 percent or so, with default penalty interest rates as high as 36 percent, said Vignocchi. Making minimum payments at just the regular 18.5 percent interest rate, it would take more than 18 years to pay off a $2,200 debt, one-third less than most students amass in their time at college, she added.
“I’ve gone on to campuses and talked to kids, and although most of them have parents who tell them that credit cards should only be for emergencies, they’ll tell me that an ’emergency’ is when they’ve studied too long, and they’ve got to go out and hit the bar or get a pizza or play video games,” said Vignocchi. “They use their credit cards for text books, school supplies, groceries and clothing, lots of clothing. It isn’t until they get the bills, and they’re in debt that they get the truth.”
To make sure you or your child don’t land in financial hot water, Vignocchi offered a few tips. Number 1: have a plan.
“The biggest mistake people make is that they don’t start off with a spending plan,” said Vignocchi. “They don’t keep track of how much money they spend or charge, and they end up making payments late when they run short.”
Wells Fargo recommends limiting your loan amounts to only what you’ll need in a year, and remember that you are not required to accept the maximum amount offered to you. Also, leave your credit cards at home, Vignocchi added. You’ll have to think twice before stepping out and buying that new pair of shoes.