Debt Management for College Students

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Debt Managementfor College Students
Understanding the Basics

• Prepared By
• Perry Crowell, MBA, Ed.D
• Executive Director
• University Financial Services

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Purpose of This Presentation

• To understand debt and how to manage it
• To understand credit and how it can work for you
• Create awareness of debt

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Presentation Overview

• Benefits of a college education
• Definition of debt management
• Important issues when beginning college
• Advantages disadvantages of credit cards
• Opportunity to win a prize for your credit card
  knowledge
• Importance of building good credit history
• Credit reports
• Planning for life after graduation
• Debt counseling
• Final notes and tips

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Benefits of a College Education

• Without a college education, individuals will
  make considerably less than their college
  educated peers.
• The 2002 Census reported individuals with
  bachelors degrees earn 64 more than those with
  a high school diploma.
• It also reported individuals with a two-year
  degree had earnings 26 higher than those with a
  high school diploma.

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Why Stay in School?

• High School Graduate 25,191
• College No Degree 29,790
• 2-Year College 31,720
• 4-Year College 41,287
• Masters Degree 50,862
• Doctorate Degree 66,989
• Prof. Degree 77,083

(Source US Department of Commerce, Bureau of
Census, March 2002)
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Benefits of a College Education

• Effective democracy and democratic institutions
• Efficient markets and adaptation to technical
  change
• Lower crime rates and reduced penal system
  expense
• Lower welfare, Medicaid, unemployment
  compensation, and public health costs
• Reduced imperfections in capital markets
• Public service in community and state agencies
• Complementarities in production

McMahon, W.W.(1987) Externalities In Education in
Economics of Education Research and Studies
p.134-35
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Live Longer

• Death rates for Persons 25-64 Years of Age
  (1996)
• Deaths per 100,000 resident population

(National Center for Education Statistics. 1995
Household Education Survey. )
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In Other Words

• Make more money
• Live longer to spend it

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Definition

• Webster defines
• Debt as a state of owing, something owed, or
  obligation.
• Management as the conducting or supervising of
• something.
• Debt Management
• Whats it all about?
• Live within your means.
• Live like youre in college.
• How can it effect your future?
• So today, we will be discussing the supervision
  of your
• obligations and how these obligations translate
  into your
• credit record.

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Beginning College

• Read any paperwork before you sign it i.e.
  student loans, credit card application, etc.
• Read or be knowledgeable any paperwork your
  parents completed in your name
• Keep paperwork available and updated
• Know the facts about your financial aid
• type loans, scholarships, grants, fellowships,
  assistantships
• which ones do you pay back and when
• who is your loan lender

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Beginning College

• Borrow only what you need. REMEMBER loans must
  be paid back. Did you know you can cancel any
  part of a student loan, so only take out what you
  can afford.
• Retain all your receipts.
• Establish a savings account for emergencies.
• Prepare a budget and stick with it.

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Do You Have Credit Now?

• You may think you have credit, but you dont.
• Establish credit while in school on a small
  scale.
• Keep in mind apartment leases or utilities may
  provide some credit history.
• Obtain a co-signer if necessary.

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Credit Cards

• Dont have too many (if any)
• Reduce available balances if not needed
• Close unneeded accounts
• Read your statement
• make your payments on time
• research erroneous charges
• Beware of low introductory rates

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Credit Cards

• Know how your interest is calculated
• variable or fixed rate
• based on average daily balance with or without
  new purchases
• cash advances vs purchases
• time value of money
• Be wary of predators (receive a free t-shirt to
  apply for a credit card)
• Beware of unsecured internet sites when making
  online purchases
• Read the SMALL print

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Credit Cards

• Advantages
• Provide credit record
• Online Purchases
• Available for emergencies
• Rent a car
• Pay for purchases over time
• Allows you to use someone elses money (float)
• Immediate cash availability
• Reduce amount of carrying cash
• Can help you solve problems with merchants
• Limited liability
• Convenience checks
• Frequent flyer miles or points

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Credit Cards

• Disadvantages
• Can create excessive debt
• Interest can be high
• Repayment could take many, many years
• Repayment could be 3 to 5 times the original
  amount
• Too many cards increase default risk
• Card number can be stolen by different means
  i.e. physically, over internet, over phone, mail
  orders, etc.
• Immediate cash availability
• Convenience checks

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Credit Cards

• Did you know?
• Some have low introductory rates that increase
  dramatically
• Some charge annual fees
• Some have late payment fees as much as 35 a
  month plus finance charges
• Some charge a transaction fee for cash advances
  and the interest starts immediately (no float)

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Credit Cards

• Did you also know?
• Some charge 35 a month plus finance charges for
  going over your credit limit.
• That if your card is lost or stolen, you should
  notify your institution ASAP to limit your
  liability.
• That there is a difference between the stated and
  effective interest rates.
• Merchants pay a discount fee for accepting credit
  cards. Any idea how much or why they do it?

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Credit Cards

• What can you do to avoid the credit card blues?

• Dont charge unless you need to
• Dont apply for unnecessary or pretty cards
• Dont get talked into filling out a credit card
  application for a t-shirt (not even for an FSU
  t-shirt)
• Transfer your balances to one or two cards with
  the lowest interest rates
• Negotiate better terms with your banking
  institution
• Dont charge unless you have to

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Credit Cards

• Lets test your credit card knowledge.
• Well look at two scenarios, the only
• difference is the monthly payment.

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Credit Cards

• Scenario 1
• You charge 2,500
• You pay 50 a month
• Yearly interest rate is 20
• How long will it take to pay the balance?

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Credit Cards

• Answer
• 9 years
• 1 month!

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Credit Cards

• Recap
• You charged 2,500
• You paid 2,920 in interest over the 9 years
• You paid 116 interest
• Not a good deal!

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Credit Cards

• Scenario 2
• You charge 2,500
• Payments are 100 per month
• Yearly interest rate is 20
• How long will it take to pay the balance?

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Credit Cards

• 2 years
• 9 months!

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Credit Cards

• Recap
• You charged 2,500
• You paid 761 in interest over the 2 years
• You paid 30.4 interest
• Compare to saving 2,500 in the bank for 2 years
  9 months, earning 3 per year interest 214.72

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Credit Cards

• Among undergraduate students ages 18-25, 83 had
  credit cards
• Average credit card debt was 2,327
• Of this 83, 21 had an average credit card debt
  between 3,000 and 4,000

Results of Nellie Mae (2001) survey conducted on
363 loan applicants
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Credit Cards

• Did you know
• Balances for outstanding
• revolving credit (including
• credit cards) has increased
• 26
• from 1998 to 2002
• (as reported by the Federal Reserve)

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Credit Cards

• For growing numbers of students, credit
• cards are becoming a savior for financing
• their educationespecially in public schools.
• For others, the initial freedom offered by
• credit cards may become financial shackles
• by the end of their college career.
• Manning (1999) (page 1)

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Why build good credit history?

• Employers can and do check your credit history
• You can leverage your purchasing power
• car
• home
• furniture
• planning a wedding or family
• Your credit history reflects in your credit
  report (much like a college transcript )

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Credit Reports

• Review your credit report periodically
• Make corrections when needed, your next loan
  could depend on it
• Be wary of stolen identities
• Your credit report also includes employment
  information as well as previous addresses
• Bad credit might prevent you from buying a home
  someday

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Credit Reports

• Too much open credit reduces your credit rating,
  as well as too many credit inquiries
• credit rating is a number that represents your
  credit quality, much like a grade
• When closing an account, make sure that the
  closure is reported to the credit bureau
  (destroying a credit card does not close the
  account)
• If an account is transferred to a collection
  agency, it can adversely affect your credit report

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Credit Reports

• Did you know?
• If you bounce checks, it will be reflected in
  your credit report
• Your bank could close your account if you write
  too many bounced checks, and it may keep you from
  opening another checking account with any bank
  for up to five years

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Planning For Life After Graduation(start now)

• Research your expected salary to determine if
• you can meet your financial obligations,
• before you take on too much debt.

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Planning For Life After Graduation
Average Yearly Salary Offers for Bachelors Degree
Candidates
Salaries from Salary Survey, Summer 2003
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Planning For Life After Graduation
Student Loan Repayment
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Planning For Life After Graduation

• Average Stafford loan debt burdens of borrowers
  who entered the post-school grace period in 2002
• 16,888

www.finaid.org/loans/
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Planning For Life After Graduation

• Lets look into the future
• Lets assume after graduation
• You take a 30,000/year position as a
  salesperson for Xerox
• You purchase a new Acura for 27,000
• You have a 16,888 unsubsidized Stafford loan
  that is in repayment
• You rent an apartment instead of buying a home
• Youre repaying 3,000 of credit card debt
• You are not married and live alone

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Planning For Life After Graduation
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Planning For Life After Graduation
Estimated Monthly Expenses
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Planning For Life After Graduation
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Planning For Life After Graduation

• Wheres the (337) coming
• from each month?

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All Is Not Lost

• There are things that you can do now to avoid
  this situation
• Dont increase your debt as your salary
  increases.
• If you have student loans, know when repayment
  begins. Some loans have reduction provisions for
  timely payment.
• Use credit cards wisely.
• If you have trouble making your payments, contact
  your creditors and set up a workable plan for
  repayment, even if its 5.00 a month.

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Need Help?

• With debt management or credit consolidation,
  help is available
• Credit Bureau
• Consumer credit counseling
• Internet (see handout)
• Phone book (yellow pages)
• Understand the basics of debt management before
  getting into trouble.

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Final Notes

• Nearly half of all American consumers have less
  than 13,000 saved for their retirement

Statistical Information from www.wife.org
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Final Notes

• In 2001 Household Debt Burden rose to over 14
• This is the first time in 15 years that this
  number has been reported over 14

Statistical Information from Federal Reserve
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Review Important Points

• Understanding the importance of establishing and
  maintaining good credit
• Being careful with credit cards
• Understanding and obtaining credit reports
• Planning for life after graduation
• Finding help with debt management
• Being informed and using your credit wisely

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• In the conclusion of Condemning Students to
• Debt (1998), Fossey stated, In sum, we must
• never forget that every dollar a student
• borrows to finance postsecondary education
• has the potential for jeopardizing rather than
• enhancing that students future. (page 186)