Debt Management for College Students Prepared By Perry Crowell, MBA, Ed.D Executive Director University Financial Services Understanding the Basics

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

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

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 bachelor’s 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.

Why Stay in School?  High School Graduate$25,191  College No Degree 29,790  2-Year College 31,720  4-Year College 41,287  Master’s Degree 50,862  Doctorate Degree 66,989  Prof. Degree 77,083 (Source: US Department of Commerce, Bureau of Census, March 2002)

Benefits of a College Education 1. Effective democracy and democratic institutions 2. Efficient markets and adaptation to technical change 3. Lower crime rates and reduced penal system expense 4. Lower welfare, Medicaid, unemployment compensation, and public health costs 5. Reduced imperfections in capital markets 6. Public service in community and state agencies 7. Complementarities in production McMahon, W.W.(1987) Externalities In Education in Economics of Education: Research and Studies p

Live Longer… Less than High School High School Graduate Bachelor’s Degree or More Both Sexes Males Females Death rates for Persons Years of Age (1996) Deaths per 100,000 resident population (National Center for Education Statistics Household Education Survey. )

In Other Words…  Make more money  Live longer to spend it

Definition Webster defines: Debt as a state of owing, something owed, or obligation. Management as the conducting or supervising of something. Debt Management –What’s it all about? –Live within your means. –Live like you’re 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.

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

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.

Do You Have Credit Now?  You may think you have credit, but you don’t.  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.

Credit Cards  Don’t 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

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

Credit Cards  Advantages –Provide credit record –Online Purchases –Available for emergencies –Rent a car –Pay for purchases over time –Allows you to use someone else’s 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

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

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)

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?

Credit Cards –Don’t charge unless you need to –Don’t apply for unnecessary or “pretty” cards –Don’t 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 –Don’t charge unless you have to What can you do to avoid the credit card blues?

Credit Cards Let’s test your credit card knowledge. We’ll look at two scenarios, the only difference is the monthly payment.

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?

Credit Cards Answer: 9 years 1 month!

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!

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?

Credit Cards 2 years 9 months!

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

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

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)

Credit Cards “For growing numbers of students, credit cards are becoming a savior for financing their education—especially 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)

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 )

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

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

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

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.

Planning For Life After Graduation Salaries from Salary Survey, Summer 2003 Average Yearly Salary Offers for Bachelors Degree Candidates Social Work$27,016Marketing/Mkt. Mgmt.$34,628 Counseling$23,991Business Admin./Mgmt.$37,122 Elementary Teacher$28,040Chemistry$38,793 Law Enforcement$33,091Accounting$40,546 Home Economics$28,201Economics/Finance$40,084 Criminal Justice/Corrections$29,324Computer Programming$45,346 Communications$30,075Consulting$44,742 Sales$35,892Computer Science$47,419 Nursing$39,350Chemical Engineering$51,853

Planning For Life After Graduation Student Loan Repayment You Borrow For How Many Years? Interest Rate Monthly Payment Total Interest Paid $10, %$98$3,420 $15,000105%$160$4,100 $15, %$147$5,130 Compare to $10,000 of credit card debt 1020%$200$14,000

Planning For Life After Graduation  Average Stafford loan debt burdens of borrowers who entered the post-school grace period in 2002 $16,888

Planning For Life After Graduation  Let’s look into the future:  Let’s 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 –You’re repaying $3,000 of credit card debt –You are not married and live alone

Planning For Life After Graduation Monthly Basis Gross income/$30,000 yr$2,500 Less 18% for income taxes($450) Less 7.65% for social security/medicare ($191) Less health insurance($75) Net income from work (take home pay)$1,784

Planning For Life After Graduation Rent$650 Utilities$170 Phone$30 Cable and Internet$93 Car payment$400 Car insurance/gas$175 Student loan$123 Food$300 Entertainment$100 Credit card payment$80 Total$2,121 Estimated Monthly Expenses

Planning For Life After Graduation Estimated Net Income From Work $1,784 Less Estimated Monthly Expenses ($2,121) ($337)

Planning For Life After Graduation Where’s the ($337) coming from each month?

All Is Not Lost  There are things that you can do now to avoid this situation: –Don’t 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 it’s $5.00 a month.

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.

Final Notes  Nearly half of all American consumers have less than $13,000 saved for their retirement Statistical Information from

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

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

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 student’s future.” (page 186)