Don't Enroll Your New College Student In IOU
If you’re the parent of a new college student or perhaps you are heading off to college yourself, it's time to get schooled in the facts of credit cards on campus.
Sallie Mae, which manages education loans for nearly 10 million student and parent customers, discovered the following facts in its National Study of Usage Rates and Trends 2009:
- 84% of undergraduates had at least one credit card and one half of the students had four or more credit cards.
- 39% of freshmen arrived on campus already owning a credit card.
- Only 15% of freshmen had a zero balance and the average freshman debt was $939.
- College seniors graduated with an average credit card debt of more than $4,100.
- 92% of undergraduate credit card holders charged direct education expenses such as textbooks, supplies and commuter costs and one-third charged tuition expenses. The next most common charges were for food, clothing and cosmetics.
- 40% of the students in the study said they had charged items knowing they didn’t have the money to pay the bill.
Under the Credit Card Accountability, Responsibility and Disclosure Act of 2009, credit card companies must stay at least 1,000 feet from college campuses if they are offering gifts to entice students to apply for credit cards. While that is progress, the Sallie Mae study found that only one in twenty college students chose a credit card vendor at a booth or table on campus while more than one in three responded to an offer in the mail.
Since the new law was enacted, anyone under 21 applying for a credit card will now have to have an adult co-signer on the account or prove he or she has enough income to repay the card debt.
If you are an adult that decides to cosign for someone under 21, sign up for online access and alerts so that you will know if there is a problem that the younger person may not know about or be afraid to tell you. Be prepared to close the account if it is not handled responsibly and threatens to harm your own financial stability. Be sure you both clearly understand what the student's responsibilities are and what you expect.
If you decide not to cosign, discuss the impact of credit histories and scores. Creditors hold both the cosigner and the credit card holder accountable for the debt and missed payments will affect both credit scores.
Another alternative is adding the student as an authorized user allowing him or her to make purchases on your account. If the student acts irresponsibly, you can cancel the authorization but you will still be responsible for the debt and any impact on your credit score.
You can also help with a college students expenses by providing pre-paid credit cards or gift cards. This allows the student to learn to budget their money while also having the freedom to shop for what they need where and when they want.
It's never too soon to begin building a credit history, just make sure it is one your student will be able to live with and not have to live down.
