Debt Managementfor 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 institutions2. Efficient markets and adaptation to technical

change3. Lower crime rates and reduced penal system

expense4. Lower welfare, Medicaid, unemployment

compensation, and public health costs5. Reduced imperfections in capital markets6. Public service in community and state agencies7. Complementarities in production

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

Live Longer…

Less than High School

High School Graduate

Bachelor’s Degree or More

Both Sexes 515.1 426.1 218.1

Males 670.5 582.1 273.2

Females 353.4 294.7 158.8

• 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. )

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 ofsomething.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 yourobligations and how these obligations translate into yourcredit 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 CardsScenario #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 years1 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 years9 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 outstandingrevolving credit (includingcredit 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 $27,016 Marketing/Mkt. Mgmt. $34,628

Counseling $23,991 Business Admin./Mgmt. $37,122

Elementary Teacher $28,040 Chemistry $38,793

Law Enforcement $33,091 Accounting $40,546

Home Economics $28,201 Economics/Finance $40,084

Criminal Justice/Corrections $29,324 Computer Programming $45,346

Communications $30,075 Consulting $44,742

Sales $35,892 Computer Science $47,419

Nursing $39,350 Chemical Engineering $51,853

Planning For Life After Graduation

Student Loan Repayment

You Borrow

For How Many Years?

Interest Rate

Monthly Payment

Total Interest

Paid

$10,000 10 3.42% $98 $3,420

$15,000 10 5% $160 $4,100

$15,000 10 3.42% $147 $5,130

Compare to $10,000 of credit card debt

10 20% $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

www.finaid.org/loans/

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 www.wife.org

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)