Debt begins in college for many students because loan options and credit card applications abound. The problem is that many students are unaware of the responsibilities that come with either.
“Twenty-one years ago I got my first credit card and my second and my third, all within my first month of being on campus and I really looked at credit as a rite of passage,” said Todd Mark, vice president of education for Consumer Credit Counseling Service of Greater Dallas. “I was given freedom to make financial decisions for the first time, which was exciting, but in my mind … making the decisions was a success. Making the right decisions is what really counts, and I didn’t differentiate.”
However, the Credit Card Accountability, Responsibility and Disclosure Act, which went into effect in February, has some specific provisions for those under 21. Under these provisions, companies are no longer allowed to issue cards on college campuses, and applicants are required to either show that they have sufficient income to pay the bill each month or have a co-signer before they are issued a credit card.
“What the credit card act does is it’s [moving the] responsibility specifically to parents,” Mark said. “That’s going to shift responsibility to mom and dad to educate, talk about the appropriate use of credit, how it works, the responsibilities. Shifting that responsibility to the family is a good [thing], because this is stuff that’s not being taught in high school. At the very least, this is going to have mom and dad think twice before they co-sign.”
But for students, getting a credit card can be a wise step that will enable them to get financing for important purchases later, Mark said.
“One of the things I see regularly are college students whose mom and dad said don’t use credit, it’s bad,” Mark said. “They’ve sabotaged their ability to get financing. While you’ve got easy access to it, open up one, and you may even open up two, but only do it if you’re going to use it responsibly. If there’s any doubt that you can, maybe cash should be king until you’re at a point where you can use it responsibly.”
Dr. Charles North, associate professor of economics in the Hankamer School of Business, said students probably need a credit card because they are required for certain transactions like purchasing airplane tickets or a room in a hotel, and also can help in building credit.
“You have to have credit cards to function in much of our society,” North said. “Credit cards are something you pretty much have to have in order to establish a credit record and so forth, but you need to know how to use them and use them wisely and properly.”
Budgeting is also important for those trying to build a good credit history, North said.
“If you know you can’t afford something, don’t buy it,” North said. “Try not to do a lot of credit purchasing, and what credit purchasing you do you need to budget for.”
Mark said he suggests that students begin with a general-purpose card that they can use once a month and pay off on time.
“Always pay on time, ideally pay on time and in full, and if you do that for two or three or four years while you’re in school, your credit is going to glisten,” Mark said. “The best way to destroy it is you charge on items you have no means to pay on; you skip payments. Your credit can be ruined in six months. You can ruin it in one day if you want to go out on a massive shopping spree as well.”
Although both credit card debt and student loans show up on credit reports, student loans are seen as more of a positive investment, Mark said.
“It’s debt, but it’s very different from credit card debt, which is looked at as living beyond your means,” Mark said. “Your commitment to your education– that’s an investment in your future, so don’t dread your student loans as much as accept them as a reality of getting your education. Credit card debt is not an investment in any way, shape or form.”
Still, Amine Qourzal, assistant director of counseling in the student financial aid office, said students should be careful with the size of their student loans.
“Even if they have eligibility to get a big loan, they don’t need to be taking out more than what they need to have a working person’s lifestyle,” Qourzal said. “One of the things we educate our students on is definitely not taking out more loans than they need, so when they do graduate they can get on with their lives and pay it off as quickly as possible.”
The financial aid office offers both private and federal loans, but recommends federal subsidized loans for students, Qourzal said. The federal subsidized loans are currently at a 4.5 percent fixed interest rate, compared to 6.8 percent for unsubsidized loans. Students also have options such as paying only the interest on unsubsidized loans while attending school and consolidating their loans after graduation.
“You always want to pursue the federal loans first because they are made especially for college students, and their interest rates are made relatively low,” Qourzal said. “If they do pursue the unsubsidized, know that they can make those interest-only payments while they’re in school.”
Other tips include locking in a low interest rate instead of choosing a variable rate, never opting to extend the terms of the loan and making paying off debts a top priority, Qourzal said.
“Be intentional about knocking that loan out,” Qourzal said. “With that first job you get, try to set aside some money to pay off those loans.”