debt management for college students prepared by perry crowell, mba, ed.d executive director...
TRANSCRIPT
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)