Thursday | February 09, 2012
Plummeting Into Debt: Are You Next?
| Rate Center | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Today's Average Rates Across the Country* | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
By
Elizabeth Stefanec
30 May 2007
With an empty wallet in his back pocket, Wyatt Smith listened to his friends place their cheeseburger and chicken finger orders. "What would you like to order?" "Nothing," Smith replied to the waitress. As he heard his friends, Smith silently hoped they would not question his action. Nevertheless, one spoke up, "Why didn’t you get anything?" Smith, a student at Indiana University, racked his brain and quickly responded, "I’m just not hungry. I ate right before I met up with you guys." He lied. Smith was hungry but the lack of cash in his pocket and debt on each of his five credit cards meant Ramen for dinner, not a burger.
College students face a growing temptation to test their purchasing power limits. Two-thirds of adolescents enrolled in higher learning will fall into debt, according to the Project on Student Debt. These students often turn to spending all their cash, maxing out credit cards and bouncing checks. Perhaps it’s the spike in tuition prices, the allure of credit cards, keeping up with dorm room neighbors, getting swindled into opening too many accounts or the ease of forgetting responsibilities, but nearly half of a million college students today are struggling to stay afloat, according to Congressional testimony given by John Higgins, Jr., Inspector General of the U.S. Department of Education.
Tuition…up, up and up
Before all the blame gets thrown onto students, there are other factors involved in this monetary conundrum. Increasing tuition costs drive more students to apply for loans and grants, according to the College Board. However, in the past five years, the number of student borrowers has increased and the number of grants awarded has decreased. This is due, in part, to the rising costs of attending college. Nearly $70 million worth of loans are distributed to students annually and the current interest rate on a loan is between 5-7%.
Dodging student inquiries is also another pitfall that is hard to avoid when dealing with school administration. For example, Barbara Bright, student loan advisor for Financial Management Services at Indiana University, redirects student loan questions to a 45-page guide that some do not have the time to read. If they did, students would find small warnings explaining that consolidated loans produce a higher interest rate, and convenience charges are tacked onto credit card payments.
Gray areas and thick information packets deter most students from fully understanding what they might be getting into, and many students find themselves forced onto a path with no clear end in sight. "Borrowing is almost a necessity to pay for college," Steve Blank, a Connecticut-based college financial aid consultant, says.
Tara Suchland, an alumnus of The Catholic University of America, is looking for efficient ways to pay back her nearly $12,000 worth of student loans that has accumulated throughout her college education. "I didn’t want my parents to pay for everything," Suchland says, "and my husband wouldn’t have been able to afford a private education without [the loans]."
Credit card land
Aside from university expenses draining their finances, there are personal debt traps that a student can fall into, sometimes unaware of the dangers. Smith, who owns five credit cards and works part-time as a supervisor for United Parcel Service, understands the dangers of acquiring plastic money. His high debt credit cards are tucked into the back crevices of his tattered wallet, so he will not face temptation. "Sometimes, in order to get yourself out of debt, you need to get a new credit card to pay off the debt on the old credit card, Smith says. "You have to be really careful with that sort of thing. If you aren’t able to keep on top of your finances, then you’ll get yourself into debt worse than you started with."
The rapid accumulation of credit cards during adolescence, and an inexperience with money accounts for nearly all of student debt. "The simple reason they fall into debt is because credit cards are easy to get in college and most of the kids getting them don’t understand basic personal finances and how much those cards and the debt they place on them costs," Jeffrey Strain, one of the creators of savingadvice.com, says.
Smith is among nearly 30% of undergraduates that own two or more credit cards, according to the National Center for Education Statistics. At any given point, students have an average balance of $2,000 due on one card alone. Although females are more likely to acquire credit cards, males have a higher risk of getting into debt.
Keeping up with the roomies
Competition is the key to understanding why males are more likely to get into serious debt issues. "It’s ridiculous how my roommates compete with one another to have the best stuff. If it’s not who has the bigger TV, it’s who has the nicer bike. There’s always something," Smith says, throwing his head toward the garage where six motorcycles are parked. He has three roommates.
Competition plays a role for why males get caught in debt, but peer pressure can also sometimes act as the silent catalyst when it comes to feverish spending. "I had a friend that would go out to the bar on the weekends and spend over $200 unknowingly. I wanted to go out and have fun, but didn’t want to wind up like him," Mandy McGann, a University of Illinois alumnus, says. Although McGann wanted to have the ultimate college experience, she was cautious of the money in her wallet.
McGann, who worked her way through school with a two-year internship at Coca-Cola and watched her spending habits, was able to save $16,000 in college expenses. Nevertheless, other students wish to enjoy their college years without worrying about costs, and can find themselves pulled into troublesome waters.
Advertisers target Generation Y
Youth-oriented commodities and services such as student discounts on iPods or Facebook’s Chase credit card featuring shareable reward points are prevalent everywhere students turn. Advertisements promise free DVDs, privileged access to concerts, and flat-screen TVs. Companies regularly seek out new ways of hooking 18-24 year olds, the golden demographic highly coveted by marketers, according to Advertising Age. Often times, students can get addicted to seemingly innocent schemes. We all can remember the company that gave us 10 CDs for $10 but then convinced us into buying more disks at inflated prices. Yes, our demographic is consumer savvy and powerful, but advertisers can still find ways to manipulate the most cynical generation to date.
Falling for clever advertisements or hot sales is not only affecting students’ personal finances, as well as their education. Smith is currently enrolled at Indiana University and does not own a single textbook, but has recently purchased his third iPod. They sit on top of his surround sound system, next to a 50-inch TV and across from his two computers. "I would take classes with friends, and we would split the cost of books, that way we’d have that left over cash that we could buy stuff we really wanted with," Smith says.
Financial what? Forgetting responsibilities
Often times, students simply get tangled in their finances because they forget about them. Never thinking twice about spending habits and college costs leads to a future of financial stress, "my friend that never worked or saved in college is, three years after graduating, now paying loan bills of over $600 a month," McGann says.
Students, who try to avoid worrying about debt until after they graduated, are faced with anxiety and a lack of preparedness for future money management skills. Even students who work through college are not safe from debt. Those who work full-time while enrolled, have a higher average debt than those working part time, according to the NCES. Some may not understand why those who earn more money have increased debt, but those students working full time are more likely to be financially dependent when compared to those working part-time. Therefore, those students have a higher tendency to be in charge of all financial aspect in their lives, thus are quicker to get into financial trouble.
However, working part-time is not the golden ticket to financial bliss, nor is waiting for someone else to take care of that overdue bill. The reality is that one day every twenty-something adult is going to sign up for a full-time job, and trying to escape money problems can only result in messy dilemmas.
Nevertheless, finding the right time to climb out of debt is not always the easiest decision. Work, graduate school and other responsibilities hamper the payback process. "It’s hard to work enough hours during school to make any real impact on your loans," Suchland says. Aside from holding a teaching position, Suchland is also working on her master’s degree. "You can postpone your debt when the timing isn’t right," Smith says, "but inevitably it will come back to haunt you."
Going out to a bar and spending over $200 in one night and bouncing checks for school books might not seem like the right path to choose, but the truth is that many college students find it difficult to avoid temptation. Adolescents today are able to reach out and almost grasp the illusion of limitless money. They can smell it in that new car, taste it in the buttery lobster and even wear their financial freedom, but purchasing power is a privilege that, if taken for granted, can lead to no where, fast.
© 2008, Young Money Media, LLC. All rights reserved.
Tag Cloud
Financial help Center
Newsletter Sign Up
Enter to win a Young Money Career Package by signing up for our newletter.
Bonita clients in America gets pretty “beat”. Many poor stop their houses under favorable mortgage loans, but soon achieve an executor rather than conveniently visit the repayment of loans. About Loan to learn that a little bit here.