The 18-year-old child of one of your clients has just finished high school and is preparing to leave for her freshman year in college. You’ve helped your client plan for her college education, and you think your job is pretty well done.
A host of studies shows that young adults are very likely to end their college careers under a mountain of debt. Students are walking around with three, four, or even five credit cards by the end of their freshman year, and are starting down a road that often leads to disastrous financial consequences for them and their parents (your clients). Ten years ago it was uncommon to find a youngster who qualified for a credit card without having a full-time job. Today it’s quite common. In fact, credit card companies have been going after young adults like college basketball coaches after big-time high school athletes–only in this instance it’s not phone calls and visits to the home that are used to capture youngsters’ hearts but very specialized marketing campaigns (see “College Credit” sidebar).
In the wake of these developments a number of planners are starting to make it their business to caution clients with college-age children of the potential pitfalls their progeny may encounter while in school. Just a few words of advice before the child goes off to college may save heartache and financial distress for all concerned.
The Wild West
| Credit card companies just love college students
By Mike Jaccarino
Karen Altfest of the Manhattan-based planning firm L.J. Altfest & Company recently got a first hand look at the specialized marketing campaigns that credit card companies have employed in recent years to entice college age students to get their cards.
“My son is now a sophomore in college so it wasn’t that long ago that I was taking him to campus for the first time,” she recalls. “I’ll never forget that there were these credit card people there telling my son that if he signed up for one of their cards, they would give him a free T-shirt with a picture of the college logo on it. I was horrified.”
Indeed, with the U.S. credit card market nearing saturation and new customers at more of a premium than ever before, credit card companies have set their sights squarely on college students. In doing so, they have employed a series of very specialized marketing strategies designed to prey upon college students’ affinities. In light of this, many financial planners who advocate broaching the subject of credit card debt with the college-age children of clients believe that knowing about these specialized marketing strategies and relaying that information is of the utmost importance.
Take the free T-shirt, for instance, which was offered to Altfest’s son for filling out an application. In recent years college campuses across the country have been flooded with credit card company representatives offering trinkets in the same manner: C.D. holders, water bottles, stress balls, bottles of Snapple, Frisbees, coffee mugs, message boards. And while Altfest says that her son wasn’t interested in the deal, recent studies have shown that college kids are responding wholeheartedly to the promotions. A 1998 study by the U.S. Public Interest Research Group showed that the vast majority of college students got their credit cards from a promotional credit card representatives giving away free stuff. The study showed that of the students who paid their own credit card bills, the majority–61%–filled out the application for their card at a table set up to give away free items by a credit card company.
“I’m convinced that credit card companies are trying to exploit college students through students’ lack of credit education,” says Lucious McEachin, a 31-year-old personal finance manager for Consumer Credit Counseling of America, a nonprofit agency in Durham, North Carolina, that helps people get out of debt. “It’s out of control. The companies target them for free items and many of the students are actually surprised when the card arrives three weeks later.”
McEachin should know. His office is literally surrounded by colleges like Duke University, North Carolina University, North Carolina State, and the University of North Carolina at Pembroke. He said that many of the students that come to or are referred to his office, and many of the adults whose credit problems began in college, said they got their first card at promotional tables. “The problem is one of education,” he adds. “They walk away with free items but never are told by an adult how to handle a credit card.”
The PIRG study shows that only 41% of students found credit card education materials they were given at the promotional tables “helpful” or somewhat helpful. The remainder found them not helpful or unreadable.
But giving away free items along with unreadable how-to manuals to a group of people–college students–who many times are diving into their first experience with credit cards, is not all that’s at the bottom of credit card companies’ marketing bag of tricks. McEachin said that such strategies are also in full force on the Internet, pointing out the Web sites for such credit card vendors as Mastercard and Visa, as well as those for many of the banks who distribute such branded cards. A student will find on the Web a section for college students liberally dotted with such words as “cool” and “hip,” along with photos of young adults in trendy wrap-around sunglasses. Then there are the special affinity cards that are obviously intended to attract college students. One card promised to deliver special discounts at such stores as Barnes & Noble, Pizza Hut, (800) Flowers.com, and different Spring Break locales around the Western Hemisphere.
The parade of promotions doesn’t end there, however, but extends to what McEachin called the most insidious of the prongs in the credit card companies’ attack. “Most of these cards come with very low introductory interest rates that only last for a few months. By the time the students have worked up a large balance, the rate has jumped to 15% or 16%,” he says, his voice filled with indignation. Once again, the PIRG study shows that many college students did indeed feel hoodwinked by the low introductory rates that were advertised to them when they signed up. Over one quarter (26%) of the students said they found such “teaser rates” misleading.
In response to these alarming statistics, McEachin and his fellow debt counselors have launched an education campaign at the colleges in their area. Consumer Credit Counseling reported that it even has plans to push this educational campaign to the North Carolina high school system, pending funding and political authorization for the project. In the meantime, McEachin extols the benefits of preparing young adults for the marketing push that awaits them.
Staff Editor Mike Jaccarino can be reached at [email protected]
Nancy Prikazsky, vice president of operations for Nellie Mae Corp., one of the largest student loan vendors in the nation with over $4 billion in loans, wouldn’t blame a financial planner if he had a hard time believing that an 19-year-old without a job could gain approval for several cards. “In the past you wouldn’t see 19-year-old kids with no credit history and no job getting cards,” she said. “Today, lenders have gotten away from this.”
In 1998, Nellie Mae conducted a study of 300 undergraduate students from schools across the country. The study found that 67% of those students had at least one credit card, and that the average student had 3.5 cards. Two years later, the study was conducted again. This time 78% of the students reported having at least one credit card, with the average student owning three. Meanwhile, a similar survey was conducted in 1999 by Georgetown University sociology professor Robert Manning, who specializes in studying credit card debt among college students. Manning found that 70% of college students at four-year schools in the United States had at least one credit card.
The largest reason for this easing of credit card criteria is technology and its effect on the competitive balance of the credit card industry, according to Robert McKinley, CEO of the Virginia-based Cardweb.com, which tracks the credit card industry for consumers. McKinley said that as late as the 1970s, credit cards were still hampered by the sheer difficulty of using them. But in the early 1980s, advances in computer and communications technology allowed shop owners to gain authorization within seconds with a simple swipe of the card through an electronic machine. Today, instant credit card approval is available, allowing a shopper at, say, Barnes & Noble to save 10% on a purchase by signing up for a store credit card at the moment of checkout. The use of credit cards has swelled to where today, there are 1.1 billion cards in circulation in the United States alone. “A few years ago, the industry became saturated, and companies had to look to other markets for growth,” McKinley says. “College students, senior citizens, and even people with subprime credit histories are now hotly contested. This is why you see card companies on campuses.”
Technology and competition, however, can’t get all the blame, according to Edward Mierzwinksi, spokesman for the United States Public Interest Research Group, which conducted a broad study of credit card use among college students in 1998. Mierzwinksi said that before 1987 only traditional banks could issue credit cards. Passage of the Competitive Equality Banking Act of 1987 allowed non-banks like Barnes & Noble, Sears, and gas stations to issue their own credit cards. “The banking industry was really asleep at the wheel,” says Mierzwinksi. “Then the industry opened up, you had much, much more competition and a greater emphasis on marketing. This has led to this Wild West atmosphere we have today.”
All of this marketing has led to pervasive credit card ownership and debt among college students. The 2000 Nellie Mae study found that among the students who owned credit cards, the average unpaid balance was $2,748. Furthermore, 13% of the students surveyed had between $3,000 and $7,000 of debt on their credit cards, and 9% had an unpaid balance of more than $7,000. “Can you imagine beginning your adult and professional life with that much debt hanging over your head?” Prikazsky says. “And it’s really worse than it seems since most of these credit cards debts are generating interest of between 15%-18% a year. That’s trouble.”
The results of such heavy debt can run the gamut from dropping out of school to irreparable financial harm to worse. There were, for instance, two recent events that sparked a national media furor involving two college kids who committed suicide after feeling cornered by their credit card debts. Both students hanged themselves in their bedrooms–one left her credit card bills scattered across her bed. Tales of students dropping out of school due to credit card debt are more common. University of Indiana administrator John Simpson remarked in 1998, “We lose more students to credit card debt than to academic failure.”
Then there are the students who manage to graduate but still suffer financial harm that dogs them into their adult lives. This is evident at the United Way-funded Credit Card Counselors of America, where troubled credit card owners go as a last resort. “The majority of the people who walk through our door had their problems begin in college,” says Sue Ortiz, a counselor in the Durham, North Carolina, office of the Credit Card Counselors of America. Ortiz says it is only when the young adults leave college and begin to try to buy things such as a home or car, or even land a job, that their muddled credit histories get in the way. “It’s then that they come to us for help.”
Taking Aim at the Parents
Perhaps more poignant for advisors are the instances when it’s the parents who are forced to come to the rescue of their debt-laden children. For instance, Ortiz’s fellow counselor Lucious McEachin recalls an instance when he was lecturing on credit card debt at the University of North Carolina at Pembroke. A student told McEachin that he had signed up for several credit cards and then used them to purchase $24,000 worth of C.D.’s, music equipment, a stereo, clothing, and food. “In the end the only thing he could do was turn to his parents or declare bankruptcy,” McEachin says. “Now his parents will be paying for a long time.”
Mierzwinkski believes that one of the main reasons credit card companies are willing to take risks on youngsters is that they ultimately have the backing of their more secure parents. “I’m convinced that the industry gives the cards to these students knowing that even if the parents are not co-signers, they can guilt-trip the student into calling home and the parents will bail them out,” Mierzwinkski says.
There are instances when very well off parents handle the credit card debt of their children without much difficulty. A planner might think at first that this is a sort of financial-planning crime without victims, but some in the profession are quick to say that isn’t the case. “When you start bailing kids out of debt, you’re getting into an area of personal responsibility,” says Denver-based planner Joseph Janiczek. “A child that is constantly being bailed out will constantly be frustrated. That person feels they don’t have any power. I’ve found that children in this situation never accept the future or the past.”
So how should financial planners handle this problem? Admittedly, the majority of financial planners interviewed for this article said that they were unaware of how dire the situation had become with students and credit card debt, or had known and still paid little attention to the situation. However, this is exactly the kind of advice that Michael Furois of The Planning Associates in Chesterton, Indiana, believes is required of planners today. “More than ever before, advisors are called on to give out this kind of general, holistic advice that doesn’t necessarily correspond to a physical financial plan,” says Furois. “Today, advice is coming from all kinds of places–insurance agents, CPAs, full-service brokers, the Internet. We really have to step up and be the quarterback.”