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Close – But No Cigar: New Credit Card Legislation Does Not Go Nearly Far Enough

Aunt Toby has written before about credit cards, their use, abuse, and the almost preternatural ability of people to create large weights of debt with which they can NOT continue to conduct their financial lives. Atkins for Plastic Thank Shopping

One thing I have not written about is how I feel about credit card companies targeting people who not only are not in a position either psychologically or financially to take on debt, but the effects of people such as these groups who end up with huge amounts of debt at times in their lives when they can least afford to have it.

These people are college students. At one time, even Aunt Toby and her beloved DH, both working, could not even get within smelling distance of getting a credit card. That was before the banking laws were changed in the early 1980s. Soon thereafter, we were inundated with credit card offers. We were not the only ones. As banks and credit card companies started to realize the overwhelming amount of money that was to be made by sticking a hunk of plastic into people’s hands and encouraging them to go shopping, they started to look for other groups of people to market debt (woops, credit) to – and one of the first was to college students. They not only went after college students with mail, special events, advertisements in college newspapers and so on, they also marketed themselves to colleges and college organizations themselves. They gained access to college student records, their home addresses, phone numbers and so on. Students were inundated with multiple card offers constantly.

Students who don’t have any visible means of income. Students who more than likely already had Guaranteed Student Loans and other forms of financial aid.

Students who could not afford to take on any more debt.

“In each year between 2000 – 01 and 2006 – 07, an estimated 60% of bachelor’s degree recipients borrowed to fund their education. Average debt per borrower rose 18%, from $19,300 to $22,700 in 2007 dollars over this time period…. In 2008, 84% of undergraduates had at least 1 credit card, up from 76% in 2004, the last time the study was conducted. The average number of cards has grown to 4.6, and half of college students had 4 or more cards.
Undergraduates are carrying record-high credit card balances. The average (mean) balance grew to $3,173, the highest in the years the study has been conducted. Median debt grew from 2004’s $946 to $1,645. 21% of undergraduates had balances of between $3,000 and $7,000, also up from the last study….The average outstanding balance on graduate student credit cards is $8,612, an increase of 10% from the 2003 average of $7,831.”
Student Debt Stats

We’ve discussed what credit card debt really costs Atkins For Plastic

Now we can discuss the new federal legislation that changes the way that credit card companies can approach college students from now on:
“The bill also addresses some of the worst abuses of credit-card use on campuses. Without a co-signer, full-time college students under 21 will be confined to what amounts to credit-card training wheels, with credit restricted to 20% of a student’s income. The presence of a co-signer protects college students from sudden rate increases; under the new law, a student’s co-signer has to approve any such hikes.”
That’s the good news. 20% of a student’s income. If a student has no income of his or her own, then that student can’t be given a credit card. On the other side, however, the bill did nothing about the access that colleges give to credit card companies in the first place:

“,…the sweeping law, which takes effect in nine months, doesn’t address every college credit-card controversy. Most notably it does little to address affinity-card contracts, which encourage colleges and universities to sell students’ contact information to credit-card companies. These often confidential contracts bond hundreds of schools across the country with credit-card companies eager to sign up undergraduates. In some cases the school’s financial reward increases handsomely when students frequently swipe their cards…”

Indeed, many students, under increasing pressures of exploding rates of tuition and fees and moribund financial aid programs, have turned to using their credit cards to pay for education.

“College students aren’t just swiping their cards to pick up pizza tabs or buy school-spirited sweatshirts. They are increasingly using them for such big-ticket items as college tuition. Just five years ago, 24% of students charged a portion of tuition to a credit card — a number that has grown to about 30%, according to Sallie Mae.”
College Students Debt

Even a college loan would not be charging the rates of interest that credit cards do. And in today’s economy, where this year’s graduates, it is estimated, only have a one in five chance of having a job at this point, how will recent graduates pay off these balances, which will be growing…and growing…and growing with all the late fees, and increased interest as we saw in the example on paying the minimum balance.

In any economy, young people just starting out are actually a vital part of the economic engine. Whether it is buying a car, furnishing an apartment, getting married, having children, or saving up for a house – young people between the ages of 22 and 30 are a vital part of the economic pipeline. Anecdotal evidence suggests that this vital piece of the machinery has actually been stalled for quite some time, as young people, burdened with huge amounts of debt upon graduation and largely without high paying jobs to repay that debt, cannot afford to get married, cannot afford to get an apartment of their own, cannot afford to buy a car..cannot afford to participate in any meaningful way in growing the economy.

The vibrant economy really does require people to spend money. Hopefully they are spending it on sensible sorts of things and saving and investing for the future.

But they can’t do it if they are starting out their lives with something approaching $30,000 in debt, most of which they have to pay off in ten years.

Here is an example
Loan Balance:
$30,000.00
Adjusted Loan Balance: $30,612.24
Loan Interest Rate: 6.80%
Loan Fees: 2.00%
Loan Term: 10 years
Minimum Payment: $50.00

Monthly Loan Payment: $352.29
Number of Payments: 120

Cumulative Payments: $42,274.24
Total Interest Paid: $12,274.24
Note: The monthly loan payment was calculated at 119 payments of $352.29 plus a final payment of $351.73.
The loan balance was adjusted to yield $30,000.00 after deducting the 2.00% loan fees.
It is estimated that you will need an annual salary of at least $42,274.80 to be able to afford to repay this loan.
Student Loan Payments

For me, the lightbulb moment is that last sentence: ‘need an annual salary of at least $42,274.80 to be able to afford to repay this loan.” How many students do YOU know who, upon their bachelor’s degree graduation, have a job in hand that grosses over $42,000? Me neither.

Something much more dramatic must be done to deal with the relationship between colleges, college students, student loans and credit card debt. The current bill is already being screamed about by credit card companies and banks and even this does not go nearly far enough. President Obama has already talked about student loans – Aunt Toby is sincerely hoping that that situation can be radically changed, otherwise, we truly will return to the days when college was affordable only to the rich.

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