7/29/2004

College Students - Credit Card Debt

“From credit cards to predatory lending to pay-day loans, Manning takes a thoughtful and comprehensive look at life on the financial edge; where credit comes at too high a price for those who can least afford it.”—U.S. Representative John J. LaFalce (D-NY), Ranking Member, Committee on Banking and Financial Services.  The unprecedented escalating credit card debt by college students, new entrepreneurs, the elderly, minorities, women, and the middle class as well as the working poor exposes one of the most severe social and economic crises of our time.  Everyone is turning to Allan Greenspan to see how we can fix the recent economy slow down, when in reality, the Bull Market has masked the economic fragility of overextended households.  This problem is only going to get worse.  Credit card companies are continuing to double and triple the dollars that they spend to advertise their “easy money.”  “Over the next five years, banks will pay the largest 250 universities nearly $1 billion annually for exclusive marketing rights on campus.”  “Between 1994 and 1998, the credit card industry’s advertising budget doubled from $425 million to $870 million.”  If we don’t get our credit card spending under control, we may end up spending the rest of our lives paying for a few stupid mistakes that we made in our youth.

13 comments:

Senator Miller said...

This is a sad, but true story of the college student. I think it's important to take into effect here that although college students may accumulate this debt, hopefully not too many years after they graduate, they'll easily be able to pay off the debt. I think a lot of the debt incurred by college students, tuition, books, housing and transportation are necessary evils for the time they are in college.

metromut said...

I seriously think getting into debt is a part of what you have to go through while going to college. The price of education is high. There is so much you have to pay for and you can't make enough money to get it all payed off while still in college. But, the main reason we go to college is so we can make lots of money so hopefully after a couple of years we will get it all payed off.

Dr. Tufte said...

I have two thoughts here about the posts and comments.

1) First, there is an ethical issue. Is it ethically or morally wrong to provide credit cards to people? It isn't like the companies are making us use the cards. This is akin to purveying gambling, alcohol, and so on. Personally, I think it is OK for people to provide these services even though they create problems for a minority of people (and this is coming from someone who has had problems with credit card debt, even though I'm a business professor). On a more technical level, economists are studying these problems, which are related to the way we discount future cash flows. Optimally we should discount geometrically (which is what the credit card firms do), but in practice people tend to discount hyperbolically (which amounts to saying that they discount the future too much). The upshot is that people charge too much.

2) The idea that college students incur debt when their incomes are low, and pay it back when their incomes rise after graduation is called consumption smoothing, and is an implication of two broader theories called the life-cycle hypothesis and the permanent income hypothesis (the inventors of those won Nobel Prizes for their work, Modigliani in 1985 and Friedman in 1976). I have mentioned in class that the relatively pure Keynesian model that we teach in principles is taught less and less at higher levels. Part of the reason is that there are some logical weaknesses in Keynes' idea that the multiplier is caused by a constant marginal propensity to consume.

Boris said...

I agree with the comments above. It is almost impossible to go through college without getting into some debt. But it's worth it. The benefits of receiving a college education increases the chances of getting a higher paying job dramatically. The monetary difference in saving money by skipping college and gaining some debt by attending college will be overwhelmingly made up for as years of employment and income progress.

I do think that college students borrow a lot more than they need to though. Do we really need cell phones and new cars? No, but hey, why not?

Kid said...

I don’t think the real problem is having a credit care. It’s like Dr. Tufte said companies give the cards out but they don’t make any of us use them. I think the real problem falls back on parents not teaching their children how to use money and what the value of money is.

Many people have no concept on what interest rates can really do to the value of money. The credit card companies didn’t set the rate to benefit you; the rates are set for them to make the most bang for their buck.

Credit cards are not a bad thing. They can be very useful, especially in times of emergencies. The thing to remember is that they can become a bad thing for any individual if thought of as an endless supply of money that doesn’t have to pay back right now. The catch phrase is right now eventually it will all have to be paid back with interest.

C-Dizzle said...

Micahnay's comments here seem to directly echo several other previously written blogs about the idea of credit. As said several times before, if we (society as a whole) weren't so concerned about what the Jones' have next door, we wouldn't have to worry about spending an outrageous amount of credit dollars on things we don't need. People need to get smarter about credit now or they'll learn the hard way in the near future!

Lizzie said...

I think it is funny that people are so convinced that a person cannot get through college without a credit card, or incurring debt. It is possible. Just because they are offering a credit card does not mean you have to take it and use it. Opportunity cost seems to come to mind. If we are all really that upset about this then we would all get full time jobs and go through school a little slower, but the majority of people don’t want to spend five or more years getting a Bachelor’s degree. Consequently, they incur debt as a college student and then participate in “consumption smoothing” after graduation.

Tennistud said...

A few of you have mentioned that many of us (students) need to go into debt for education costs (tuition, books, etc.) Sure we need to sometimes, but I definitely hope that students aren't using credit cards to pay for those things! The interest rates on credit cards are much higher than those of other loans that students can take advantage of. I personally think that credit cards should only be used for emergencies or small short-term purchases.
I think that there are many factors in why students get into so much credit card debt. Some of you have already mentioned some of them such as, a "need" for cell phones, new cars, etc. I think that students have a hard time separating "needs" from "wants". Many students have just moved away from home and away from living with their parents and want to have everything that their parents have now. They don't realize that their parents have been working on it for many years. I have friends who have fallen into that trap and are now deep in debt.

kavindavis said...

I think if you cant control the way you spend your money and you rack up a huge dept on things you dont need, like a girl I dated that used a credit card to buy shoes. But if you use loans and credit cards to get you through school so you can get a good job and make money to pay it off, then you made a good choice.

Dr. Tufte said...

Spelling mistake in Kavin's comment.

All the comments are good, and Kavindavis sums them up nicely.

I'm curious about C-Dizzle's comment. Having lived in 5 parts of the country, the worst examples of "keeping up with the Jones's" are right here in Utah. But (I'm guessing) that the predominant cultural institution doesn't encourage that behavior. So, what's up?

Lorra said...

I think u have to realize that by going to college you take a great responsibility and the debt is a part of. but if u are smart enough to choose the right card most likely you will not get into trouble.

Dr. Tufte said...

Thanks for reading and commenting

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