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.

6 comments:

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.

derek 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?

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?

Anonymous 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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