Educating college students about debt

College students are drowning in credit card debt. Study after study confirms the dismal state of undergraduates’ financial affairs, yet students continue to spend, remaining in denial or in a weird state of suspended reality about their precarious financial circumstances.

Away from home and experiencing independence for the first time, many students really let loose and spend — not cash, which typically is limited to the balance in a checking or savings account, but with a swipe of a credit card that is easy to obtain and often attached to a credit line in the thousands of dollars.

Although parents worry about the dangers of teenage experimentation with drugs, alcohol and sex, the kids are digging themselves and/or their parents into a financial mess that can be just as damaging in the long run as any of the consequences of the more familiar vices.

One recent study found that the average graduating senior has six credit cards in his or her name (and 83% of college students have at least one card). In another study, Sallie Mae found that 21% of undergraduates are carrying a credit card balance of between $3,000 and $7,000.

Factor in the student loans that graduates are carrying — which, unlike other debt, doesn’t go away in personal bankruptcy — and you are looking at a looming financial disaster.

Given the severity of the problem, this is an area where savvy financial advisers can make a valuable contribution to society and also cement ties with clients by educating their teenage and young adult children about credit, budgeting and debt.

In many ways, tackling this issue is trickier and more emotional (and a lot less remunerative) than, say, recommending a mutual fund or re-balancing a portfolio. But I am sure the moms and dads among your clients would be thrilled if you could help their kids with some basic money management skills that would put them on the right path.

It won’t be easy.

SNOWBALLING DEBT

Most undergraduates are financial illiterates who find themselves in a new and exciting independent phase in their lives where keeping track of how much they are spending is probably the last thing on their minds. But many students have little or no idea that a few pizzas here and a few concert tickets there can snowball into credit card debt that will dog them for years and affect their lives, probably more than their all-important grade point average.

That is the irony of credit cards: Without one, students find it difficult to make the leap from college to the real world, because they have no credit history. Without credit, it is difficult to buy a car, rent an apartment or even purchase a big-ticket item.

But having credit can be a problem, too, and abusing credit (whether on a personal or even a national level) can be devastating.

A middle ground does exist, according to the advisers with whom I spoke on this subject. A credit card used correctly by a college student can be a vital financial tool.

One adviser said that the problem is that as a society, we teach young people how to make money but not how to manage it once it is in their pockets.

Because credit card debt haunts so many college students and their parents, the smart adviser should be proactive and find ways to help.

Do that and you will win over many clients for life.

Jim Pavia is the editor of InvestmentNews.

Related Topics: ING Group, Just Thinking