Students shedding credit cards as recession, new law sink in
Study says they're wising up, owning fewer cards, taking on less debt
The nation's college students finally may be absorbing a lesson that won't count toward class credit but will improve their life skills -- how to responsibly handle credit cards.
A national study from Sallie Mae, "How America Pays for College 2012," finds that credit card ownership by college students has dropped during the past two years and that one-third of the surveyed college students carried no monthly balance on their cards. Those students paid off their credit card debt as it occurred, sometimes with parental assistance -- but not always.
"I think it is good for students, their families and their long-term financial health," said Jim Hawkins, an assistant professor at the University of Houston Law Center who has closely studied the nexus between college students and credit cards.
"Not only are students avoiding the debt they can rack up by opening a credit card in college, they are learning other budgeting techniques and payment patterns that can help them avoid the seduction of over-indebtedness in the future," Hawkins said.
Adi Redzic, 25, a member of the college-age millennial generation and managing director of the iOme Challenge, an annual college competition intended to enhance retirement planning and financial literacy on campus, called the results encouraging.
Many factors apparently are involved, he said, but the student provisions of the Credit CARD Act of 2009, which seek to diminish student indebtedness, appear to be having an impact.
"This is showcasing great progress in behavioral change among college students and I feel very excited about it," Redzic said. "But there's much work left to do."
Cards, no, student loans, yes
Evidence of one remaining challenge came July 20, with release by federal officials of another study, "Private Student Loans," a report measuring the mammoth mountain of debt still confronting college students and their parents. The Consumer Financial Protection Bureau and the U.S. Department of Education reported that student loan debt in the United States exceeded $1 trillion in 2011.
About 15 percent of that debt -- $150 billion -- came as a result of private student loans, granted outside the federal government's student loan program. Such private loans often lack the payment flexibility, fixed interest rates and other protections provided by the federal program. The situation reminds experts of the recent mortgage and foreclosure crises.
"Subprime-style lending went to college and now students are paying the price," U.S. Education Secretary Arne Duncan said in a statement. "We still have some work to do to ensure that students who take out private student loans have the same kinds of protections offered by federal loans. In the meantime, if you have to take out a loan to pay for college, federal student aid should be your first option."
Credit card ownership falls
Returning to the college student credit card report, those conducting the survey found that 35 percent of college undergraduate owned a credit card in 2012, down from 40 percent in 2011 and 42 percent in 2010 (see chart, "Credit card ownership by grade level"). The study was conducted for Sallie Mae, the leading college student loan company, by Ipsos Public Affairs, a market research firm.
Other college-related findings:
- Thirty-three percent of students carried a zero balance on their cards and a plurality (41 percent) carried balances under $500. Only 3 percent shouldered balances greater than $4,000.
- Students from higher income families were more likely to carry cards (53 percent) than students from middle income (31 percent) and low income (29 percent) families.
- The average student made a payment of $81 per month toward his or her credit card bill; the average parent paid $106 per month toward the student's credit card bill.
- As has been the case in recent years, freshmen were least likely to carry a card (21 percent in 2012), with card ownership rising steadily as students moved toward their senior year, when 60 percent carried cards.
- Neither students nor their parents were likely to use credit cards for tuition or the other fundamental costs of a college education. Even when all costs of a college education were considered, credit card use tended to be modest. The average parents put about 1 percent of the family's college costs on credit cards; the average student puts even less than that on his or her cards.
- Still, as expected, some economically struggling families reached for their cards when college bills came due. About 4 percent of the parents reported using credit cards to pay significant college bills, with an average of $4,911 in debt.
- Debit card ownership is far more prevalent among college students than credit card ownership. Nearly one out of every five college students carry a debit card, which works as a pay-as-you-go, immediate-cash-out-the-door card.
When taken together, the statistics suggest a growing regard among college students and their parents for thoughtful cash versus credit management and responsible use of credit cards.
"College students, and young people as a whole, may be impulsive, but not necessarily thoughtless," Redzic said. "The key is in education and understanding. Once we understood the implications of irresponsible credit card use, we naturally diverted from using them and, if we did use them, we made the effort to pay bills on time and use them in a responsible manner."
He and other experts point to the CARD Act, which attempts to sharply curtail the distribution of credit cards to college students and requires them to demonstrate that they have sufficient income to repay their debts or have a co-signer for the cards.
"I would equate credit card ownership to a buffet meal -- if it is in front of me, the temptation is too difficult to pass," Redzic said. "The CARD Act of 2009 has removed the frequency of this temptation, thus certainly impacting students' impulsiveness."
But the act does not totally prohibit credit card issuers from focusing their marketing efforts on college students, and many firms are still active on campus.
Credit still seductive
Hawkins conducted a survey of 500 students at the University of Houston and Baylor University in Waco, Texas, and found that many were being seduced by credit card offers that showed up in their mail boxes, by promotional gifts and by policies that allowed them to include college loans as part of the income they cited to qualify for a card.
"It is hard to disentangle the effects of the CARD Act with other factors that could cause decreases in credit card use, such as changing attitudes to credit, the rise of the popularity of other payment devices like debit cards, and the constriction of credit generally because of the recession," Hawkins said.
"Based on my own research, it appears the CARD Act is having some effect on students' reports of credit card marketing, but it is hard, without more data, to say how much each factor is contributing," he said.
The latest survey from Sallie Mae and Ipsos was conducted by telephone between April 2 and May 13, 2012. It involved interviews with 801 undergraduate students, ages 18 to 24, and 800 parents of undergrads. The margin of error was plus or minus 2.5 percentage points.
Students paying more, making choices
The survey also found students are bearing more of their own tuition bills, using savings, income and loans to handle 30 percent of that cost compared to 24 percent four years ago. In addition, incessantly rising tuition costs are having a major impact: Sixty-nine percent of the surveyed families reported crossing some college choices off their lists due to their high costs.
Returning to the use of cards by students and their parents, the much higher percentage of debit cards on campus than credit cards caught the eye of many experts, though the causes and implications were not entirely clear.
"It is definitely a positive sign that students are using debit cards instead of credit cards because, while debit cards are not as good as cash, they have a greater tendency to promote fiscal discipline than credit cards," Hawkins said.
Speaking on behalf of his counterparts in the millennial generation and as one who has studied their financial attitudes, Redzic saw other factors at work.
One may argue that instead of purely impulsive -- wanting it here and now -- we have become thoughtfully or responsibly impulsive.
"I am not sure that students deliberately choose debit over credit card ownership from the get-go because they prefer to pay cash out of pocket right away or because they view it as more responsible," he said. "Rather, I think that because debit cards come with the first checking account a student opens, their greater ownership and usage is probably more related to the habit and convenience -- and logic, if you will -- than anything else."
Regardless of that, Redzic likes the trend. "One may argue that instead of purely impulsive -- wanting it here and now -- we have become thoughtfully or responsibly impulsive," he said.
Financial writer Martin Merzer has a particular interest in on-campus financial literacy and serves as a judge of the annual collegiate iOme Challenge.
See related: Study: Despite new law, credit cards finding their way to students, Survey: Students fail the credit card test
Published: July 24, 2012