Wednesday, May 6, 2009

America's Big Banks: STILL Crazy to Get College Students into Debt After All These Years?

In 1985, American college students graduated with a credit card balance of zero. They didn't have credit cards then. Today, college seniors are graduating with an "average credit card debt of more than $4,100, up from $2,900 almost four years ago," according to Sallie Mae. The origins of this growing mountain of debt go back to the early 1990's and to a single bank, Citibank, which then was on the verge of bankruptcy. As Robert Manning writes, CEO Sandy Weill saved CITI by flooding American college campuses with free frisbees and credit card applications. Given the disastrous outcomes of fast money schemes like this and given also the present life-support status of dinosaur banks like Citi, you'd think they'd no longer be getting people into debt while they're too young to know any better and keeping them there.

Not so. Although the government has forced big banks to give up most of their failed "debt peonage" home mortgage models, as Mike Hudson intriguingly calls them, the government has done nothing to stop these banks from getting college students into debt and keeping them there. Last week I saw for myself that Bank of America CEO Ken Lewis, for one, is playing Weil's "enthrall the students" game aggressively.

It hit me as I entered the lobby of the north suburban Chicago community college where I teach. There it was: two gaily festooned tables chock full of free goodies - frisbees, coffee mugs, key chains - all decked out in banners and streamers in bright Bank-of-America red and white. Two non-white salesmen (matching the non-white majority of the college student body) manned the tables. Me being me, I walked up and jovially asked if I could get a credit card. One of the BofA guys sidled up and in a sugary voice whispered in my ear, "And how would you like a mortgage?"

I laughed and asked if BofA prepares students to be financially responsible. Soon my hands were full of booklets and brochures, one quite helpful on this point. Yet in my very next class, a student turned in an eye-opening paper on student credit card use. It drew from a Chicago Tribune article based on a recent Sallie Mae study of student credit card use. Key findings of the study? Here they are, verbatim. Read 'em and weep. Sallie Mae says that
In this time of credit crunch and economic downturn, college students are relying on credit cards more than ever before. Nearly every indicator measured in spring 2008 showed an increase in credit card usage since the last study was conducted in fall 2004. Eighty-four percent of undergraduates had at least one credit card, up from 76 percent 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 four 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. Twenty-one percent of undergraduates had balances of between $3,000 and $7,000, also up from the last study.
By year in college, credit card usage and debt also is increasing across all categories—credit card ownership, average balance, median balance, those carrying any balance, and those carrying high balances.
  • Since 2004, students who arrived on campus as freshmen with a credit card already in-hand have increased from 23 percent to 39 percent.
  • In spring of 2008, only 15 percent of freshmen had a zero balance, down dramatically from 69 percent in the fall of 2004. The median debt freshmen carried was $939, nearly triple the $373 in 2004.
  • Seniors graduated with an average credit card debt of more than $4,100, up from $2,900 almost four years ago. Close to one-fifth of seniors carried balances greater than $7,000.
Nine in 10 undergraduates reported paying for direct education expenses with credit cards—and the average amount they charged more than doubled since the last study.
  • Ninety-two percent of undergraduate credit cardholders charged textbooks, school supplies, or other direct education expenses, up from 85 percent when the study was last conducted, in 2004.
  • Nearly one-third (30%) put tuition on their credit card, an increase from 24 percent in the previous study.
  • Students who used credit cards to pay for direct education expenses estimated charging $2,200, more than double 2004’s average of $942.
  • The most common education expenses charged were textbooks (76%), school supplies (75%), and commuter costs (54%).
  • Food (84%), clothing (70%), and cosmetics (69%) ranked at the top of other expenses charged.
Many college students seem to use credit cards to live beyond their means—not just for convenience—and more than three-quarters incurred finance charges by carrying a monthly balance.
  • Sixty percent experienced surprise at how high their balance had reached, and 40 percent said they have charged items knowing they didn’t have the money to pay the bill.
  • Only 17 percent said they regularly paid off all cards each month, and another 1 percent had parents, a spouse, or other family members paying the bill. The remaining 82 percent carried balances and thus incurred finance charges each month.
One-third of students rarely or never discussed credit card use with parents, and nearly all undergraduates would like more information on financial management topics.
  • Two-thirds of survey respondents said they had frequently or sometimes discussed credit card use with their parents. The remaining one-third who had never or only rarely discussed credit cards with parents were more likely to pay for tuition with a credit card and were more likely to be surprised at their credit card balancewhen they received the invoice.
  • Eighty-four percent of undergraduates indicated they needed more education on financial management topics. In fact, 64 percent would have liked to receive information in high school and 40 percent as college freshmen.
Question for President Obama: in light of these findings, what is your administration doing to keep American college students from being further exploited by the very banks whose business models crippled the global economy and whose non-exploitative conduct your administration insists is critical to recovery? And more important, what is your administration doing to make college more affordable for all qualified American students? (Here's how civic media can empower college students and others to address and help solve the problem.)

This morning I see that BofA stock is rising in early trading"amid reports that it needs $34 billion in new capital." Who's got the barf bag? For students, the Tribune article has these tips:
Several student credit cards have interest rates of 14.99 percent for those with good credit, according to the Web site Federal Stafford loans have interest rates of 6.8 percent. Private-school loan rates average about 8 percent, according to

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