Transcript Debt Management Presentation for First Year Experience Seminar

Debt Management
for College Students
Understanding the Basics
Prepared By
Perry Crowell, MBA, Ed.D
Executive Director
University Financial Services
Purpose of This Presentation
 To understand debt and how to manage it
 To understand credit and how it can work
for you
 Create awareness of debt
Presentation Overview
 Benefits of a college education
 Definition of debt management
 Important issues when beginning college
 Advantages & disadvantages of credit cards
 Opportunity to win a prize for your credit card knowledge
 Importance of building good credit history
 Credit reports
 Planning for life after graduation
 Debt counseling
 Final notes and tips
Benefits of a College Education
 Without a college education, individuals will make
considerably less than their college educated peers.
 The 2002 Census reported individuals with bachelor’s
degrees earn 64% more than those with a high school
diploma.
 It also reported individuals with a two-year degree had
earnings 26% higher than those with a high school
diploma.
Why Stay in School?
 High School Graduate
 College No Degree
 2-Year College
 4-Year College
 Master’s Degree
 Doctorate Degree
 Prof. Degree
(Source: US Department of Commerce, Bureau of Census, March 2002)
$25,191
29,790
31,720
41,287
50,862
66,989
77,083
Benefits of a College Education
1.
2.
3.
4.
5.
6.
7.
Effective democracy and democratic institutions
Efficient markets and adaptation to technical
change
Lower crime rates and reduced penal system
expense
Lower welfare, Medicaid, unemployment
compensation, and public health costs
Reduced imperfections in capital markets
Public service in community and state agencies
Complementarities in production
McMahon, W.W.(1987) Externalities In Education in Economics of Education: Research and Studies p.134-35
Live Longer…
• Death rates for Persons 25-64 Years of Age (1996)
• Deaths per 100,000 resident population
Less than
High School
High School
Graduate
Bachelor’s
Degree or More
Both Sexes
515.1
426.1
218.1
Males
670.5
582.1
273.2
Females
353.4
294.7
158.8
(National Center for Education Statistics. 1995 Household Education Survey. )
In Other Words…
 Make more money
 Live longer to spend it
Definition
Webster defines:
Debt as a state of owing, something owed, or obligation.
Management as the conducting or supervising of
something.
Debt Management
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What’s it all about?
Live within your means.
Live like you’re in college.
How can it effect your future?
So today, we will be discussing the supervision of your
obligations and how these obligations translate into your
credit record.
Beginning College
 Read any paperwork before you sign it; i.e.
student loans, credit card application, etc.
 Read or be knowledgeable any paperwork your
parents completed in your name
 Keep paperwork available and updated
 Know the facts about your financial aid:
– type: loans, scholarships, grants, fellowships,
assistantships
– which ones do you pay back and when
– who is your loan lender
Beginning College
 Borrow only what you need. REMEMBER
loans must be paid back. Did you know
you can cancel any part of a student loan, so
only take out what you can afford.
 Retain all your receipts.
 Establish a savings account for
emergencies.
 Prepare a budget and stick with it.
Do You Have Credit Now?
 You may think you have credit, but you
don’t.
 Establish credit while in school on a small
scale.
 Keep in mind apartment leases or utilities
may provide some credit history.
 Obtain a co-signer if necessary.
Credit Cards
 Don’t have too many (if any)
 Reduce available balances if not needed
 Close unneeded accounts
 Read your statement
– make your payments on time
– research erroneous charges
 Beware of low introductory rates
Credit Cards
 Know how your interest is calculated
–
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–
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variable or fixed rate
based on average daily balance with or without new purchases
cash advances vs purchases
time value of money
 Be wary of predators (“receive a free t-shirt to
apply for a credit card”)
 Beware of unsecured internet sites when making
online purchases
 Read the
print
SMALL
Credit Cards
 Advantages
–
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Provide credit record
Online Purchases
Available for emergencies
Rent a car
Pay for purchases over time
Allows you to use someone else’s money (float)
Immediate cash availability
Reduce amount of “carrying cash”
Can help you solve problems with merchants
Limited liability
Convenience checks
Frequent flyer miles or points
Credit Cards
 Disadvantages
– Can create excessive debt
– Interest can be high
– Repayment could take many, many years
– Repayment could be 3 to 5 times the original amount
– Too many cards increase default risk
– Card number can be stolen by different means; i.e.
physically, over internet, over phone, mail orders, etc.
– Immediate cash availability
– Convenience checks
Credit Cards
 Did you know?
– Some have low introductory rates that increase
dramatically
– Some charge annual fees
– Some have late payment fees as much as $35 a
month plus finance charges
– Some charge a transaction fee for cash
advances and the interest starts immediately (no
float)
Credit Cards
 Did you also know?
– Some charge $35 a month plus finance charges for
going over your credit limit.
– That if your card is lost or stolen, you should notify
your institution ASAP to limit your liability.
– That there is a difference between the stated and
effective interest rates.
– Merchants pay a discount fee for accepting credit cards.
Any idea how much or why they do it?
Credit Cards
•What can you do to avoid the credit card blues?
– Don’t charge unless you need to
– Don’t apply for unnecessary or “pretty” cards
– Don’t get talked into filling out a credit card application
for a t-shirt (not even for an FSU t-shirt)
– Transfer your balances to one or two cards with the
lowest interest rates
– Negotiate better terms with your banking institution
– Don’t charge unless you have to
Credit Cards
Let’s test your credit card knowledge.
We’ll look at two scenarios, the only
difference is the monthly payment.
Credit Cards
Scenario #1:
 You charge $2,500
 You pay $50 a month
 Yearly interest rate is 20%
How long will it take to pay the balance?
Credit Cards
Answer:
9 years
1 month!
Credit Cards
Recap:
 You charged $2,500
 You paid $2,920 in interest over the 9 years
 You paid 116 % interest
 Not a good deal!
Credit Cards
Scenario #2:
 You charge $2,500
 Payments are $100 per month
 Yearly interest rate is 20%
How long will it take to pay the balance?
Credit Cards
2 years
9 months!
Credit Cards
Recap:
 You charged $2,500
 You paid $761 in interest over the 2 years
 You paid 30.4% interest
 Compare to saving $2,500 in the bank for 2 years
9 months, earning 3% per year interest = $214.72
Credit Cards
– Among undergraduate students ages 18-25,
83% had credit cards
– Average credit card debt was $2,327
– Of this 83%, 21% had an average credit card
debt between $3,000 and $4,000
Results of Nellie Mae (2001) survey conducted on 363 loan applicants
Credit Cards
Did you know…
Balances for outstanding
revolving credit (including
credit cards) has increased
26%
from 1998 to 2002
(as reported by the Federal Reserve)
Credit Cards
“For growing numbers of students, credit
cards are becoming a savior for financing
their education—especially in public schools.
For others, the initial freedom offered by
credit cards may become financial shackles
by the end of their college career.”
Manning (1999) (page 1)
Why build good credit history?
 Employers can and do check your credit
history
 You can leverage your purchasing power
–
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car
home
furniture
planning a wedding or family
 Your credit history reflects in your credit
report (much like a college transcript )
Credit Reports
 Review your credit report periodically
 Make corrections when needed, your next loan
could depend on it
 Be wary of stolen identities
 Your credit report also includes employment
information as well as previous addresses
 Bad credit might prevent you from buying a home
someday
Credit Reports
 Too much open credit reduces your credit rating,
as well as too many credit inquiries
– credit rating is a number that represents your credit
quality, much like a grade
 When closing an account, make sure that the
closure is reported to the credit bureau (destroying
a credit card does not close the account)
 If an account is transferred to a collection agency,
it can adversely affect your credit report
Credit Reports
 Did you know?
– If you bounce checks, it will be reflected in
your credit report
– Your bank could close your account if you
write too many bounced checks, and it may
keep you from opening another checking
account with any bank for up to five years
Planning For Life After Graduation
(start now)
Research your expected salary to determine if
you can meet your financial obligations,
before you take on too much debt.
Planning For Life After Graduation
Average Yearly Salary Offers for Bachelors Degree Candidates
Social Work
$27,016 Marketing/Mkt. Mgmt.
$34,628
Counseling
$23,991 Business Admin./Mgmt.
$37,122
Elementary Teacher
$28,040 Chemistry
$38,793
Law Enforcement
$33,091 Accounting
$40,546
Home Economics
$28,201 Economics/Finance
$40,084
Criminal Justice/Corrections
$29,324 Computer Programming
$45,346
Communications
$30,075 Consulting
$44,742
Sales
$35,892 Computer Science
$47,419
Nursing
$39,350 Chemical Engineering
$51,853
Salaries from Salary Survey, Summer 2003
Planning For Life After Graduation
Student Loan Repayment
You
Borrow
For How
Many
Years?
Interest
Rate
Monthly
Payment
Total
Interest
Paid
$10,000
10
3.42%
$98
$3,420
$15,000
10
5%
$160
$4,100
$15,000
10
3.42%
$147
$5,130
Compare
to $10,000
of credit
card debt
10
20%
$200
$14,000
Planning For Life After Graduation
 Average Stafford loan debt burdens of
borrowers who entered the post-school
grace period in 2002
$16,888
www.finaid.org/loans/
Planning For Life After Graduation
 Let’s look into the future:
 Let’s assume after graduation:
– You take a $30,000/year position as a
salesperson for Xerox
– You purchase a new Acura for $27,000
– You have a $16,888 unsubsidized Stafford loan that is
in repayment
– You rent an apartment instead of buying a home
– You’re repaying $3,000 of credit card debt
– You are not married and live alone
Planning For Life After Graduation
Monthly
Basis
Gross income/$30,000 yr
$2,500
Less 18% for income taxes
($450)
Less 7.65% for social security/medicare
($191)
Less health insurance
Net income from work (take home pay)
($75)
$1,784
Planning For Life After Graduation
Estimated
Monthly
Expenses
Rent
$650
Utilities
$170
Phone
$30
Cable and Internet
$93
Car payment
$400
Car insurance/gas
$175
Student loan
$123
Food
$300
Entertainment
$100
Credit card payment
Total
$80
$2,121
Planning For Life After Graduation
Estimated Net Income
From Work
Less Estimated Monthly
Expenses
$1,784
($2,121)
($337)
Planning For Life After Graduation
Where’s the ($337) coming
from each month?
All Is Not Lost
 There are things that you can do now to avoid this
situation:
– Don’t increase your debt as your salary increases.
– If you have student loans, know when repayment
begins. Some loans have reduction provisions for
timely payment.
– Use credit cards wisely.
– If you have trouble making your payments, contact
your creditors and set up a workable plan for
repayment, even if it’s $5.00 a month.
Need Help?
 With debt management or credit consolidation,
help is available:
– Credit Bureau
– Consumer credit counseling
– Internet (see handout)
– Phone book (yellow pages)
 Understand the basics of debt management before
getting into trouble.
Final Notes
Nearly half of all
American consumers
have less than $13,000
saved for their retirement
Statistical Information from www.wife.org
Final Notes
In 2001 Household Debt
Burden rose to over 14%
– This is the first time in 15 years that this
number has been reported over 14%
Statistical Information from Federal Reserve
Review Important Points
 Understanding the importance of
establishing and maintaining good credit
 Being careful with credit cards
 Understanding and obtaining credit reports
 Planning for life after graduation
 Finding help with debt management
 Being informed and using your credit
wisely
In the conclusion of Condemning Students to
Debt (1998), Fossey stated, “In sum, we must
never forget that every dollar a student
borrows to finance postsecondary education
has the potential for jeopardizing rather than
enhancing that student’s future.” (page 186)