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Higher Education Must Fill the Void in Student Financial Management

The statistics are clear: those who have a college degree will earn on average more and have a more productive life than those who do not. According to the Bureau of Labor Statistics, college graduates earn a minimum of $400 more per week (at the median) than workers with just a high school diploma.

College graduates have experienced growth in real (inflation-adjusted) earnings since 1979. In contrast, the real earnings of workers who dropped out of high school have declined. In a report titled “The Big Payoff: Educational Attainment and Synthetic Estimates of Work-Life Earnings” (which is based on 1999 earnings projected over a typical work life, defined as the period from ages 25 through 64), over an adult’s working life, high school graduates can expect on average to earn $1.2 million; those with a bachelor’s degree, $2.1 million; and master’s degree recipients, $2.5 million.

I am concerned, however, that while many students have to borrow funds to finance their education, several will fall prey to what more than 100,000 do annually — leave the halls of academia with thousands of dollars of debt from high-interest credit cards. According to Nellie Mae, the nation’s largest student loan lender, the average undergraduate has about $2,700 in credit card debt and graduate students have about $5,800. Nellie Mae further reports that about 80 percent of undergraduates have at least one credit card, compared to 95 percent of graduate students. In fact, some studies show that undergraduates average four cards and about 13 percent of them have annual balances of $3,000 to $7,000. About 10 percent have balances in excess of $7,000.

A 1996 survey by the Education Resources Institute indicated that about 12 percent of students with credit cards use them to pay for tuition and fees while 55 percent use them to cover books and supplies. Though this may sound like a legitimate use for the cards, such practices are also leading students to a bad credit posture that will follow them long after they have completed or left their degree programs. As Lawrence Gladieux and Laura Perna of the National Center for Public Policy and Higher Education pointed out in their 2006 article, “Borrowers Who Drop Out,” about a quarter of student borrowers leave school without completing their degrees.

According to the U.S. Census Bureau, more than a third of Americans demonstrate little or no literacy concerning finances, and the average American has no savings and overspends on a monthly basis, exceeding income. Thus, it should be mandatory that institutions of higher learning sensitize freshmen and students, in general, to the perils of credit card spending. This is imperative because the U.S. General Accounting Office reports that the average undergraduate student loan debt upon graduation is approximately $20,000. In fact, more than one-half of the funds on which students rely to supplement their family resources are in the form of loans, including cash advances from credit cards.

What many students who secure credit cards fail to realize is that their credit record is being established and will follow them long after they have left the institution.

“People are not born with an innate ability to manage money,” says David Sandor, vice president at VISA USA. “It is a skill that has to be learned.”

Therefore, colleges and universities must help students understand not only the value of money but the importance of managing it.

Moreover, there must be increased emphasis on helping students to understand that credit cards are not free money. They are loans that include finance charges, annual, cash advance and late payment fees, which can hike the interest rates to their highest levels, causing unforeseen problems both now and in the future. Institutions also need to help students understand that by not paying the entire balance or more than the minimum, students may be on a course to outrageous debts that are likely to get out of control. It is imperative that students read thoroughly the fine print on the application materials, paying special attention to the “teaser rate” expiration, interest rates, late fees, etc.

Credit success should start with parents instilling in their children the importance of effectively managing money. But since many students arrive on college and university campuses with no idea of personal financial management, institutions must take up this mantle. After all, these are the future alumni of the institution. Their support will be needed to sustain the institution for years to come. It is ideal to encourage students to consider debit cards as opposed to credit cards, and this discussion should be engaged annually. Students should be encouraged to avoid impulse spending and should be told to save at least 10 percent of each dollar they have. Additionally, progressive institutions will take it even a step further and assist students in establishing investment clubs or protocols that will yield a nest egg for the future.

— Dr. Robert R. Jennings is president of Alabama A&M University

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