Predators In The Mist. Not What You Think.

Do you want some frightening news about college kids? No, it’s not that. And no, it isn’t related to sex, drugs or rock and roll. Or, even student loan debt, now having grown to over $1.2 Trillion, overtaking total US Consumer Credit Card debt.

 

No, the news is that American college students have lots of credit cards, are loaded with credit card debt, use them frequently, and have absolutely no idea what they are doing. And, it’s a growing problem. In 2004, the average college student had $946 in credit card debt. By 2009, the average stood at more than $4,100. That is a 434% increase in credit card debt in just 5 years. Think about that.

These findings are from an academic paper on credit card debt and the larger issue of financial literacy among college students. Results of the survey, conducted by researchers from five American universities, were published this month, coinciding with Financial Literacy Month, and they are shocking.

As I mentioned in an earlier blog post, 70% of American college students have credit cards, 84% of those students do not know their cards’ interest rates, 75% of them don’t know what their late payment charges are and 70%of them don’t know what their over- limit fees are.

Therefore, it’s no surprise that more than 90% of college students who hold credit cards are carrying monthly credit card debt.

And guess which course of study these students were majoring in? Yes. Business.

Nearly all of the 725 students who took the survey in fall 2009 were business majors — likely to be among the most financially astute of their generation. Credit card knowledge and general financial literacy we would suppose are even worse among others of the millennial generation, whether in college or not.

“In America, credit cards on campus have been a disaster, leaving students buried in debt before graduation, often with little hope of paying off the debt before high fees and interest double the amount,” the study’s authors said.

“It’s not just college students — you could also argue that young people out in the work force, from a practical standpoint, should be more educated about this because they see these financial issues in play every day.” ,” said one college professor.

“Some have exclaimed that credit cards are a greater threat on campus than alcohol or sexually transmitted diseases … ,” the study’s authors said. “It is too late to implement a ban when nearly every student already has a credit card.”

“A lot of students have been lured into getting credit cards by companies that often set low initial limits and then start pumping them up. They get into it as a way to enhance their cash flow, but they’re not really thinking too much about the long-term ramifications about what they’re getting themselves into.”

Only 9.4% of credit-card-carrying college students paid off their debt in full each month, a sharp drop from the 32% found by a survey just 5 years ago. The general on-campus ignorance concerning interest rates, late payment charges and over-limit fees shocked the researchers, particularly when it came to interest rates. “Since the interest rate is the primary cost of credit, a financially literate student should know the interest rate he/she is paying,” the study said. “We predicted this amount to be high, since so many credit card issuers advertise these rates as a key marketing tool. We were surprised, but not in a good way.”

The survey was conducted by researchers at the University of Central Oklahoma, Midwestern State University in Texas, Texas A&M University, the University of Texas and Framingham State University in Massachusetts. It was published in the April 2012 edition of the International Journal of Business and Social Science.

“This result may also explain part of our national problem with credit,” the study said. “If our college students don’t understand credit costs, what can we expect from the larger portion of our society without a college education?”

But, this may not be a natural corollary, as there is nothing that says college students should understand how credit works any better than a single Mom of 22 working at a clerical job. In fact, the better question has to go to the quality and content of the education our Business majors are getting in our colleges. Aren’t you shocked that over 70% of Business majors don’t know how much they are paying in interest, how much their over-limit charges are, and how much their late payments fees are?

Is there another corollary here too? Might it be possible that if tested, our business majors might not understand how discounted cash flow analysis works or why and when you might want to use it, or be able to explain the future value formula for calculating the time value of money and compounding returns? Does that scare anyone? What if 70% of all business majors failed that pop quiz?

Business Major.

This, of course leads me to my next blog post which is all about a revolutionary alternative to college, student loans and high school curriculums. I know. You can’t wait.