Student Debt: The Good, the Bad and the Plastic

We’ve all seen the headlines about college students graduating with unprecedented debt, but not all debt is created equal, and not all student debt is insurmountable or even a bad thing. Debt is a more complex subject than mainstream media has the time or resources to tackle because of factors such as multiple types of debt, from loans to credit card debt, combined with varying interest rates, costs of living, employment status, wages and how all these factors change over time.

Tuition and fees for 2012-2013 at public 4-year colleges cost students on average $8,655.00 per semester, an increase of 104% since just one decade ago. So, why does tuition continue to increase faster than inflation? States have cut the amount the money they give to colleges by about 17% in the last 5 years. At the same time student enrollment continues to rise, indicating that young adults still view a college education as a worthy investment despite the rising costs. i

Two-thirds of American students will graduate with some debt. And, the average borrower will graduate with $26,600 of debt. ii

Still, student loan debt is often referred to as “good debt”. A college degree is an investment in the future, required in some fields and providing a competitive edge in others. Over the course of a lifetime, associate’s degree recipients will earn $500,000 more than those with only high school diplomas, and those with bachelor’s degrees will earn $500,000 more than those with associate’s degrees. iii

Student loans aren’t the whole debt picture. Some students will graduate with credit card debt or other types of loan debt. While credit card debt is often labeled as “bad debt” it is really more about why the individual has the debt, not what form it takes. For example, a laptop for school might be a good investment (good debt), while spring break in Mexico might be poor investment (bad debt).

qSample wanted to find out how credit card debt factored into the big debt picture for students. A recent survey of qSample’s Campus Universe panel revealed that most participants (99%) own at least 1 major credit card. Participants’ top reasons for having major credit card(s) tended to be responsible with over 60% indicating that “build my credit rating” and “in case of emergency” are very important reasons to have a credit card. Almost half of participants (46%) reported having no credit card debt at all, while about 25% have over $1,000 in credit card debt. Student loan debt was much more prevalent in the group with over 50% owing $10,000+.

Most participants with credit card debt (82%) planned to have their credit card debt paid off in 2 years or less. Only 15% of participants with student loans planned to have them paid off in 2 years or less. Thirty-one percent planned to have their student loans paid off within 3 to 5 years and 28% planned to be done within 5 to 10 years. Nine percent believed it will take closer to 20 to 30 years to pay off their student loans.

1

Given the typical ratio of load-to-card debt, it is no surprise that the Campus Universe panelists said that they worry more about their loans than their credit card bills. Over 50% of participants only rarely or occasionally worry about credit card debt, while 21% worry often or all the time. When it comes to student loans, 37% rarely or occasionally worry about their debt, and 40% worry often or all of the time.

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The federal government depends heavily on student loan programs for funding and is expected to make a record $50 billion in profits this year. The good news is that measures are being taken to help keep student debt within reason. In August of 2013, President Obama signed a new law that dictates Federal Student loans will now move with the financial markets. This will lower interest rates for now but could mean higher interest rates as the economy improves. However the loans do have a cap. With the new law, federal student loan interest rates now range from 3.4% to 6.41% depending on the type of loan. iv

The U.S Government has also been looking out for its youngest cardholders. Gone are the days of credit card companies giving away t-shirts on the quad. The 2009 Credit Card Act requires the card companies to stay 1,000 feet away from campus if offering free giveaways. Plus, anyone under 21 needs either an adult co-signer or proof of adequate income to repay the debt. v

Student debt in all its forms is typically not that scary. Yes, there are extreme cases that rack up to six figures and take decades to pay down. But most of the time, an education is a sound investment in the future. By and large, students are staying away from overspending on credit cards, which could lead to a larger debt problem with higher interest rates. With the Credit Card Act of 2009 and the recent student loan relief, the federal government is taking measures to protect young adults from accumulating too much debt too early in life. For most college students, the future is brighter and shiner than the plastic in their wallets.

i http://money.cnn.com/2012/10/24/pf/college/public-college-tuition/index.html
ii http://www.forbes.com/sites/specialfeatures/2013/08/07/how-the-college-debt-is-crippling-students-parents-and-the-economy/
iii http://money.cnn.com/2013/02/26/pf/college/community-college-earnings/index.html
iv http://www.cbsnews.com/8301-500395_162-57597680/6-things-to-know-about-the-new-student-loan-rates/
v http://www.creditcards.com/credit-card-news/help/what-the-new-credit-card-rules-mean-6000.php

Campus Universe is an online community of on and off campus college students who have opted-in to participate in a variety of research studies. The panel is developed and managed by qSample, a Chicago based research and data collection firm.

by Stacy Sherwood

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