An analysis of the current status of student debt: implications for helping vulnerable students manage debt.

ABSTRACT

Too many students are having serious problems with credit card debt. This debt can lead to the student's dropping out of school in the worst case; however, even when the students stay in school, they begin their careers saddled with excessive debt. Over half of today's college students own one or more credit cards, and the more credit cards students own, the greater the likelihood that they will have serious debt problems. Our survey of over 4,000 students indicated that as students progress through college, they acquire more credit cards and debt; furthermore, our survey indicated that students who work 10 or more hours per week are more likely to report debt problems than those students who work less than 10 hours per week. Married students report the fewest debt problems while divorced students report more debt problems than single or married students. Students should be educated, the earlier the better, on how to make wise financial decisions. This article reports the findings of a survey of over 4,000 college students from Arkansas, California, and Ohio. The results indicate which factors or characteristics are related to significant debt problems, and recommendations are made for helping students avoid making unwise financial decisions.

INTRODUCTION

One of the most natural transitions for students arriving at college is to obtain a credit card. Offers for easy-to-obtain credit cards flood many campuses each year, and credit card companies often used free items (e.g., t-shirts, ball caps) to attract student customers. Indeed, credit card offers are so numerous that some colleges have begun to ban or at least limit the presence of credit card companies on campus (Waggoner, 2005). Yet, according to a recent article in the Wall Street Journal (July 18, 2006), students are still obtaining credit cards with more than one-half of the students carrying at least one credit card that is directly billed to them. In fact, Manning and Kirshak (2005) write that among today's undergraduate, four-year college students, about 75-80% have their own universal bank credit card.

Clearly, credit cards provide students with a convenient way to make purchases, particularly when the students are low on cash, perhaps while waiting on their allowance from home for the fortunate few, or waiting on their paychecks or their student loans to arrive ("Majority of College Students," 2006). This convenience, however, can lead to serious consequences for the students who are not well-informed about the proper use of credit cards; unfortunately, according to a recent survey, this includes the majority of students. Braunsberger, Lucas, and Roach (2005) studied college students' ability to evaluate and choose the credit card offer that best fit their particular needs. As a result of their study, Braunsberger, Lucas, and Roach concluded that college students "possess a fairly low level of knowledge of credit cards and thus are not very well equipped to make educated choices concerning such cards (p. 237). This lack of knowledge about credit cards and debt makes students vulnerable and can lead to debt problems that include being delinquent in payments or not paying at all.

Angela Lyons (2004) references a study by Staten and Barron (2002) that compared credit card accounts opened as a result of marketing to college students on campus with those opened as a result of traditional marketing to 18-24 year olds and to those 25 years old and older. The comparison revealed that those opened as a result of marketing to students had a higher rate of delinquent payments and were more likely to result in charge-offs to the credit card companies than the other two groups. Students' lack of knowledge of credit cards, poor choices, and failure to make payments in a timely fashion (or at all) may lead to the students' having to drop out of school. John Simpson, a university administrator in Indiana, has been widely quoted for his comments in a Chicago Tribune article in 1998 in which he lamented the problems students have with credit cards and stated that "we lose more students to credit card debt than to academic failure." (Gallo, 2006; Cason, 2005; Smith, 2004; Chamberlin, 2001).

PROBLEM STATEMENT

The primary purpose of this study was to determine the current status of university students with respect to credit card use and debt and to determine which factors or characteristics seem to be related to the students' becoming vulnerable as far as debt is concerned. Furthermore, as a result of the findings of this study, recommendations will be made that would help vulnerable students manage their debt more successfully.

METHODOLOGY

A total of 4,469 surveys were received from students at 13 schools in three states: Arkansas, California, and Ohio. These schools include 11 holding AACSB accreditation. The schools participating in the survey in Arkansas were Arkansas State University in Jonesboro, Henderson State University in Arkadelphia, and the University of Arkansas at Little Rock. In California, the participating schools were Allan Hancock Community College, Cal Poly San Luis Obispo, Cal Poly- Pomona, Chico State, and UCLA. The Ohio schools were Cleveland State, Miami University, Ohio State, The Ohio University-Athens, and the University of Akron. A total of 768 surveys from 39 classes were completed in Arkansas; 1,376 surveys from 17 classes in California were returned, and Ohio students returned 2,304 surveys from 15 classes.

The students participating in the survey were assured that the survey was voluntary as well as anonymous and were given information concerning how to contact the IRB board which had approved an exempt status for the survey as it pertained to human subjects. Of the students surveyed, 19.4% were freshmen, 18.66% were sophomores, 22.25% were juniors, and 27.11% were seniors. Graduate students comprised 12.58% of the participants. One hundred and twenty-three non-students in the same age group, 19-25, were surveyed as a control group. A regression analysis was conducted to determine which, if any, of the dependent variables was significant at the .01 level of testing. The Independent Y variable was the response to the question: "Do you consider your debt out of control?"

Using a Likert scale, the students were asked to indicate their level of agreement with selected questions. On other questions, the students were asked Yes or No questions (e.g., if they carried a balance on their credit cards). Finally, the students were asked some open-ended questions such as the amount of any credit card balance they might have accrued.

FINDINGS/CONCLUSIONS

In our survey, almost 62% of the students reported owning one or more credit cards. This finding is in line with the article in the Wall Street Journal that reported over half of the students own one or more credit cards (2006); however, our findings were less than the 75-80% that Manning and Kirshak (2005) reported owning one or more credit cards. Regardless of whether the exact percentage is 80%, 62%, or 50%, any of these numbers is certainly significant enough to cause problems for students who do not manage their credit cards responsibly.

Furthermore, our study found the ownership of credit cards related to serious debt problems. Of the participants in our survey who reported owning no credit cards, only 1.02% also reported having serious debt problems compared with almost 19% of the students owning at least 4 credit cards who reported having serious debt problems. This statistic was found to be significant at the .01 level of testing. These findings are in line with other research that suggests that student debt has increased as credit cards become more available (Robert Manning as quoted by Fitzgerald, 2003). Interestingly, while most of the literature reviewed for this article pertained to college students in the United States, credit card usage and debt problems are not only found among students in the US. Braunsberger, Lucas, and Roach (2005) give several examples of other countries that have concerns about their students' use of credit cards including the UK where the "popular press reports that university and college students are dealing with financial problems" (p. 250).

Another student characteristic we found related to student debt is status in school. With a small dip during the sophomore year, as students progressed through school, they acquired more credit cards, more debt, and, subsequently, more debt problems.

The students may believe that the higher salaries they expect to receive after completing their education will enable them to fairly easily pay off their debt; thus, they may not take the debt they are accumulating as seriously as they should or be as willing to sacrifice and "do without" while in college. Furthermore, perhaps many of the students accumulate more debt simply as a result of additional tuition, books, and other school-related expenses that add up as the students progress through school.

Interestingly, our survey revealed that students who work 10 or more hours a week acquire more credit cards and more debt than students who work less than 10 hours a week or have no job. Students who do not work or who work less than 10 hours per week may have parents who are paying for their school-related expenses, as well as paying for their cars, insurance, clothes, entertainment, and the like. Or students who are not working may be on scholarships that alone or in conjunction with support from their parents pay for their school and personal expenses. Meanwhile, students who are working at least 10 hours a week may be receiving little or no help from their parents or the university and may have to work to stay in school; these students may turn to credit cards and/or student loans to make ends meet. These are just a few of the possible conclusions one might reach from the findings.

Our findings indicate that marital status is related to student credit problems. Of all the respondents, divorced students were most likely to report having credit problems with almost 20% so reporting. On the other hand, married students reported less credit problems than single students; although, again, both groups were less likely than divorced students to have credit problems. The survey did not request students to list possible reasons for their debt problems. Possibly, though, the married students--who had the fewest reported credit problems--may have been the more mature, settled group, and this might have accounted for their fewer credit problems than the single students. Also, the fact that married students could share expenses as well as resources may have helped their financial standing. The divorced students may have been single parents which contributed to their having the most reported credit problems.

Another disturbing finding was that 86% of all the students responding did not know the interest rate on their credit cards. Of the students reporting serious debt problems, 96% did not know their interest rates compared with 65% of the students who reported not having significant debt problems. Since the students who reported having significant debt problems were also those who reported having more credit cards, we might assume that as the students acquired more credit cards and got deeper in debt, the interest rates on the cards became less important because the students were more dependent on the cards.

RECOMMENDATIONS

The results of our survey, which agree with the general consensus among researchers in this area, indicate that today's college and university students clearly are not adequately prepared to handle the responsibility that comes with credit card ownership specifically and debt in general. The following recommendations are provided in an attempt to help students become better able to handle their finances.

1. Educate students on how to make good financial decisions and to become effective financial managers. Students must "understand that credit cards are not "free money," and that every time they charge an item, they are in fact receiving a very expensive loan" (Barrett, 2006, p. 58). Students should learn that before they apply for or accept any credit card, they must understand certain aspects of personal finances. Some of the many important aspects include choosing the right credit card, understanding the differences among the annual, introductory, and default interest rates, paying bills on time, paying off the card each month, taking measures to prevent identity theft (Barrett, 2006; Hoak, 2006).

2. Make sure that students are aware of their credit scores. As Bridgett Smith, with LendingTree says, "You think your GPA is really important---in the longer term, your credit score is more important" (Hoak, 2006, D3).

3. Encourage students to carefully read the pamphlets or educational materials that many credit cards companies have designed specifically for students.

4. Make sure students understand the "opportunity cost" of money they spend paying off their debts after they graduate from college. This "opportunity cost" may include the home, graduate school, or other investment opportunities they miss as a result of having to pay off debt acquired in college (College Students and Credit Card Information, 2007).

5. Advocate that colleges closely monitor any credit card companies that use their campuses to recruit student customers

6. Promote personal finance education in high schools; this will enable students to come to college prepared to handle the credit card offers they are likely to be hit with during their first weeks on campus.

SUMMARY

More than half of today's college students own one or more credit cards, and the more credit cards students own, the greater the likelihood that they will have serious debt problems. Our survey of over 4,000 students indicated that as students progress through college, they acquire more credit cards and debt; furthermore, our survey indicated that students who work 10 or more hours per week are more likely to report debt problems than those students who work less than 10 hours per week. Married students report the fewest debt problems while divorced students report more debt problems than single or married students.

Students are not going to give up student loans or the convenience of credit cards. But they might be able to more effectively handle these forms of debt if they had more information. Because students begin using credit cards their freshmen year (or in high school), the sooner we get this information to them, the better off they will be. Students need to understand the importance of selecting the right credit card for them, and they certainly need to know the interest rates, annual fees, and penalties for late payments. They need to understand the importance of building a high credit score and how to monitor their own credit scores. Just because credit cards are here to stay doesn't mean significant debt problems have to be.

REFERENCES

Barrett, L. (Oct. 2006). Good credit 101. Black Enterprise, 37(3), 58.

Braunsberger, K., Lucas, L. A., & Roach, D. (2005). Evaluating the efficacy of credit card regulation. The International Journal of Bank Mar k e t ing, 23(2/3), pg. 237, 18 pgs. Current url: http://proquest.umi.com/pqdweb?did=850969941&sid=3&Fmt=4&clientId=19249& RQT=309&VName=PQD 

Cason, C. (Nov. 2006). Credit before it's due: College students get crash course in debt. Available at http://web.insidevc.com/special/projects/stories/stuff03b.shtml

Chamberlin, G. (Sept. 7, 2001). Economy hits credit card companies, now pursing high school, college students. Available at http://www.sddt.com/Commentary/article.cfm?Commentary_ID=10& SourceCode=20010907tbj

College students and credit card information (2007). Rutgers Cooperative Research & Extentsion, Rutgers University. Currentl url: http://www.rce.rutgers.edu/ru-fit/collegestudents.asp

Gallo, E. (April 2006). Credit, college, and competency. Journal of Financial Planning, 19(4), pg. 50, 2 pages. Retrieved from the ABI Inform on September 8, 2006.

Fitzgerald, K. (2003). They're back: Credit card marketers on campus. Credit Card Management, 16(3), 18-20.

Hoak, A. (Sept. 17, 2006). Extra credit: Five things to tell your college student about managing debt. MarketWatch. Current url: http://www.marketwatch.com/news/story/ five-things-tell-your-college/story.aspx?guid=%7 B4DF109AB-2B32-4BBB-AECC-448159EF7DFC%7D

Hoak, A. (Sept. 20, 2006). College students need lessons in prudent credit card usage. Wall Street Journal, (Eastern edition). New York, NY: p. D3.

Lyons, A. C. (Summer, 2004). A profile of financially at-risk college students. The Journal of Consumer Affairs, 38(1), p. 56, 25 pgs. Retrieved from ABI Inform on September 8, 2006.

Majority of college students carry credit cards (2006, July 18). Wall Street Journal (Eastern edition). New York, NY: p. D2.

Manning, R. D, and Kirshak, R. (2005). Credit cards on campus: Academic inquiry, objective empiricism, or advocate research? NASFAA Journal of Student Financial Aid, 35 (1), 1-48. Available at: http://www.nasfaa.org/Annualpubs/Journal/Vol35N1/Manning_Kirshak.pdf

Smith, J. D. (October 15, 2004). Credit companies profit from students. Northern Iowan, 10. Current url: http://fp.uni.edu/northia/archives3.asp?ID=2321

Waggoner, D. (May, 2005). Cards on campus dealt another blow. Collections & Credit Risk, 10 (5), 2 pgs. Retrieved from the ABI Inform on September 8, 2006.

Larry R. Dale, Arkansas State University Sandra Bevill, Arkansas State University

Table 1: Statistical Analysis

Factor/significance       [R.sup.2] Sign at .01 Level    F-statistics

GENDER                      [R.sup.2]=.6634 NS           1.237 (.0001)
AGE                         [R.sup.2]=.8006 NS          14.13 * (0021)
MAJOR                       [R.sup.2]=.5341 NS           2.14 (0701)
STATUS                      [R.sup.2]=.9977 S           25.09 * (0001)
# OF CREDIT CARDS           [R.sup.2]=.9866 S           23.07 * (0001)
MARITAL STATUS              [R.sup.2]=.9694 S           11.09 * (0002)
ANOUNT OF STUDENT LOAN      [R.sup.2]=.9991 S           36.71 * (0001)
HOURS WORKED                [R.sup.2]=.9874 S           19.91 * (.0001)
# OF LATE PAYS              [R.sup.2]=.9963 S           20.24 * (0001)
SIGN. BALANCE               [R.sup.2]=.9801 S           18.12 * (0001)
USED CREDIT COU.            [R.sup.2]=.9531 S            6.34 * (0001)
SAVE                        [R.sup.2]=.9997 S           27.12 * (0001)
CHECKED CREDIT              [R.sup.2]=.9889 S           19.37 * (0001)

Factor/significance          T-ratios

GENDER                    ..00204 (.0381)
AGE                       1.909 (0091)
MAJOR                      .0076 (0321)
STATUS                    3.146 * (0031)
# OF CREDIT CARDS         2.941 * (0028)
MARITAL STATUS            2.776 * (0055)
ANOUNT OF STUDENT LOAN    4.801 * (0032)
HOURS WORKED              3.123 * (0029)
# OF LATE PAYS            4.006 * (0031)
SIGN. BALANCE             2.911 * (0047)
USED CREDIT COU.          2,745 * (0018)
SAVE                      5.123 * (0001)
CHECKED CREDIT            54.23 * (0027

Value in () Is the Significance Level of the F-statistic
Value in () Is the Significance Level of the 2-tailed T Test