Credit Card Debt Statistics
Nellie Mae - December 2000
By Marie O'Malley

Credit Card Usage Continues Among College Students

The prevalent use of credit cards by a growing number of college students has generated concern about the impact of easy credit card availability and subsequent indebtedness accumulated by students. Those who are directly responsible for managing student loan default prevention among that very population are particularly concerned; after all, students who owe substantial amounts of money on credit cards and education loans may not have the wherewithal to make payments on both after graduation.

Less stringent underwriting criteria at major credit card companies, coupled with the direct push to students on many campuses to apply for credit cards, has led to easier access to credit cards for students who may have arrived on campus with no credit history. A recent analysis of credit card debt from students who applied for credit-based loans with Nellie Mae in calendar year 2000 showed that 78% of undergraduate students (aged 18-25) have at least one credit card. This is up from the 67% of undergraduates included in a similar study by Nellie Mae in 1998. In years past, these same students would not have been given credit cards, certainly not without a co-signer.

Using small increments of available credit responsibly is a great way to learn about the pros and cons associated with borrowing, and to establish a positive credit history. Unfortunately, without being educated on the possible pitfalls associated with amassing too much debt, some of those students may be learning lessons the hard way. The undergraduates in the 2000 Nellie Mae analysis carried an average credit card balance of $2,748, up from an average of $1,879 in the 1998 study. A student using a card with an 18% APR and who makes only a minimum monthly payment of $75 will be paying off that credit card balance of $2,748 over 15 years, paying as much interest on the loan as he originally borrowed. And that assumes the student doesn't make additional charges. Some students unwittingly accumulate credit card debt, not consciously planning ahead whether they can afford to borrow that sum, and not aware of the actual finance charges they will pay over time.

Graduate students have even higher debt levels than undergraduates, though graduate student credit card debt and usage levels remain similar to 1998 levels. In both studies, 95% of Nellie Mae graduate student loan applicants had at least one credit. The average credit card balance was $4,776 in 2000, down slightly from $4,925 in 1998.

The above statistics indicate a growing comfort level with credit card borrowing. Being comfortable, however, doesn't necessarily indicate knowledge about the ramifications of borrowing in general; nor does it show that the student has evaluated the benefits and costs of borrowing with a credit card vs. other types of financing. For example, it may be easier for a student to use a credit card to pay for some expenses associated with a college education, such as books and transportation - even tuition in some cases - but a federally guaranteed student loan is a much more cost-effective choice. However, it takes planning to obtain a student loan; the student must file the appropriate forms and work through the financial aid and bursar's offices, as well as work with the lender, to process the loan. Although school offices and loan processes are becoming more streamlined, a credit card is simply more convenient. Students may base their borrowing choice on that rationale, rather than long-term cost.

Although many students do their homework -- they understand and manage the responsibilities of borrowing, they don't borrow more than they need, and they borrow as cost-effectively as possible -- there is some apprehension that a certain percentage of the credit card-using student population is setting up itself for financial failure even before graduation. Without assistance, these students may not have the know-how to borrow wisely on the front end and they won't have the income to honor their credit obligations after they've borrowed.

It would be ideal if credit card companies agreed to take a more conservative approach to lending to students to prevent them from getting too deeply into credit card debt while in school. They could put low borrowing caps on accounts when students are enrolled; they could institute stricter re-issue rules; they could agree to put a cap on the number of cards that can be issued to students. But, more practically, students need to learn how to manage financially. Credit cards and other borrowing options will continue to be available to them while they are in school, and after they graduate.

Colleges and lenders work together today to provide student debt counseling at the beginning and end of the enrollment/borrowing cycle. One solution might be to have colleges and lenders work together to provide financial management education throughout the student's college career. A curriculum could be developed that teaches several aspects of sound fiscal management, and where lessons are reiterated at key points during the total enrollment period. Of course, teaching by example is always effective; therefore planners should strive to keep costs minimal for implementing such a program. Interactive tools are already available on a number of finance-related web sites today, and e-mail allows for efficient, cost-effective communication between schools and students.

Credit card use and borrowing money have become common practices in American society and aren't going to cease. To prevent debt levels from becoming burdensome for students, which could result in student loan defaults as well as general poor financial health for a segment of the population, it behooves colleges and lenders, as well as credit card issuers, to teach students to limit credit card usage and to borrow wisely.

Marie O'Malley is director of marketing for Nellie Mae, a leading national student loan provider based in Braintree, Massachusetts.