It's not just sex and drugs parents have to worry about when sending their children off to college. It's their credit lines.
Personal bankruptcy is running rampant among members of so-called Generation Y, those from 8 to 23. These young people currently make up the fastest growing segment of the population filing for bankruptcy.
Bankruptcies for those under age 25 have increased 51 percent from 1991 to 1999, according to a recent study from the General Accounting Office, the investigative arm of Congress. The GAO estimates those under age 25 now account for 6.9 percent of all bankruptcies.
One contributing factor in their credit woes is the proliferation of credit cards among college students. According to a 2001 study by college lender Nellie Mae, 92 percent of college students carry a credit card, and 47 percent possess four or more credit cards. They aren't shy about using them either: 22 percent of undergraduates who have credit cards maintain balances between $3,000 and $7,000.
Before your child gets to campus, it is very important to make sure he or she is educated about the potential perils of credit cards, especially since plastic is the most efficient, convenient and safest way to make purchases.
Here's an example that illustrates why it is so important that students do not rack up debt early on.
Mellody's Math: If a student has $5,000 in credit card debt after college, and the interest rate on the card is 18 percent, it would take 26 years to pay off the card if they simply make minimum payments. In fact, you would pay $7,115.42 in interest during that time. Theoretically, that student's own children could be college graduates before the last payment is made.
Credit Still Efficient for Students
Despite the possible debt trap, credit cards remain the most efficient, convenient and safest way to make purchases.
With so many credit cards on campus, and consumer debt at an all-time high, parents and students should approach the credit card roulette table with caution and awareness. There are a couple of new products on the market which are excellent ways to educate children about credit and are reminiscent of the training wheels you put on your young child's bike when he or she was learning how to ride.
Recently, a new breed of credit card has come onto the scene directed toward the 14- to 17- year-old market. In the past five years, this market has grown significantly to $172 billion a year, from $122 billion.
Here are my picks for the best student plastics.
Campus Bookstore vs. Campus Pub
One alternative to a traditional credit card is the Visa Buxx card, which is similar to teaching your kids to swim in the shallow end of the pool instead of the deep end.
The Buxx card works like a reusable, prepaid calling card, drawing money from an account exclusively set-up for purchasing. Similar to a debit card, the cost of the purchase is withdrawn from the account once your child makes a purchase. After the card is activated, parents can add or subtract from the balance over the telephone or Internet every other week, or once a month. Individual banking institutions determine the annual or one-time enrollment fees for the Buxx card. However, a monthly charge of $2 is universal if no activity occurs for a month.
The Buxx is an excellent tool for teaching a student about the virtues of budgeting and financial responsibility. Plus, monthly paper statements and/or timely Internet updates allow parents to monitor their spending and make sure the money is spent at the campus bookstore, not the campus bar.
Visa offers teen-friendly information on its Web site (visabuxx.com), which is also an excellent educational tool for first time credit card carriers. It includes information on interest, financial goals and various investment vehicles, and is a worthy read for credit cardholders, new and old.
When applying for the Buxx card, parents and teens can test their financial skills with an assessment test that is on the site to determine the financial literacy of the teen, and to encourage family dialogue about money management and financial responsibility.
Pick a Card
The next best card for students is the Citi Cash Card, offered by Citibank. The Citi Cash Card is a pre-paid, reloadable card that is accepted at most retailers. The minimum age to apply for the card is 16.
The card will then be in the child's name, and they will be legally responsible for the account, including the task of loading money onto the card from their checking or savings account, or from a credit or debit card. However, the Citi Cash Card does not come with the same, extensive credit literacy material that the Buxx card does and is therefore not as financially rewarding for students. The Citi Cash Card costs $25 a year.
Next in line is MasterCard's version of the Visa Buxx card, also known as the i-GEN card. Originally, the i-GEN card was targeted at teens who shopped online, but now, through their partnership with Next Estate Communications, the card is sold at more than 10,000 brick and mortar retailers across the country.
The premise of the i-GEN card is similar to the Citi Cash Card, except there is no application to complete. No application also means no educational opportunity, so be sure to talk to your children first before turning them lose with the card.
The i-GEN card costs around $10.50 and comes with a monthly fee of $4.95. In addition, it costs $2.50 every time you use it in an ATM-on top of whatever the local ATM charges.
Long Distance Credit Checks
An alternative to the pre-paid route and credit cards with high credit lines, is to set-up a College Parents of America Student credit card (www.collegeparents.org). CPA is national association with 200,000 household members that helps parents prepare to put their children through college. The credit card (a partner of MBNA) allows the parent to set the maximum line of credit for the student's card.
The card arrives directly at the home of the parent, unlike most college credit cards, which arrive directly at children's dorms and are often marketed with T-shirts, calling cards, free compact discs and credit limits upwards of $5,000.
Like the Visa Buxx card, parents can monitor their children's expenditures via the Internet or a toll-free number.
The CPA provides educational resources to its members via its Web site, which also assists parents in the explanation of credit, responsibility, and budgeting.
Finally, American Express offers the Blue for Students card (americanexpress.com.). This card has no annual fee and, after six months, has an APR of the prime rate plus 7.99 percent. Students are offered money saving discounts on music and books, travel and entertainment through their card membership.
Blue for Students does not have a universal set credit limit for students, but instead assigns the credit limit based on individual credit history. (Note: This is a potentially frightening proposition for parents of college-bound students.)
Mellody Hobson, president of Ariel Capital Management in Chicago, is GoodMorning America's personal finance expert. Click here to visit her Web site, Ariel Mutual Funds.com. Ariel associate Matthew Yale contributed to this report.