(U-WIRE) -The latest trend for college students isn't a pair of Crocs or quoting from Napoleon Dynamite. It's getting into debt.
A study published last year by the State Public Interest Research Group suggested that increasing tuition rates, higher borrowing limits on government loans and a new surge of low-income students have pushed college graduate's debt burden higher as they borrow more to subsidize their undergraduate educations. The study also said that while the rising cost of college education grew by 40 percent, the median family income increased by only 12 percent.
Maybe that is also why it's not just less-fortunate students who need to take out loans now. By 2000, 46 percent of students from the top income bracket reported borrowing money to help pay for college, which is a sharp increase from 1992, when only 24 percent in this bracket borrowed money, according to government figures. Over all brackets, the percentage borrowing at least $25,000 rose from seven to 26 percent.
But even when borrowing from the government, students need to be knowledgeable. Recently, there has been an increase in the number of unsubsidized, as opposed to subsidized, loans offered by the federal government. In the former, interest accumulates while the student is still enrolled in a university and is then capitalized --or added to the total --upon graduation.
In the previously more common subsidized loan, the state pays the interest on the student's behalf while he or she is attending school. When the student finishes their studies, the graduate is only responsible for the initial amount borrowed.
What's more, the situation does not look bright for anyone taking out a government loan. Currently, interest rates are set at 2.75 percent. Just recently, Alan Greenspan issued a statement indicating the government's willingness to further step up rate increases. Previously the increases came in quarter increments, but now, fearing inflation, they warn that steeper increases could be ahead. Higher tuition rates and fewer scholarships can be seen at the University of Kansas just like any other university in the country.
During the 2002-2003 school year, students received more than 10,800 scholarships, but during the 2003-2004 school year, only 7,650 scholarships were allotted. Now the 2004-2005 school year has seen an increase of $318 per semester for resident undergraduate students taking 15 hours. And, thanks to a last-minute save by Student Sentate, we averted another tuition hike intended for the College of Liberal Arts and Sciences.
Therefore, when government loans and scholarships aren't enough, students turn to credit cards as an alternate source of spending power. But this can prove just as detrimental if not handled properly.
Part of the problem is that credit card companies see college students as a prime target. That is because they are most likely not going to be able to pay off their balances every month and, therefore, incur interest. So these companies hawk their wares at basketball games or in the Union, they offer cards but students don't understand exactly what they are getting in to.
The average undergraduate has $2,200 in credit card debt, according to Nellie Mae, the nation's largest student creditor. This is a result of all the charges and fees that come with a lot of the credit cards offered to students. For example, a finance charge is an interest charge, which can be as high as 20 percent, on the unpaid portion of your bill each month or an annual fee. Some companies charge yearly membership fees of anywhere from $20 to $100.
Therefore, the longer students wait to pay the debts off, the worse it gets. By sticking to minimum payments, it would take a student more than 12 years and $1,115 in interest to pay off a $1,000 bill on a card with an 18 percent annual rate.
Perhaps college students have gotten into this mess because they have no formal education in financial matters. While 37 states have policies that encourage or require students to receive instruction in consumer education, only 14 mandate financial literacy training in high school. Essentially, we are expected to learn from our parents or trial by fire.
It is important to keep a few things in mind when dealing with credit cards and loans. Read all application materials carefully, especially the fine print, in order to be familiar with the terms of the agreement. Also consider using a debit card instead of a credit card. Money is deducted directly from your checking account, so you can't spend more than you actually have. And lastly, pay bills to keep finance and other charges to a minimum.
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