Decisions involving credit cards will be yours as long as you are at least eighteen years old. Prior to this age, any credit cards you may have had were in your parents’ name. Even though you were able to use the card, it still was your parents’ account. Once you reach a legal age though, the card becomes yours and so does the liability.

You are free to have as many credit cards as you can obtain with a credit limit as high as you can qualify for. But being responsible for making spending decisions on your own also means being responsible for repaying the debt you’ve accumulated. You’ll find that your freedom in choosing how to spend your available credit does not apply to your freedom in choosing how and when to repay it. There are payment deadlines and set amounts that you are required to repay. With as many as one third of college graduates having problems with credit card debt, your credit obligations should be carefully considered prior to getting that first card.

Jane came from a small Midwestern town to attend Ohio State University, a school whose student body totals over 50,000 undergraduates. Jane knew almost everyone in her hometown and now she found herself living in a dorm with more people than her entire town’s population. This “new world” was overwhelming and liberating at the same time. Jane was finally free from her strict parental rule. Now all she needed was money.

Her parents were very conservative, especially in regards to financial matters. They always paid cash for everything and put themselves and Jane on a strict budget. In addition to monitoring Jane’s allowance, they had always paid close attention to her friends and activities. Now that she was away from their watchful eye, she planned on asserting her newfound independence.

As a freshman, she signed up for her first credit card when an application caught her eye. It said, “Finally, a credit card that gives you something you really want, fun.” Jane filled out the application immediately.

Armed with her first credit card, Jane made sure that she did not deny herself anything. Her credit cards were always there for her when she needed economic help. They did not ask questions about why she needed the money or moralize about her spending patterns like her parents would have. After all, she was just following what the advertisements were telling her to do, “Just do it,” “Don’t deny yourself,” and “Indulge.” Some of Jane’s friends turned down social invitations because it wasn’t in their budget, but Jane never missed an opportunity. She went to movies, football games, concerts, stores, and restaurants.

One night, less than one month after getting her first credit card, Jane tried to pay at a restaurant with her credit card and found that the approval wouldn’t go through. She had not yet received her first bill, since she had had the card for less than a month, and she couldn’t imagine that she had already reached the limit. Several days later the credit card statement arrived in the mail and confirmed that she had indeed reached her initial $500 limit. Jane started to panic but then noticed that all she was required to pay was a $20 minimum payment. This she could handle. In fact, if she could handle one credit card, why not another?

Jane applied for two more credit cards and promptly charged them up to their limits. As she continued to make the minimum payment each month, Jane couldn’t believe what a small price she had to pay for so much fun (just like the advertisement promised)! Jane had every intention of continuing her pattern of getting a new credit card every time she had exhausted the credit available on her last card. In fact, the credit card companies were helping her by frequently increasing her available credit limit. Unfortunately, this pattern stopped working after her sixth credit card.

For a reason that she couldn’t understand, her applications were now getting turned down. The reason given was that she was “overextended.” Jane did not have any idea what that meant. All that Jane understood was that her source of money had suddenly dried up. She had started using cash advances on her sixth credit card as a means to make payments on her other five accounts. She was playing the “credit card shuffle,” using one credit card to pay the other. Now how was she supposed to pay her credit card bills?

To make matters worse, her parents’ combined income precluded her ability to qualify for a subsidized Stafford loan (Guaranteed Student Loan) and she would have had to get her parents’ approval for any other loan program. Telling her parents was not an option. She was sure they would take away her credit cards and put her on a strict budget if they found out, and she couldn’t let that happen.

Jane decided to start working part-time at a retail store at the mall in order to have money to pay her credit card bills. Unfortunately, this decision added a seventh credit card to Jane’s wallet. She justified the additional card because she could only get store discounts if she made her purchases with the store credit card. She convinced herself that she was saving money by using this credit card.

As her debt accumulated, so did the number of hours Jane was forced to work. Between working and studying, Jane started burning the candle at both ends. In fact, the more she worked part-time, the more she felt she deserved to eat out, enjoy a concert, and hit the clubs with friends. What Jane didn’t realize at the time was that she had opened a Pandora’s Box of rising expectations that could only be satisfied with greater levels of debt and more hours of employment. It became a vicious cycle.

Soon her grades started to suffer because she had less and less time to spend studying. Before she knew it, she was working almost full-time and failing most of her classes. She decided to drop out for the semester and catch up financially. Unfortunately, by only making the minimum payment each month, her debt never seemed to go down. In addition, she had a tremendous amount of guilt because she had been lying to her parents who still thought she was in school.

Jane is living a lie, which will eventually be found out by her parents. The truth will come out and the longer she waits, the longer her college education is being delayed. Right now she is just treading water by making only the minimum payment each month on her $6,000 in total debt. The following example puts into perspective the time it will take Jane to pay off her debt.

If a college freshman with a much lesser balance of $1,000 quits charging on the card and only pays the minimum due each month, he or she could earn a bachelor’s degree, complete a master’s program, and still have three years left to finish paying off that freshman plastic binge.

Once Jane accepts the fact that her current course of action cannot make a dent in her debt, she will hopefully be more willing to talk to her parents, discuss her situation with a credit counselor, or explore a solution with her school’s financial aid office. Until she does so, Jane will continue burning the candle at both ends until it finally burns out.

Some danger signs of being overextended are:

Jane should have figured out before she started to experience any of these danger signs how much debt she could handle by completing the debt percentage worksheet introduced in Chapter 3. As a refresher, the following guidelines correspond to the percentage of your total monthly debt payments compared to one’s net income.

If the debt percentage is:

If Jane had done these calculations prior to getting her first credit card, she would have realized the maximum amount she could have handled per month. Since her net monthly income was only $1,000, Jane could not take on more than 20 percent, or $200 a month, in debt payments. Her car payment was $150 so she could only afford to pay $50 extra in credit card payments. Do you now see why she was forced to play the “credit card shuffle”?

Robbing Peter to pay Paul is never a long-term answer. It may temporarily fix the problem, but in the long run you can’t accept a debt level that is in the danger zone! Keep this danger zone in mind when you are confronted with the spending decisions you must now make on your own. Recall one of the lessons from Chapter 2, “Do you really need it or just want it?”

The Freshman Ten

Although the “freshman ten” has usually referred to the extra ten pounds the average college freshman gains during their first year, it also can refer to debt. In the case of Christi, the “freshman ten” referred to the extra $10,000 she charged on credit cards her first year in college.

Credit card companies eagerly seek your business. College students are targeted for many reasons: it is cheaper to conduct mass marketing campaigns on college campuses (about one-half the cost of marketing elsewhere); students forge long-term corporate loyalties (an average of at least fifteen years for credit cards); and their present and future needs include a wide-range of financial services (private student loans, debt consolidation loans, checking accounts, savings accounts, auto loans, and home mortgages). Finally, unlike other nearly saturated credit card “niche” markets, at least one-third of the population of four-year colleges and universities are replenished each year with new students (freshmen and transfers). These factors inspired Citibank to spend $10 million in 1999 just marketing credit cards to high school and college students.

The reality is that the United States is a free market society, and when someone is of a legal age, they can be pursued as a customer and held responsible for their debts. This means that as a college student, you will continue to be sought after by credit card companies and other financial institutions. Remember that just because you are offered a credit card doesn’t mean that you have to accept it.

Christi’s problems all started as a freshman when she found a credit card application that had been placed in her bag at Florida State University’s bookstore. She did not have a credit card and thought it would be smart to have one for emergencies. She was far from home, having been born and raised in Illinois, and she felt safer having a credit card in her possession. Unfortunately, Christi’s definition of an emergency included meals out, new CDs, and football tickets. She enjoyed going out with her friends, which soon became a daily occurrence.

When she reached the limit on her first credit card she easily obtained another application from a credit card company’s booth outside the student union. Christi even got a water bottle for filling out the application. When this card also became charged to the max, Christi went back to the student union and this time got a T-shirt along with her third credit card.

Before it even seemed possible, Christi had accumulated $10,000 on her three credit cards. She never kept track of her spending, so it was easy to get her debt level up this high. So far she had been able to handle the minimum payments by working her part-time waitress job, but now these payments were more than she could handle. She responded by increasing her hours at the restaurant, which left less time to devote to her schoolwork.
By the time summer break arrived, Christi returned home with poor grades and a large debt. She advised her credit card companies of her new address in order to receive her bills over the summer. Her spending habits would have remained a secret if it hadn’t been for her brother. He saw a credit card bill arrive one day for Christi and promptly opened it. He wasted no time in telling Christi’s parents about the amount of money that she owed.

Her mother and father were livid. They were extremely disappointed and Christi had to endure numerous lectures on her poor money management. But in the end, they paid off her credit cards since they didn’t want Christi’s credit affected negatively. By the time Christi returned to college in the fall, they had her sincere promise to not apply for any more credit cards. If she did, her parents said she would be on her own to pay them off.
Christi might argue her story had a “happy ending.” Her parents paid off her debt and her problem went away. Typically though, when the debtor has someone else pay off their debt, they never learn the lesson. Therefore, the behavior that got them into debt in the first place will probably be repeated. Christi could easily continue her same old spending habits and believe that despite her parents’ warning, they would bail her out again if she gets into trouble. By relying on her parents to be her financial guardians, Christi could have a difficult time becoming financially independent.

A much happier ending would have been for Christi to have taken a loan from her parents and remain accountable for her debt. She could have paid them back interest free at a payment schedule she could handle. This lingering debt would have served as a reminder of what can happen when credit is not used wisely. Hopefully Christi would then have learned a valuable lesson.

Remember these simple rules regarding credit usage:

A Degree in Debt

Credit cards are not the only source of money that needs to be managed wisely in college; student loans and scholarship money can be equally as dangerous. It has become a reality that most students will need to receive financial aid during college. Currently, the cost of a four-year degree (including room and board) averages $90,164 at a private university and $33,880 at an in-state university, according to The College Board. Overall, a study by the Institute for Higher Education Policy found that parents had saved an average of only $9,956 for their children’s college education. This represents about one-quarter of the total cost of attending public universities and only about one-tenth of the cost of private colleges.

Unfortunately, rarely do parents start saving early enough. Many times, they first think about funding their children’s college education while the entry applications are being filled out. This reality means that you may have to supplement savings with financial assistance. In the seventies, loans made up 25 percent of government assistance in funding higher education, while grants were the majority. Now loans are about 80 percent of government assistance.

You will need to apply for loans to make up the difference of what you have available and what you need to pay. This amount should be estimated frugally. You may be eligible for more money than you need. Remember the lesson from Chapter 2: the more money you have, the more you spend. If this pattern holds true for student loans, you may be tempted to borrow too much and spend it on things totally unrelated to school.
Michael had always wanted to attend an Ivy League school, so when he got his acceptance notice from Harvard, he was elated. Even though its tuition was very high, Michael believed that a degree from this prestigious school was well worth the expense. Since his parents couldn’t afford to help him pay for the tuition costs, Michael, who had just turned eighteen, had to rely on student loans and a scholarship to foot the bill.
During his freshman semester, the school recorded his student loan and scholarship disbursements electronically in his university account. After the school debited his account to cover tuition, room and board, and other fees, the amount left over was given back to Michael. This amount should have been earmarked for future educational expenses. Instead, Michael considered this money his own private funds to pay for any personal (non-educational) expenses, which might come his way.

These personal funds turned out to be for expenses like drinks for his buddies at the local bar, road trips during the weekends, dinners out with his girlfriend, football tickets, and other daily personal expenditures. Michael felt lucky that he had this extra source of income while his friends seemed to barely have enough money to buy an occasional burger at the local hangout.

When it came time to apply for his student loans for his sophomore year, there was no question that Michael would request the maximum amount available to him, even though his actual school expenses were much lower. He repeated this pattern every year without worry, since he didn’t have to start repaying these loans until after he graduated.

Eventually that day came to pass and Michael was out on his own working his first post-college full-time job.

His salary of $25,000 was typical for a recent college graduate and it was able to cover his living expenses until he got a bill in the mail six months after he had graduated. This bill was the first monthly payment for his student loans, which he would now be repaying for ten long years. Michael was shocked when he saw the amount he was now required to pay monthly. The reality of the $12,200 in total student loan debt that he owed sent him into a panic.

In fact, when Michael did a monthly budget of his situation based on his student loan obligation plus $2,200 in credit card debt plus monthly living expenses of $2,100, he found out that he would have to earn $38,512 annually in order to break even! His current salary left him $14,000 short. This shortfall quickly put Michael into default since he could not afford his monthly payment. As many as one-fifth of those with student loans may default on their loan repayment.

Michael should have borrowed student loans only up to the amount that he actually needed and not up to the available limit. Since Michael also had received a scholarship, the actual shortage needed to be covered by student loans was not that great. Borrowing more money than was necessary left Michael with a generous slush fund, which allowed him to live a life not like the typical “starving student.”

Michael seemed to have forgotten the true purpose of student loans, to pay for school expenses and not personal expenses. Otherwise, they would have been called “personal loans” instead of “student loans.”

Leaving the Nest

Moving away from home for the first time is a pivotal moment in your life. It is one of the rites of passage to becoming an adult. Whether your first place is a room in a dorm or in a sorority or fraternity, it is still your own. You can decorate it how you please, invite over whom you want, and stock your refrigerator any way you wish. It is up to you.
Independent spending decisions now become an everyday occurrence, but they also involve an incredible amount of financial freedom that most young adults are not prepared to handle. Living at home usually meant that your parents paid for most living expenses. It is a rude awakening when bills start arriving in the mail once you’re on your own. Phone bills, utilities, car payments and credit card bills are just some of the new arrivals you’ll find in your mailbox.

It is a good idea to do a budget prior to moving out if you can anticipate your expenses. If you can’t do a budget in advance, it should be done as soon as you start living independently. Estimate your monthly income from all sources (student loans, scholarships, jobs, parent’s allowance, and gifts). This should be income left over once you have paid your tuition-related expenses. Then multiply by the percentages given for each expense category to figure out how much you should budget for each expense. If you determine that you can afford a maximum of $200 for food per month, then you need to spend within that limit. That may mean not bringing your dates to expensive restaurants on a regular basis (especially if you are paying for two). Try to live within the limits of each category in order to live within your means.

Income
Monthly net income (after taxes) $__________________

Expenses

The total expenses should be equal to the net income. If you know what your expenses are and the income you have available, you will be more likely to live within your means.

Financial Aid

It is necessary to realize that financing your education with your credit cards, day trading, or gambling are potentially the most expensive and risky things you can do. You need to research other forms of financial aid. The biggest problem in students securing financial assistance is that they are not always aware of what’s available. Most colleges provide a variety of financial aid programs. Too many students wrongly assume they won’t qualify. The truth is there are plenty of sources for grants, work-study programs, scholarships, and low-interest loans. According to the U.S. Department of Education, the following are average financial distributions:

There’s a single form that all colleges use called the Free Application for Federal Student Assistance (FAFSA). Most financial aid information is easily available online from the school you are planning on attending. Generally there will be a connection or a link to web resources for scholarships and other types of aid. After you’ve submitted your FAFSA, you will start getting requests for information. You need to respond quickly and provide all the information that’s requested. That way, you’ll stay on time and get the best aid available.

Grants or scholarships generally don’t have to be repaid, but loans do. The repayment doesn’t start until six months after graduation. If you continue onto graduate school, these payments can be deferred (delayed) until your schooling is complete. The interest on student loans is usually much lower than that of a conventional loan and definitely much lower than the interest on credit card debt. Keep in mind that most student loans can also be deferred if you suffer a hardship situation like the loss of a job.

Words of Wisdom

By understanding the special financial situations you may encounter in college, you will be able to handle them more intelligently. You should take the following “words of wisdom” with you from this chapter:

Off to Work We Go

The decision to go to college after high school can be influenced by many factors. The percentage of graduates going on to college from your high school can play a big role. If a large number of your classmates are college bound, it increases the likelihood that you will consider attending college.

The reality is that increased education and increased pay go hand-in-hand. The statistics show that the higher educational level you attain, the higher salary you will command. Take a look at the Department of Labor’s 1996 findings relating to earnings by educational attainment:

A “diploma premium” is attached to each advanced educational level. The average salary of someone with a master’s degree is double that of someone with only a high school diploma; someone with a professional degree averages four times more than someone with a high school diploma.

Brent’s dad Walter had an undergraduate degree and always preached to Brent the value of going to college. Over the years, Walter had been passed over for promotions three times by people who were less qualified but had higher degrees. These disappointments frustrated him and he wished he had stayed in school longer. Walter didn’t want his son to miss out on advancement opportunities, so he encouraged Brent to go to college. However, his son did not share Walter’s dream. Brent, at eighteen, thought college was a waste of time when the alternative was to earn “big bucks” immediately. His older brother was a starving student, and Brent did not find that lifestyle attractive. He didn’t believe that a college degree had anything to do with making money, Brent’s No. 1 priority was “a well-paying job.” In fact, 81 percent of teen males chose “a well-paying job” as their number one future goal, according to Men’s Health 18 (mh18.com). Brent began by selling health club memberships at a new fitness club. He made good money because he was paid a commission on each person he enrolled. The new members joined since this neighborhood had been underserved before; the closest gym had been a twenty-minute drive away. As the new members flocked to the club, Brent saw his paycheck get bigger and bigger, reinforcing his belief that he had made the right decision in choosing not to go to college. He would be studying and writing term papers right now instead of earning and spending money.

The good times did not last forever. As the club became saturated with new members, the new enrollees dwindled along with Brent’s paycheck. His income leveled out to an amount that was far below what he felt he deserved to make. So Brent quit and started looking for another job. He thought that a different industry would prove to be the solution.

As he applied for jobs, he noticed that many required a college degree. He could apply only for those jobs that required a high school diploma. After failing to earn the money he wanted, Brent started to wonder if maybe his dad had been right. When he came to his dad for advice, Walter had the urge to say, “I told you so” but didn’t because he knew his son had to make this discovery on his own.

After a long discussion, Brent decided to go to college after all. In fact, in convincing his son to go to school, Walter also convinced himself. He found an evening program that allowed him to continue working full-time and get his master’s degree at the same time. As Walter lectured Brent about the need to delay gratification while making sacrifices in the present, he was also lecturing himself. He knew that his decision to go back to school would not be an easy one.

The short-term difficulties of juggling a job and an education can pay off well in the long-term. There are many training programs to increase your skills in a specific area, which could also make you more marketable and increase your salary. There are also many colleges and universities that cater to the working adult. You can continue to work and also receive your education at the same time. Achieving this is not always easy, but people who have disciplined themselves to complete this undertaking are almost never sorry.

The Education Reporter Gets an Education

If you are spending a minimum of forty hours a week at a job, you should try and pick a profession you enjoy. Choosing an occupation that you are ill suited for may make you frustrated and unsuccessful in your career ambitions. Since we all have different skills and strengths, it is worthwhile to decide upon a career path that allows you to use your talents to the best of your ability.

Although we can argue that no job skill should be worth more than another, the fact remains that a doctor’s skills are more highly compensated than a teacher’s. If you find that the job of your dreams does not pay well, that fact should not detract you from pursuing it. When people decide upon professions solely for the financial reward, they often find themselves miserable in a job for which they feel no passion.

Once you have answered the difficult question “What do you want to be when you grow up?” you then need to do some research. Find the answers to the following questions:

Joan had decided upon her profession when she was a little girl. She always interviewed everyone around her. Joan loved to ask questions and had an inquisitive mind. She became the editor of her high school newspaper and was responsible for the paper winning several awards. It was therefore no great surprise to her parents when she decided to become a journalist.

She enrolled in Northwestern University’s school of journalism and graduated near the top of her class. Upon graduation, at twenty-four, she started working as a reporter for a local newspaper in a Los Angeles suburb. Unfortunately, this dream job did not offer a dream salary. She made only $23,000 a year. Joan found it very difficult to survive on this salary in a very expensive city along with the $30,000 in student loans she had started repaying.

Since her beat was “education,” she decided to write a story which compared average salaries for different jobs. The median salary for her profession “journalism” was $35,776, about equal to what a postman earns. Joan was surprised by many of her findings when she did a random sampling from the Department of Labor’s statistics:

For her story, Joan interviewed a young woman, Claire, who had graduated from law school two years earlier. After receiving her law degree, Claire promptly took the bar exam and flunked it. While she studied to prepare for her second attempt, she worked as a paralegal. While “lawyer” topped Joan’s earning list at an average salary of $59,748, Claire’s legal assistant job only paid her $25,000. She had been relying on the higher salary to pay her student loans, which totaled $70,000. Now Claire found herself unable to make the monthly payments on her loans and was in default. She was scheduled to retake the bar exam the following week. If she didn’t pass the second time, she knew she would be in a lot of trouble.

After hearing Claire explain that a higher paying job would be the solution to her problems, Joan went back to researching jobs and their respective salaries. She discovered that she could work as a technical writer and make more money. Although her heart was in reporting, Joan decided that her more immediate concern was being able to repay her student loans. So she put her dream on hold and found a job as a technical writer.

Once you have created your career action plan and identified jobs that are a good match for your skills, interests, and financial needs, you will be in a better position to make the right choice. If you decide to skip those steps and figure it out as you go along, you might eventually stumble upon your dream job, but you will waste a lot of time along the way.

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