I’d like to introduce you to Robyn Beck, a college graduate with a good starting position. Robyn enjoyed the college experience with her friends; maybe a little too much. You see, upon leaving school, Robyn had $7,000 of credit card debt, and instead of being able to buy a new car with her hard earned money, Robyn had to dig herself out of debt. She was paying 20% of her take home income to credit card companies in order to pay off the cards as quickly as possible. Robyn’s full story can be found here on YouTube.
There is good news from college students as a whole. According to 2012 research from Sallie Mae and Ipsos, 35% of college students have credit cards, compared with 42% in 2010, and freshmen were least likely to use credit, with 21% having a card in their name compared to 60% of seniors. But wait, there’s more good news. Most college students exercise caution with credit cards: 33% of card holders had a zero balance, 42% had a balance of $500 or less, and just 24% had a balance of more than $500. “College is a time for building not only book smarts but also money smarts,” said Patricia Nash Christel, vice president at Sallie Mae.
According to recent Sallie Mae research, students are optimistic about their financial abilities as 60% reported they are good or excellent at managing money. But the question is, are they actually good or do they just think they are? Sallie Mae’s research also revealed that 23% of parents help pay at least a portion of their student’s credit card bill. So, are we helping or hurting?
Let’s return to Robyn. She thought she would be able to pay off her credit debt quickly, once she started working. Her rude awakening came when she saw the impact that taxes, social security and health insurance had on her take home income. She also had not budgeted for gas because her parents had always paid for it. Fortunately, Robyn was smart about paying off the debt as quickly as she could. She could have chosen to pay only the minimum monthly payment. If she had, it would have taken her approximately 35 years to pay off her $7,000 debt (assuming a 17% interest rate), and she would have paid a total of approximately $59,000 to the credit card company. To really put this in perspective for you, at the end of her first year of making minimum monthly payments of $100, Robyn would have paid down her debt by $5 because the remaining $1195 paid for the 17% interest her original debt had accumulated that year.
As parents, we must educate our children about money. That means teaching them to spend, save, give and invest and the basics of credit cards. There are so many great resources available online. Money Magazine ran an entire series entitled, “Kids and Money.” For teaching the basics around credit cards, I recommend using the following YouTube Video. It is simple enough for a teenager to understand but very impactful. A great resource for teaching, even very young children, about giving is Giving Families, an organization founded right here in Cincinnati.
Robyn’s parting advice is something she wished she would have heeded, “Live like a professional while you are in college so you can live like a college student when you are a professional.”