When Finances Go Bad
Impact of Student Debt
As we discussed earlier, students who feel compelled to work more hours to pay off debts or to afford luxuries may find they no longer can devote the time they need to their classes. Grades suffer, or the student decides to drop a class or two. In the long run, they extend their education, which means their degree costs more. The job itself can increase their daily expenses if it means having a car, paying for parking, buying "work clothes," or eating out because there's no time for lunch in the residence hall or at home.
Parents, too, face the consequences of student debt. If the student is on a parent's credit card, problems like excessive charges, failure to pay a bill on time, or high debt levels can affect the parent's credit rating. Many parents don't want their student to suffer from a poor credit rating or to graduate with excessive debt, so they use their savings or reduce their own discretionary spending in order pay off their child's loans.
Parent: "Our sophomore son received his first credit card just this past year. I feel like we should have started this phase sooner, but didn't see a need for it. He is aware of establishing his credit rating, and he's aware that since we signed on the credit card with him, if he misses a payment, our credit rating will be affected, too."
Affluenza
Once on campus, students may see their roommates and friends regularly buying concert tickets, lattes, new clothes, or peripherals for their computers, iPods, or other electronics. It is easy to be tempted to join the spending spree. A hard test, a research paper, or the stress of planning next semester's class schedule might be reason enough to go shopping and treat oneself to something new.
Some people call that “affluenza.” It's a condition that affects adults, teens, pre-teens, and college students, and it can lead to excessive debt for material belongings or entertainment that is not really necessary. The outcome can be a bad credit rating or long working hours to pay off credit card debt—and too many belongings to fit into a residence hall room or small apartment.
If you or others in your family are prone to affluenza, remember these tips:
- Before you buy—STOP
- Think it over
- Does this purchase fit into my financial goals?
- How many hours will I have to work to pay for it?
- Are there more satisfying alternatives?
- Decide if you want to create savings or create more debt
Adapted from “Dealing with Affluenza: An Epidemic Sweeping the Nation”, Lori Hendrickson & Becky Hagen Jokela, Regional Extension Educators, University of Minnesota Extension Service
Signs of Trouble
The following are signs of financial mismanagement:
- Paying only the minimum amount due on credit cards
- Spending/charging more each month than you make in payments
- Using credit and cash advances for items that used to be purchased with cash, like gas and groceries
- Your total credit balance rarely goes down
- Being at or near your credit limit and still applying for new cards
- Needing a consolidation loan to pay new debt
- Not knowing the total amount you owe
- Feeling stress whenever you use your charge cards
- Draining your savings to pay debts
- Making bill payments late
For more information visit Project Money.
No one wants their student to suffer from their mistakes, but students learn valuable lessons when they must face the consequences of their actions and change their behaviors in order prevent further problems. For more information on avoiding debt and getting out of debt visit Young Money
Parent: "Our son has had a credit card since he was 16 years old. He obtained it without any input or co-signing from us (which surprised my wife and me greatly!). It had a limit of $300. He immediately charged to the limit, then had to get it paid back with the money that he earned from his lawn care business and his restaurant job. The learning experience was absolutely priceless! When I saw his statement, I would point out to him the interest he was paying and remind him of how many hours he was going to have to work just to pay that, let alone the principal. After paying it off, he has never (to the best of our knowledge) charged more than he has been able to pay in full each month."
Students also learn from the situations their friends, brothers, or sisters get into, so talking about the mistakes of others can be very effective.
Parent: "I discussed finances with both of my children, but probably not enough. Some things, however, just need to be learned by experience. I believe the problems my son had with credit card debt made an impression on my daughter. She is three years younger than he is and realized what he had done. She has been much more responsible with her credit cards than he ever was."
Debt, Smoking, and Alcohol
Question: Is there any correlation between student debt and smoking? Answer: According to a survey conducted by Boynton Health Service, students who use tobacco are 1.7 times more likely to carry credit card debt of $1,000 or more. (2004 Leading Health Indicators Survey)Excessive use of alcohol can result in problems with money management, including late payment or nonpayment of bills, high credit card debt, and/or frequent money shortages. Be alert to these warning signs and ask specific questions concerning your student's alcohol use.
The Student Health Assessment Survey administered to students at the UM found that credit card debt was higher among alcohol users than non-users. 28.0% of alcohol users had a credit card debt over $1000, while only 18.3% of non-alcohol users had a credit card debt over $1000.
Assignment
Please consider the following:
Students frequently tell us they learn the most about avoiding financial problems from the mistakes their siblings or friends make. How has your student learned from the mistakes of others?