The 18-year-old child of one of your clients has just finished high school and is preparing to leave for her freshman year in college. You've helped your client plan for her college education, and you think your job is pretty well done.
A host of studies shows that young adults are very likely to end their college careers under a mountain of debt. Students are walking around with three, four, or even five credit cards by the end of their freshman year, and are starting down a road that often leads to disastrous financial consequences for them and their parents (your clients). Ten years ago it was uncommon to find a youngster who qualified for a credit card without having a full-time job. Today it's quite common. In fact, credit card companies have been going after young adults like college basketball coaches after big-time high school athletes--only in this instance it's not phone calls and visits to the home that are used to capture youngsters' hearts but very specialized marketing campaigns (see "College Credit" sidebar).
In the wake of these developments a number of planners are starting to make it their business to caution clients with college-age children of the potential pitfalls their progeny may encounter while in school. Just a few words of advice before the child goes off to college may save heartache and financial distress for all concerned.
The Wild West
Credit card companies just love college students |
By Mike Jaccarino
Karen Altfest of the Manhattan-based planning firm L.J. Altfest & Company recently got a first hand look at the specialized marketing campaigns that credit card companies have employed in recent years to entice college age students to get their cards.
"My son is now a sophomore in college so it wasn't that long ago that I was taking him to campus for the first time," she recalls. "I'll never forget that there were these credit card people there telling my son that if he signed up for one of their cards, they would give him a free T-shirt with a picture of the college logo on it. I was horrified."
Indeed, with the U.S. credit card market nearing saturation and new customers at more of a premium than ever before, credit card companies have set their sights squarely on college students. In doing so, they have employed a series of very specialized marketing strategies designed to prey upon college students' affinities. In light of this, many financial planners who advocate broaching the subject of credit card debt with the college-age children of clients believe that knowing about these specialized marketing strategies and relaying that information is of the utmost importance.
Take the free T-shirt, for instance, which was offered to Altfest's son for filling out an application. In recent years college campuses across the country have been flooded with credit card company representatives offering trinkets in the same manner: C.D. holders, water bottles, stress balls, bottles of Snapple, Frisbees, coffee mugs, message boards. And while Altfest says that her son wasn't interested in the deal, recent studies have shown that college kids are responding wholeheartedly to the promotions. A 1998 study by the U.S. Public Interest Research Group showed that the vast majority of college students got their credit cards from a promotional credit card representatives giving away free stuff. The study showed that of the students who paid their own credit card bills, the majority--61%--filled out the application for their card at a table set up to give away free items by a credit card company.
"I'm convinced that credit card companies are trying to exploit college students through students' lack of credit education," says Lucious McEachin, a 31-year-old personal finance manager for Consumer Credit Counseling of America, a nonprofit agency in Durham, North Carolina, that helps people get out of debt. "It's out of control. The companies target them for free items and many of the students are actually surprised when the card arrives three weeks later."
McEachin should know. His office is literally surrounded by colleges like Duke University, North Carolina University, North Carolina State, and the University of North Carolina at Pembroke. He said that many of the students that come to or are referred to his office, and many of the adults whose credit problems began in college, said they got their first card at promotional tables. "The problem is one of education," he adds. "They walk away with free items but never are told by an adult how to handle a credit card."
The PIRG study shows that only 41% of students found credit card education materials they were given at the promotional tables "helpful" or somewhat helpful. The remainder found them not helpful or unreadable.
But giving away free items along with unreadable how-to manuals to a group of people--college students--who many times are diving into their first experience with credit cards, is not all that's at the bottom of credit card companies' marketing bag of tricks. McEachin said that such strategies are also in full force on the Internet, pointing out the Web sites for such credit card vendors as Mastercard and Visa, as well as those for many of the banks who distribute such branded cards. A student will find on the Web a section for college students liberally dotted with such words as "cool" and "hip," along with photos of young adults in trendy wrap-around sunglasses. Then there are the special affinity cards that are obviously intended to attract college students. One card promised to deliver special discounts at such stores as Barnes & Noble, Pizza Hut, (800) Flowers.com, and different Spring Break locales around the Western Hemisphere.
The parade of promotions doesn't end there, however, but extends to what McEachin called the most insidious of the prongs in the credit card companies' attack. "Most of these cards come with very low introductory interest rates that only last for a few months. By the time the students have worked up a large balance, the rate has jumped to 15% or 16%," he says, his voice filled with indignation. Once again, the PIRG study shows that many college students did indeed feel hoodwinked by the low introductory rates that were advertised to them when they signed up. Over one quarter (26%) of the students said they found such "teaser rates" misleading.
In response to these alarming statistics, McEachin and his fellow debt counselors have launched an education campaign at the colleges in their area. Consumer Credit Counseling reported that it even has plans to push this educational campaign to the North Carolina high school system, pending funding and political authorization for the project. In the meantime, McEachin extols the benefits of preparing young adults for the marketing push that awaits them.
Staff Editor Mike Jaccarino can be reached at email@example.com.
Nancy Prikazsky, vice president of operations for Nellie Mae Corp., one of the largest student loan vendors in the nation with over $4 billion in loans, wouldn't blame a financial planner if he had a hard time believing that an 19-year-old without a job could gain approval for several cards. "In the past you wouldn't see 19-year-old kids with no credit history and no job getting cards," she said. "Today, lenders have gotten away from this."
In 1998, Nellie Mae conducted a study of 300 undergraduate students from schools across the country. The study found that 67% of those students had at least one credit card, and that the average student had 3.5 cards. Two years later, the study was conducted again. This time 78% of the students reported having at least one credit card, with the average student owning three. Meanwhile, a similar survey was conducted in 1999 by Georgetown University sociology professor Robert Manning, who specializes in studying credit card debt among college students. Manning found that 70% of college students at four-year schools in the United States had at least one credit card.
The largest reason for this easing of credit card criteria is technology and its effect on the competitive balance of the credit card industry, according to Robert McKinley, CEO of the Virginia-based Cardweb.com, which tracks the credit card industry for consumers. McKinley said that as late as the 1970s, credit cards were still hampered by the sheer difficulty of using them. But in the early 1980s, advances in computer and communications technology allowed shop owners to gain authorization within seconds with a simple swipe of the card through an electronic machine. Today, instant credit card approval is available, allowing a shopper at, say, Barnes & Noble to save 10% on a purchase by signing up for a store credit card at the moment of checkout. The use of credit cards has swelled to where today, there are 1.1 billion cards in circulation in the United States alone. "A few years ago, the industry became saturated, and companies had to look to other markets for growth," McKinley says. "College students, senior citizens, and even people with subprime credit histories are now hotly contested. This is why you see card companies on campuses."
Technology and competition, however, can't get all the blame, according to Edward Mierzwinksi, spokesman for the United States Public Interest Research Group, which conducted a broad study of credit card use among college students in 1998. Mierzwinksi said that before 1987 only traditional banks could issue credit cards. Passage of the Competitive Equality Banking Act of 1987 allowed non-banks like Barnes & Noble, Sears, and gas stations to issue their own credit cards. "The banking industry was really asleep at the wheel," says Mierzwinksi. "Then the industry opened up, you had much, much more competition and a greater emphasis on marketing. This has led to this Wild West atmosphere we have today."
All of this marketing has led to pervasive credit card ownership and debt among college students. The 2000 Nellie Mae study found that among the students who owned credit cards, the average unpaid balance was $2,748. Furthermore, 13% of the students surveyed had between $3,000 and $7,000 of debt on their credit cards, and 9% had an unpaid balance of more than $7,000. "Can you imagine beginning your adult and professional life with that much debt hanging over your head?" Prikazsky says. "And it's really worse than it seems since most of these credit cards debts are generating interest of between 15%-18% a year. That's trouble."
The results of such heavy debt can run the gamut from dropping out of school to irreparable financial harm to worse. There were, for instance, two recent events that sparked a national media furor involving two college kids who committed suicide after feeling cornered by their credit card debts. Both students hanged themselves in their bedrooms--one left her credit card bills scattered across her bed. Tales of students dropping out of school due to credit card debt are more common. University of Indiana administrator John Simpson remarked in 1998, "We lose more students to credit card debt than to academic failure."
Then there are the students who manage to graduate but still suffer financial harm that dogs them into their adult lives. This is evident at the United Way-funded Credit Card Counselors of America, where troubled credit card owners go as a last resort. "The majority of the people who walk through our door had their problems begin in college," says Sue Ortiz, a counselor in the Durham, North Carolina, office of the Credit Card Counselors of America. Ortiz says it is only when the young adults leave college and begin to try to buy things such as a home or car, or even land a job, that their muddled credit histories get in the way. "It's then that they come to us for help."
Taking Aim at the Parents
Perhaps more poignant for advisors are the instances when it's the parents who are forced to come to the rescue of their debt-laden children. For instance, Ortiz's fellow counselor Lucious McEachin recalls an instance when he was lecturing on credit card debt at the University of North Carolina at Pembroke. A student told McEachin that he had signed up for several credit cards and then used them to purchase $24,000 worth of C.D.'s, music equipment, a stereo, clothing, and food. "In the end the only thing he could do was turn to his parents or declare bankruptcy," McEachin says. "Now his parents will be paying for a long time."
Mierzwinkski believes that one of the main reasons credit card companies are willing to take risks on youngsters is that they ultimately have the backing of their more secure parents. "I'm convinced that the industry gives the cards to these students knowing that even if the parents are not co-signers, they can guilt-trip the student into calling home and the parents will bail them out," Mierzwinkski says.
There are instances when very well off parents handle the credit card debt of their children without much difficulty. A planner might think at first that this is a sort of financial-planning crime without victims, but some in the profession are quick to say that isn't the case. "When you start bailing kids out of debt, you're getting into an area of personal responsibility," says Denver-based planner Joseph Janiczek. "A child that is constantly being bailed out will constantly be frustrated. That person feels they don't have any power. I've found that children in this situation never accept the future or the past."
So how should financial planners handle this problem? Admittedly, the majority of financial planners interviewed for this article said that they were unaware of how dire the situation had become with students and credit card debt, or had known and still paid little attention to the situation. However, this is exactly the kind of advice that Michael Furois of The Planning Associates in Chesterton, Indiana, believes is required of planners today. "More than ever before, advisors are called on to give out this kind of general, holistic advice that doesn't necessarily correspond to a physical financial plan," says Furois. "Today, advice is coming from all kinds of places--insurance agents, CPAs, full-service brokers, the Internet. We really have to step up and be the quarterback."
Karen Altfest of the Manhattan-based financial planning firm L.J. Altfest & Company says of credit card debt among students: "It's part of the total financial picture and there is no reason not to bring it up with clients. It might be more than clients ask for, but it's beneficial nonetheless."
What solutions should be presented? A good first step, says Furois, is to gently warn clients with college-age children of just how epidemic the problem has become. Quote some of the numbers, talk about some of changes in the industry that eased young adults' access to credit cards, and mention how hard the credit card companies are marketing to their children. "This sort of information not only gets a client to take note but could make them feel indebted to you for all the potential problems you could be saving them," says Furois.
Both planners point out that while it's certainly good to warn parents, it would be even better to be able to present more comprehensive solutions. Here's where the 1996 PIRG study can most helpful. That survey studied the difference between students who had gotten their credit cards in conjunction with a family presence (usually Mom or Dad) and those who impetuously filled out applications in return for trinkets at the pervasive booths set up by credit card companies on college campuses. The study found that 69% of the 1,260 students interviewed had gotten their credit cards on their own without family guidance; the other 31% reported that a parent either co-signed for the card or assisted with payments. The students who had gotten the cards on their own had more cards on average (2.6 as opposed to 2.1 cards) and a higher balance ($1,039 to $854) than those who had some familial presence in the process. The verdict from the findings: Advise clients with college-age children to try and play a role in their child's credit card experience, either in helping to choose the card or in paying off the debt.
"This makes sense," says Marilyn Bergen, a financial planner with the Portland-based firm Capital Management Consulting, who has dealt several times in the past with young adults having credit card problems. "You want to have the parents play a role in the process." Bergen said that the best possible solution is to have young adults gain their first exposure to credit cards and checking accounts when they are still in high school. "It's worthwhile to educate the parents when the child is still at home so they can exercise some control over the situation."
Then there are those planners who feel the advice involving college-age children and credit card debt shouldn't necessarily be restricted to simply speaking with the parents. Many planners have had positive experiences when they actually had a chance to talk to the child directly. Curt Weil of the Palo Alto, California-based firm Capital Management tells of a couple he was advising who asked him to talk to their 19-year-old son, who had fallen into considerable credit debt during his first year away at college. Weil said that he found the kid didn't realize that at the rate he was making payments it would have taken him six or seven years to pay off the principal--and that was without ever charging another item during that time. "It was the power of compound interest that a lot of these kids don't understand," says Weil, who has since had several other experiences talking face-to-face with the children of clients. "You have to first get them to realize this concept, and then you have to point out how it can work in their favor as well if they are able to pay off the debt and save."
Weil tried to talk the student into not only setting aside a certain amount of money each month for payment of the credit card debt, but also investing an equal amount in a mutual fund once his creditors were paid in full. "I told him that he would be so used to going without that money by the time the card was paid off that he should invest that money and have interest work for him." The story has a particularly happy ending, when four years later the kid called Weil after graduating to ask him if he should continue to put the $275-a-month in the mutual fund that he had been investing for the last several years. "It was totally amazing," said Weil, a hint of surprise still evident in his voice. "The kid had actually not only paid off the credit card debt but invested the money like I told him to." Now Weil regularly broaches the topic with clients with similar-age children, hoping for similar results.
You also don't have to convince Denver planner Janiczek of the value of meeting with clients' children to help keep them on the correct financial path. The planner said that he not only suggests to clients with college and high school age children that they sign their kids up for a session in his office, he is also working on instituting seminars to satisfy that very need. "It's in the works right now," he says. "We're going to have classes where several clients can bring their children to the office and meet with me or another planner as a single group."
Janiczek said he plans to go over topics ranging from setting financial goals to avoiding credit card debt. "I'm very excited about this. I've done it several times for parents and their children on a one-on-one basis, but I think this format will tend to get more parents involved."
Such a feeling is borne out of a conclusion Janiczek arrived at far earlier in his career when pondering how he could not only capitalize on the growing college market but also provide advice to some of the people who needed it the very most. "I knew that young adults were having so many problems with credit card debt and the like, but I found that it just wasn't practical to market directly to them as potential clients. They have little money and are in debt."
So Janiczek came up with the solution of "mass marketing" to make time spent with young adults beneficial for both the planner and the kids. The trick, he says, is for a planner to do something once and then satisfy a large group with that single effort over and over again. He says this was the thinking behind the publication of his book, Absolute Financial Freedom (Prosperity Press, 2000), last year as well as the production of a number of audio tapes addressing such topics as credit card debt and how to extricate yourself from its clutches.
Janiczek's says he could see planners not only using this method in their practices, but also going straight to campus. "Why not?" he asks. "These kids are so desperate for advice, they'll come."
Altfest did that very thing, albeit by accident. She said a law journal recently contacted her about the possibility of speaking at a conference it was holding for law school seniors in the New York area. "I thought (students) would be more interested in the law firms attending looking for new students to fill jobs," she recalls, "but my session was standing room only, and these kids were asking millions of questions about how to get out of credit card debt and other financial issues."
The Direct Approach
Of course, with several hundred million dollars in assets under management, Altfest wasn't ready to pack up the spreadsheets and head over to Columbia Law to apply the practice for profit. Yet where Altfest sees needy students to be served solely on an altruistic basis, there are some planners who believe there are actually potential clients. Take for instance, Peter McDonnell, a Carle Place, Long Island-based planner who says he has long been thinking of a way to market his services directly to students. "I could see them on an hourly basis and give them some advice on how to get out of debt, pay off their student loans, and set up an IRA account," he said. "I've been toying with the idea of advertising in college newspapers around here."
If he should finally decide to take that course, there are more than enough collegiate publications in which to post ads. Actually, the great number of colleges in and around McDonnell's practice prompted him to move in that direction. "I'm right near the border between Long Island and Queens and without thinking there is St. John's, Hofstra, Long Island University," he says. "There are more than enough students."
Indeed, McDonnell envisions long lines of students desperate for the means to get out of credit card and student loan debt lining up outside his office to pay his $100 hourly fee. And that's not even the best part, according McDonnell, a planner with only three years experience under his belt. "You have to think," he says with a hint of cunning in his voice, "that if I were to help these college students get out of debt when they were really in trouble, they would think of me when they actually got a good job and had some assets to invest. That's the real beauty of it."