Parents face a perfect storm: college kids and plastic

As schools encourage students to apply for credit cards, parents should provide guidance so their kids can avoid giant debt burdens.

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An annual college ritual is quickly approaching as parents, preparing to drop off their college students at campuses across the country, focus on finalizing financial packages.

This year, with private-college costs topping $50,000 annually and the implosion of many college-financing programs, there is increasing parent-student anxiety regarding the ability to pay for a college education.

Families are patching together a hybrid of monetary sources. Financial support from parents will be available to 60 percent of students to cover some or all of their educational costs, 40 percent will receive scholarships, an equal number will receive student loans, and a third will contribute to college costs through part-time or summer jobs. Student debt for a graduating senior in 2006 totaled an average of $19,646, according to Projectonstudentdebt.org.

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While families are struggling to put together a college finance package to limit student debt, their good intentions are being undermined. Many universities and alumni associations are consorting with credit-card companies to encourage college students to sign up for credit cards and, more recently, debit-student ID cards.

Some universities and alumni groups engage in exclusive agreements with credit-card companies, selling their student lists, allowing use of their trademarked logos, and granting access for on-campus marketing, featuring gimmicky giveaways of food, sports toys, and clothing upon completion of a credit-card application.

Banks have long viewed marketing of college credit cards as an attractive business opportunity, despite a failure to underwrite student credit. Credit companies wish to be the first card in the student's wallet, building brand recognition and loyalty. Companies encourage student associations, such as sororities and fraternities, to use credit-card enrollment as a fundraiser, paying fees for every new application.

Matt Smith, a 22-year-old senior at the University of Michigan, was introduced to his first credit card at age 19 as a result of a fraternity fundraiser, which netted his frat $10 for each new credit-card applicant. "My frat brothers told me to throw it away or cut it up. I eventually used the card, exceeded my limit, making late payments – boosting my interest rate to 30 percent. I am now using my financial aid to pay off my credit card."

Concerns regarding deceptive billing practices and high interest rates of college credit cards have resulted in many state legislatures passing bills limiting aggressive campus-marketing tactics and requiring disclosure of university/ credit company relationships.

A new frontier of credit concerns is being investigated, with New York Attorney General Andrew Cuomo broadening his student-loan industry inquiry of last year to a current investigation of debit-card relationships between colleges and banks, focusing on abuse of overdraft fees.

"Anytime you use a debit card and have insufficient funds, you will be charged an overdraft fee, warns Leslie Parrish, senior researcher at the Center for Responsible Lending. "Contrary to common belief, you can spend more than you have in your bank account." Since most students frequently use their debit cards for small purchases, the standard overdraft fee of $34 may be many times the amount of the purchase.

Students will experience social pressures to carry a debit or credit card, and parents should educate them about the costly charges associated with these financial products. Use the following guidelines:

1. Recognize the "perfect storm" of credit and debit-student ID card marketing awaiting your student. Check your college's relationships with credit-card companies and insist on reviewing credit-card agreements.

2. Encourage your student to initially use a debit card exclusively to establish the idea of living within a budget. Compare debit-card alternatives and get overdraft protection. Consider being a parent cosigner on the account and monitor student activity – but be careful your own accounts are not linked.

3. Graduate your student to a credit card once they have proven responsible with a debit card. Stress the importance of good credit scores for their future.

4. Stop credit-card solicitation by calling 888-567-8688 or go to optoutprescreen.com.

With proper coaching, your student may adopt the practices of Ruta Tesfamicael, a 2007 UCLA graduate. With her parents' guidance, she became a credit-card user. "My reason to use a credit card was to build my credit score," she says. "My advice to students: Treat a credit card simply as a convenience – not to carry cash – don't spend more money than you have in the bank."

Dr. Kathleen Connell is a professor at Haas Graduate Business School, University of California, Berkeley.

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