Wednesday, May 27, 2009

Credit Card Reform...It's About Time

Financial institutions that prey on college students by offering gifts and other promises in order to entice them to sign up for credit cards has been a huge problem…one that fortunately is about to come to an end. Both the House and the Senate recently passed the Credit Card Accountability Responsibility and Disclosure Act of 2009, which President Obama is expected to sign into law. What is significant about this act? Aside from addressing what are considered unfair practices with respect to interest rates charged to cardholders, this act will do much to curb potential abuses targeted at college students. You may recall from one of my prior posts that students graduate from college with, on average, more than $4,000 outstanding in credit card debt, according to a recent Sallie Mae survey. This truly illustrates how serious a problem student leverage has become.

The most significant provisions of the act relating to college students can be summarized as follows:
- The issuance of credit cards to consumers under the age of 21 is prohibited unless
- a co-signer, 21 or older, agrees to be jointly responsible for the account, or
- the borrower can demonstrate independence and the means to repay debt incurred under the card.
- Credit card companies may no longer offer give-aways on or near college campuses to induce students to sign up for credit cards; The act will also encourage colleges to set policies that will limit credit card marketing locations and institute credit and debt counseling as part of their student orientation.
- Any contracts between colleges and credit card companies will require public disclosure.

This is a much needed first step to address a practice that is contributing to the potential financial irresponsibility of the Millennium generation. The changes that the act will institute are overdue, and we as parents should take this opportunity to also counsel our children on good and bad debt to help them establish sound money management habits as they move on to financial independence.

Tuesday, May 19, 2009

Finding the Colleges That Will Change Your Child's Life

Many of you are probably familiar with Loren Pope’s book, Colleges That Change Lives, in which he identified 40 schools that he believed offer unique college experiences and which have strong track records for producing graduates who go on to become successful scholars and scientists. Last night these 40 colleges drew a crowd of several hundred students and parents at the Colleges That Change Lives (CTCL) information session and college fair in New York City. Whether or not one of these schools is potentially the right fit for your son or daughter (go to the website to check out the list of these 40 colleges:, the approach has merit for all students beginning the college search process. The CTCL colleges travel across the country each year as a group to reach out to students and families and to share their philosophies on admission and on picking the right college match:
- Don’t let yourself be seduced by rankings such as those in U.S. News & World Report, which are based upon entering student statistics. These rankings say nothing about what goes on during the four years in college!
- Identify schools where serious and thoughtful scholarly work is performed. Pope picked his 40 schools by finding out where PhD students did their undergraduate studies. These colleges out pace many of the more selective schools in terms of the number of future PhDs they turn out each year.
- Look for colleges that are student centered and focused on undergraduate education.
- Find schools that produce creative and critical thinkers, encourage cooperative rather than competitive learning, and where students are engaged in intellectual pursuits both in and outside the classroom.
- Bottom line: Look at outcomes, rather than inputs. What do students accomplish while they are in school and what paths do they follow after graduation?
The principle message of the CTCL schools is that students are more likely to have meaningful and worthwhile college experiences if they jettison the criteria of name recognition, prestige and ranking, and focus on understanding their particular needs and how these will be met by the mission and identity of the college community they choose. Young people owe it to themselves to take ownership of the process. That means knowing themselves well and having the confidence about what they have to offer. Your son or daughter is more than just test scores, a GPA and his or her class rank. Fortunately most colleges are more interested in learning about who the student is as a person. They share your objective of helping your child find the right fit and have the best possible college experience!

Thursday, May 14, 2009

Teaching Financial Responsibility - Talk to Your Kids About Money

This week I gave a presentation on Good Debt/Bad Debt to students at Chess-in-the-Schools, a not-for-profit after school program for New York City youth. I am hopeful that they left the session that much smarter about how to manage their personal finances. I am encouraged that I made some headway and was able to impress upon a group of high school kids that good financial habits will make or break their ability to lead financially secure lives.

Personal financial responsibility is a subject that needs to be taught to all young people, not just kids from lower socio-economic backgrounds who have no safety net. No one wants a child to graduate from college with excessive and unpaid credit card balances or to rack up large and unmanageable debts during any point in his or her life. Many of us had children in our thirties, and need to be thinking about our retirements too. Do we really want to be supporting our children’s bad spending habits after we’ve shelled out an obscene amount of money for a four year college education that we hoped would lead to their financial independence?

So what can we as parents do? Don’t wait until they go off to college to talk to them about good personal financial habits. Teach them the difference between good debt and bad debt. Using a credit card for impulsive purchases and paying the monthly minimum balance means that they are probably financing that purchase, at an 18% interest rate, over a period exceeding 20 years! At a double digit rate, the amount of interest they’ll end up paying will exceed the cost of the original purchase. If your son or daughter has a newly acquired credit card and is finding it difficult to pay off the balance each month, suggest using a debit card which takes the money directly from the checking account (but make sure that the checking account has sufficient cash so as not to overdraw the account). Help your child to see the need to cut back on impulsive spending.

Here are some staggering statistics. A recent survey conducted by student lender Sallie Mae, as reported on Bloomberg, revealed that 84% of students have at least one credit card, compared to 76% in 2004. Students with credit cards have an average of 4.6 cards and half of them have 4 or more. The average credit card debt among graduating college seniors was more than $4,100 last year, up from $2,900 in 2004. And only 17% of those who responded to the survey said they paid off their credit card balances each month!

You may be shocked to learn just how easy it is for an 18 year old college student to get a credit card. The banks prey on them on college campuses, send mailings about low initial rate offers, post inviting pitches in college bookstores and even entice students with free lunches. Make your child aware of these seductive offers and help him or her to understand how to be responsible about money and credit. There is no shame being one of the 17% who pays off credit card balances each month!

Tuesday, May 5, 2009

We've Deposited...Now How Do We Pay?

I am just back from college tours and an Independent Educational Consultants Association (IECA) conference in San Francisco. My college visits took me to Stanford University, Menlo College, University of San Francisco, Mills College, St. Mary’s College, Cal Berkeley and Santa Clara University, a rather eclectic grouping of schools. These trips always reinforce for me the benefits of the college visit experience, where one can truly get a feel for the campus and academic life, as well as the character of the student body. College visits are the only way to experience a school firsthand. There is no near substitute. When students make a judgment about whether they click with a particular school it is rarely cerebral. Fit is generally about feel: how well can I envision myself here?

But before I get ahead of myself talking about fit for the juniors just beginning this process, I want to continue with a topic that has been tops on the minds of many with high school seniors: how to pay for college, especially now that the May 1 deposit date has come and gone and students have committed to a school.

Myth #1: Families who do not qualify for need-based aid are the fortunate ones since they can afford to pay for college.

The opposite is often true. Middle income families are among the ones most affected by the economy and the rising cost of attending a four year school. Unless your child receives merit aid, he or she will not have access to outside resources such as federal or institutional grants that would help defray some of the costs. Even those families that were disciplined about saving for college are finding that the 529 plans have come up short. For many of us, closing the gap with income is a stretch.

If paying for college is a concern (you are not alone!), you hopefully gave serious consideration to all of these factors prior to putting down the May 1 deposit. Taking a more practical and realistic approach to financing a college education has motivated some to decide in favor of the more affordable option. The role that the financial factor will play this year has been the wildcard that has had colleges on edge about their enrollment numbers for the fall matriculating class. Some schools, perhaps in panic, even went to their waitlists prior to the May 1 deposit deadline, previously unheard of!

Whether your son or daughter is attending a state or expensive private college, you still want to consider all of your options for financing these four years. Scholarships are one route, but your student must be willing to devote the time and energy to filling out more applications and writing essays. Amounts tend to be in the $500 to $1,000 range, but with any luck, he or she will be able to win one or two that will make a dent in the cost. Good websites for scholarship searches include and, and some scholarship donors are still accepting applicants. Additionally, you may want to inquire in your guidance department to see if there are local scholarships that remain unclaimed. Don’t be alarmed if you have to register at a scholarship site, but you should never have to pay, so move on to another if they ask for money.

If savings, available income and scholarships still do not cover the cost, your option is to borrow, and unsubsidized federal Stafford student loans are the best priced loans for those not eligible for need-based awards. Students who do not demonstrate need can borrow up to $5,500 at 6.8% in their freshman year under this program. The amount goes up by $1,000 each of the next two years, maxing out at $7,500 for juniors and seniors, a borrowing total for all four years of $27,000. Though 6.8% is high based upon today’s interest rates, the loans are fixed so they hedge the risk of a rate rise. These loans are unsubsidized which means that the student is responsible for paying the interest on the loans while in school. Otherwise interest will be capitalized, or added to the principal. Principal repayment begins 6 months after graduation.

Other borrowing options include the PLUS (Parent Loan for Undergraduate Students), which is also part of the federal loan program. Unlike the Stafford loan, where the student is the borrower, PLUS loans are taken out by the parents and have no specific dollar limit. Parents who qualify (there is a credit evaluation) can borrow up to the full amount of the difference between the total cost of attendance and the student’s financial aid (grants, scholarships, Stafford loans, work-study). The rate is 8.5% if borrowed from a bank or 7.9% if the federal government is the lender. Unfortunately you have no control over the rate. The college determines in which program it will participate. Don’t forget that many of these loans will have to be repaid in 10 years, so before you start loading up on debt, check out one of the many student loan calculators to estimate your aggregate monthly payments after four years of borrowing. My favorite site for this purpose is I plan to discuss reasonable debt load in an upcoming post so stay tuned.

Tapping home equity, if there is still any in your home, is another way to go. Families can take the mortgage interest deduction. However, equity lines of credit are generally adjustable rate. While the rate might be attractive today, expect that it will go up as the economy recovers, though anyone’s guess is when that will be.

In my view, two last resorts for borrowing are private loans, which are also adjustable rates, subject to rate increases, and retirement funds. Many banks have pulled out of the private loan market given difficulties over the past year and a half in securing funding for these loans. Banks that continue to offer private student loans will continue to do so only if the business remains profitable (i.e., the spread between the interest earned on the loans and cost of funding them is positive). Sallie Mae, the largest private student lender, recently changed its lending terms such that the private student loans it offers will now begin to amortize while the student is still in school. This is clearly an additional financial burden on a family that is paying for college at the same time. Lastly, your 401(k) is sacrosanct so do not touch it! Early withdrawals will result in a 10% penalty. Even borrowing against your retirement fund has its drawback. The money is no longer working for you and you must pay it back with after tax dollars, not a good strategy since the money you initially invested was pre-tax. Also keep in mind that you can borrow for college. You can’t borrow to fund your retirement so don’t raid this account!

One last thought on paying for college with borrowing and this is perhaps the most important point! You must fill out the Free Application for Federal Student Aid or FAFSA if your student is going to apply for unsubsidized Stafford loans, despite the fact that they are not need-based. To fill out the FAFSA you will need a pin number for you and your student ( which is used to sign the form. The FAFSA can be accessed at The other primary reason to complete the FAFSA is that situations change: a parent loses a job or perhaps becomes sick. The last thing you want to do is have to scramble to complete yet another form if that were to occur. A situation change might even be a new family member or an additional student in college. These are factors that will directly affect your aid eligibility. Lastly, FAFSA rules do change from year to year, so your eligibility for financial aid may change as a result of an adjustment to the federal methodology. These are reasons why I advise all families to fill out the FAFSA form each year, regardless of their financial situation.