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Credit Card Applications » News » Products » Student Loan Bubble Threatens to Burst

Student Loan Bubble Threatens to Burst

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The Consumer Protection Bureau had some sobering news this week. Here`s what Rohit Chopra, their student loan ombudsman, said in a speech to the Consumer Bankers Association on March 21 in Austin, Texas: “According to data from the Department of Education, federal student loan debt isn`t growing just with new originations – with so many borrowers unable to keep up with interest payments, debt is growing even for many who have left school. Too much debt means too much risk for a generation of young people, many of whom are struggling in today`s economy.”

Earlier this month the Federal Reserve Bank of New York reported that the national student loan balance sits at approximately $870 billion – more than the national credit card debt, which is $693 billion, and the amount owed on auto loans, about $730 billion. With college continuing to be costlier and enrollment on the rise as the unemployed flock back to school, this number can only get higher.

Doubling Up on Debts

While young people are certainly not the only ones saddling themselves with student loan debt, they are of special concern because as new consumers, they may be vulnerable to getting themselves even further into debt through irresponsible credit card use. When college students are used to student loan packages picking up the bill for tuition, books, and maybe even room and board, it can be easy for them to be lulled into letting debt pile up in other ways. Credit card debt may not seem so much different from student loan debt, and it`s all too easy to rack up debt on plastic at the same time they are incurring student loans, leaving them doubly in debt by the time graduation comes.

Credit-Land.com Education Initiative to the Rescue

In an effort to help students become conscientious financial consumers and learn to use credit cards responsibly, Michael Germanovsky, editor-in-chief of Credit-Land.com, founded the site`s Student Credit Card Education Initiative. Knowing how easy it can be for students to slide into debt if they aren`t careful, Germanovsky urges young people to understand the way credit cards work and how savvy students can use credit cards to their advantage.

“There is a laundry list of bad decisions a student can make to fall into debt, especially with credit cards, but the two most common are: spending carelessly and making inconsistent payments on the money they owe on the card,” says Germanovsky. “The goal of the Student Credit Card Education Initiative is to spread awareness and educate college students on how credit cards work, how credit scoring works, and how reward programs work, so they can benefit from owning their first credit card.”

Student loan debt doesn`t accrue interest as rapidly as credit card debt does, and unlike credit card debt, it can be deferred. This may be part of the reason that we have a student loan bubble ready to burst now, with millions of people having deferred their student loan debt for years.

Ready or Not, Here They Come

Whether or not college students are able to use their credit cards responsibly, they are getting them in droves. Reports show that 60% of college freshman have a credit card by the end of the year – with 20 % having gotten one in high school, and the rest getting their first card during their freshman year.

How can young people manage credit responsibly, so they don`t add credit card debt on top of their student loan debt?

  • Here are a few rules of thumb that apply to any credit card holder, not just a young person:
  • Make a budget and stick to it – don`t spend money you don`t have.
  • Always pay your credit card bill on time – late payments can quickly sink your credit score.
  • Pay your balance in full – if you can`t, you`re spending more than you can afford and you should stop using the card until you`ve brought your balance back to zero.
  • Remember that having a credit card is not a license to spend beyond your means.

The student loan bubble isn`t going to go away anytime soon, and it remains to be seen what long-term affect it will have on the economy. In the meantime, young people would be wise to stay out of debt as much as possible in every area that they can.

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