Hearing on "The Importance of Financial Literacy Among College Students."

Senator Sarbanes and members of the Committee:

It is my honor to appear before you today to represent the interests of the students of the Johns Hopkins University, in the great state of Maryland, to discuss financial literacy, and credit card usage among college students. As you know, Johns Hopkins is a decentralized, multi-faceted research university, and I cannot presume to speak for all the divisions of the university. My 13-year experience there, helping students to pay for college, has been primarily with traditional undergraduate students – and at that endeavor we are a small, selective private college of 4000. However, Hopkins does educate more than 17,000 students each year through our programs, both full and part time, graduate and undergraduate, in eight divisions, at nine campuses and on three continents, and my remarks do touch many of these learners in some way.

Hopkins is proud of our outcomes – our students succeed and graduate in impressive numbers, and more than in any other school in the nation, they go on to graduate and professional education. This has made our undergraduates an attractive market for financial companies who are looking for lifelong customers. I have never wanted for student loan lenders willing to lend to our students and their families – with a default rate of less than 2 percent, even with an average graduating debt of $16,200, our students have established themselves as good payers. Solicitation of our students starts early – many freshmen arrived on campus this past weekend armed with credit cards they received senior year of high school. It appears that lists are available to the direct mail marketers from a variety of sources, long before the students register at school. However, they also arrive without understanding of how that credit card works – what is APR, compound interest, and why they only have to pay a small amount each month.

Because of the ease of getting credit, the lack of financial savvy on the part of these otherwise very bright students, and the unchecked solicitation and giveaways that were going on during orientation, in 1994 the Dean of Students decided it was best to prohibit credit card vendors from the Homewood campus. At about that same time, my staff and I became alarmed at the growing number of students who reported credit card problems – in some cases, causing them to have to leave school for a time to repair their financial health (I have a statement from one former student appended to this document – he was a poor, inner city Baltimore child who was motivated and mentored by family, counselors and clergy – and he became a successful graduate and attorney, but not before falling victim to the easy allure of credit card debt). Keeping credit cards out of the hands of students is a difficult task. We know that credit is not always a bad thing - it provides for emergencies, allows students to shop on the internet, sometimes for used books to keep their costs low, and gives them air miles to help keep the cost of travel down – our students do come from all 50 states. However, we thought that if we made sure that our student loan and other financial services vendors were not cross marketing financial products to the database of students they were lending to, it would help to reduce the direct mail and internet offers that came because of the student’s relationship with the university.

For a variety of reasons, the university decided to participate in the William D. Ford Direct Loan program, which took private lenders out of the student loan equation for our need-based loans. While we have no empirical evidence, we believe that this decision has also reduced the number and type of solicitations that our students received for other financial products, including credit cards. Our concern remains that if you or I get into credit trouble, we have ways out – home equity loans or mortgage refinancing. If our students get in trouble, their options are limited – sometimes to their unknowing parents.

However, we are not so naïve as to believe that we can restrict or control the behavior of our students, who live their lives on the internet – and if you ever searched on the web, you know that pop-up credit card offers are a way of life. Speaking of the web, colleges and universities have offered new web services to students to ease getting through administrative processes, including allowing tuition to be paid by credit cards. While Hopkins does not allow this for full time students, we can see how it could help to get students into trouble. Because of the short time it takes to apply for and receive a credit card, some students will follow the path of least resistance and opt for credit card payment rather than a student loan. Compared to the process of applying for a federal student loan, which can require up to 6 weeks and numerous applications and forms, credit cards are easier.

Our alumni association does offer an affinity card – the JHU card, but they are not permitted to market it to current students. In financial aid, we are pleased to have that card available as some of the proceeds come back to the annual scholarship budget to help fund needy students. But we are also happy that the marketing is restricted to graduating seniors.

What we as administrators can do is:

1. Be aware of the cross-marketing that our vendors do – whether it is the ID and stored value card vendor or our student and alternative loan vendors
2. Use our stored value/debit cards as important learning tools – sort of credit cards on training wheels
3. Encourage students to use the opt-out service of the major credit bureaus
4. Use our role as educators to teach about compound interest, capitalization and credit reports, at the same time we are doing student loan default prevention

Many students and parents are concerned about this topic – whenever I mentioned that I was coming here, there was universal agreement that a problem exists. My husband, an elementary school teacher, was a credit card executive in a former career. He believes that the banks need to take responsibility to offer a national education program at the high school level – as the use of cards will not go away. He says it’s like sex education, educating young people about birth

control after the pregnancy occurs is not very helpful.

The card industry can also help us with better disclosure in account statements, so that young people don’t think that paying the minimum is sufficient, more programs like Life Skills, offered by USA Funds, and restricting their marketing to those who can afford to pay– not the students without the financial safety net and/or parental resources to fall back on.

Thank you for your time and attention.

Statement of a Hopkins graduate, now an attorney:

TIMELINE OF MY CREDIT EXPERIENCE

Spring–Summer 1995

• I am young and finally free from my parents. The desire to spend money the way I choose coupled with the lure of campus flyers that proclaim "NO ANNUAL FEE STUDENT VISA/MASTERCARD" induce me to begin applying for credit.

• I apply for and receive my first three credit cards – one of them with a $1000 credit limit, another with a 17.99% interest rate. Rather than explaining the effect of the interest rate on the time it will take to pay off the debt, the cards simply play up the low $15 minimum monthly payment.

• By the end of the summer I would have 4 credit cards, destroying one of the original three and picking up two more, including a department store credit card, in its place. My credit limits totaled $3700 at this point. My major credit purchases were a 3-CD shelf stereo system and an Apple Computer.

Fall 1995 – Spring 1996

• Three of my four credit cards are maxed out because of the computer and its accessories. I begin to use the fourth for groceries, clothing and other miscellaneous items.

• During registration week and all through the fall, I see credit vendors outside of the campus bookstore giving away free tee shirts, mugs and other gifts for merely filling out a credit card application. Driven partially by the drive to see how many cards I could get, and also because the freebies were nice, I began to apply for these cards also. Almost without exception, I would be approved for generous amounts of credit.

• I cannot fully remember what I would use my credit for, but I know that I was not using it responsibly. I would charge concert tickets, trips to the movie theater, nights dining out, tickets for college functions – basically anything I wanted to do but did not have cash on hand for.

• By the spring of 1996, I had at least 8 credit cards, all of them with balances, and credit debt approaching $5000. I only needed to be a student to get credit cards. As long as they knew I was a student, creditors would lend me money without regard to my lack of income (my only source of income was a federal work study job working 10 hours per week at $5.25/hour).

Fall 1998

• I am now married. Combined, my wife and I have 13 credit cards, more than $11,000 in credit card debt and we earn $18,500 annually. Two of the cards that I’ve had sense 1995 have increased my credit limit by $500 every six months for the preceding two years, making their combined credit limit almost $6000.

• After years of financially irresponsibility, I decide to finally get my financial house in order. This task is made somewhat easier by the fact that, by never being late with a payment, I have a nearly perfect credit history.

• I begin to seriously talk with my college financial aid advisors. I acquire financial software and begin reading books on credit literacy. For the first time I learn that, thanks to the magic of compound interest, I would probably spend the rest of my life paying off credit cards if I continued to make the minimum payments. I learn that making payments on time does not help my credit rating in the short term because my debt to income ratio is high and because I have high balances on credit cards. I realized that your credit rating affects your ability to get a house, a car, and even a job.

• I begin the slow process of defeating my credit card debt through a combination of increasing my monthly payments as much as my wife and I could afford and by paying down my credit cards with student loans left over from my final year of college.

Present

• Thanks to self-education about credit, coupled with strict financial management, my wife and I were able to pay off our last credit card in September of 2001. We destroyed most of the original 13 cards and today only have 2 of those cards left (for emergencies of course).

• I have been able to use my credit to my advantage to secure commercial educational loans to fund my professional school education, to buy an affordable used car and to buy a wonderful town home.

THE MORAL OF MY STORY

My story actually resonates through college campuses. Thousands, perhaps even hundreds of thousands of young, financially irresponsible eighteen year olds leave home each year in search of social and financial freedom from their parents. These eighteen year olds are easy prey for credit card advertisements that play up "no annual fee" and "low minimum monthly payment" while offering free gifts as bonuses for applying for cards. By no means however, does the onus fall totally on credit card companies. Although there were resources that I could utilize at my college, many colleges perhaps do not offer entering students programs and services designed to help them make wise decisions about their credit. Many of these eighteen year olds, including myself at that age, also need to own up to the responsibility that freedom demands of them by educating themselves in the manner that I eventually did.

I do not have all the answers. I do know, however, that the ability and willingness of an eighteen year old college student to begin to amass a credit debt of $11,000 with 13 credit cards raises questions that demand answers and action on the part of the student, the educational institution, the Congress, and the credit card companies.

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