How Students Get Stuck In The “Debt Trap”

By • Nov 4th, 2011 • Category: Debt

The life of a college student can be care-free and alot of fun. Unfortunately this “college experience” is often being financed by future debt. Tuition and housing costs are rising, and students often turn to their credit cards as a way to pay for it all. Within the last couple years, major changes to how 18-21 year olds receive credit cards, have been enacted by the Obama administration. The CARD Act of 2009 makes it difficult for students without a job or other source of income, to receive a new card. This may help to curb student debt, but many issues keep kids stuck in this “debt trap”.

How The CARD Act Changes Student Credit

The CARD Act was enacted in 2009 to reduce the credit card debts incurred before students even have a chance to get a job. The Act states that students under the age of 21 must prove they can pay their bills before they can apply for a credit card. Students will still be able to get a card if they have a co-signer. A co-signer will take on all the responsibility of this debt. The CARD Act also creates new rules to prevent campus giveaways and makes late fees more clear. These changes have already made a significant dent in costs incurred by students and other consumers.

Tuition Costs and Student Loan Debt

A major problem contributing to enormous student loan debt and defaults, are “for profit” educational institutions. These “diploma mills” offer very little educational value, but significant costs. “For profit” colleges are heavily advertised on television, mostly to a low income demographic. They typically offer very little in the way of job placement, but the debt incurred can be significant. Recently the Department of Education restricted funding to schools which had a student loan default rate of more than 25% for 3 consecutive years or more. These regulations help to control educational institutions that specifically target low income people, without offering much opportunity to its graduates.

Obama Responds to Rising Tuition Costs

In the past year, tuition costs at four year schools rose an average of $631 (8% increase). Recently new rules have been announced to reduce this debt from graduates. The rules that will be enacted require that loan repayments cannot be more than 10% of a graduates discretionary income. Also any debt that is not repayed will be forgiven after a 20 year period (previously this was 25 years). Almost six million graduates will be allowed to consolidate their government loans to save them $100s of dollars in interest each month.

When students are on their own for the first time, they are particularly vulnerable to debt. At this time, they may not be financially savvy or understand what kind of ramifications their actions will be. A loan default can severely damage credit (here are some tips on how to repair it) and follow these kids for up to 10 years. Changes that the Obama administration has made to reduce the financial burden on students can help kids get educated without ruining them financially.

Ross runs the website Great Credit Score, which focuses on consumer debt and credit. It also contains articles on the economy, investing, and the stock market.

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