Mr. Chairman, members of the Committee, I appreciate the opportunity to testify today, and I am particularly grateful that you are shining a spotlight on the important issue of financial literacy among college students.
It is fitting that the hearing is being held today, because, as we speak, tens of thousands of young men and women across the country are, for the first time, leaving the protections of home and entering college. The first few weeks of college have always presaged many rites of passage. Choosing a major. Attending your first football game. Rushing for a fraternity or sorority.
But a new rite of passage has emerged recently for college freshmen on campuses across the country. Applying for your first credit card.
Credit Card Marketing on College Campuses
The opportunities are endless. If you have been to a ball game or a public event recently, you likely have been barraged by credit card companies offering some gift or service in return for filling out an application. For college students, this is almost an everyday occurrence. Beginning with freshmen orientation, at activities fairs, in student unions and lunchrooms, in the campus bookstore, even in the privacy of their dorm rooms, students are tempted by unavoidable offers from dozens of different credit card companies. It is rare to find a bulletin board on campus that is not nearly covered by card offers.
The sales pitches can be irresistible. Thousands of dollars of "free money" if you just fill out this form. And by the way, here’s a t-shirt or a chance to win an enticing vacation. The offer might come from a friend who needs your help in completing his quota of completed applications. The card might come with a so-called "teaser" rate – a low introductory interest rate that looks too good to be true -- unless, of course, you read the fine print and find out that the rate balloons dramatically within a few months. As the General Accounting Office (GAO) reported last year, some credit card "vendors created a carnival atmosphere with loud music and games…mask[ing] the responsibilities of owning a credit card, especially since there was no discussion of the consequences of misusing a credit card."
In some circumstances, the solicitation turns ugly. Last year, the Kentucky State Treasurer’s Commission on Personal Savings and Investment held a hearing on the issue of credit cards on college campuses. A University of Kentucky student testified that one credit card marketer pushed his way into her freshman dorm room and would not leave until one of her roommates filled out a credit-card application. This young woman, for obvious reasons, felt violated. The GAO study revealed that this example is not unique: students reported that vendors followed them around campus when their initial sales pitches were rejected. Sometimes even students are manipulated into revealing personal information in exchange for gifts.
The economic incentives that encourage these types of aggressive credit card solicitations are enormous. Many universities, struggling to fund vital programs because of state budget cuts, have signed multi-million dollar contracts to give a particular company exclusive rights to market its credit cards on campus. Student organizations raising funds to pay for their expenses have been recruited as sales agents by credit card companies – these groups often are compensated $25-$200 a day to table the student union and are paid $1-$5 for every completed application. Peer pressure has become an invaluable sales tool.
Impact of Credit Cards on College Campuses
For many college students, owning and using a credit card does not pose any serious problems and offers some advantages. For instance, in an emergency situation, where cash is not available, a credit card can be invaluable. When properly educated about their use, credit cards can be a useful tool to learn about personal finance and budgeting. Particularly when parents are involved, young people can be taught important lessons about financial responsibility and accountability. Credit cards, moreover, offer a vehicle, albeit an imperfect one, for young people to develop a positive credit rating. For the majority of students, credit card debt is not a problem – recent surveys revealed that almost 60 percent of students pay their credit card balances in full every month.
However, for a significant and growing minority of college students, credit card use and misuse can be devastating. Without proper education on credit card use, and with only self-serving, on-campus promotions instructing them, students often sign up for numerous credit cards, making purchases up to the credit limit on each. In a telling study by the Public Interest Research Group (PIRG), it was revealed that students who obtained credit cards at student union tables had more cards and higher debt balances than those that signed up elsewhere.
Instead of the false promise of "free money," students wind up building mountains of credit card debt before they even have an income stream to pay for it. Students are tempted by promotions on campus and through the media to live beyond their means – many do not understand the consequences of incurring excessive debt and making late payments, both of which can severely damage their credit ratings or their financial health in general.
The GAO report concluded that because of their inexperience, college students are more likely than other credit card customers to accumulate significant debts. That’s why those companies that sign up cardholders with higher risks of default – in exchange for higher interest rates – often target college students. Students see low, seemingly easy minimum payments, but don’t realize they could spend much of the rest of their lives repaying their debts.
Let me give you one example. Suppose a student today built up a credit card balance of $3000 on a credit card that charged a 19.8% interest rate. If that student never made another purchase, and dutifully made the minimum payment each month, it would take her 39 years to repay that debt. In this example, the student would have to pay out over $10,000 in interest – on only a $3000 balance.
Our Commission took testimony revealing that this was not an uncommon experience. One Kentucky student built up over $6000 in debt in her freshman year, and was still trying to pay it off four years later, having already paid more in interest that what she put on the card. Various studies revealed that the average student credit card debt ranges from $500 to more than $3000. Meanwhile, in 1999, a record 100,000 Americans under the age of 25 filed for bankruptcy.
The impact on students can be more than financial. My Commission received testimony that the stress of credit card debt has significant emotional, even physical effects on these young adults, compounding the stress of leaving the shelter of home and family. One Indiana administrator reported that they "lose more students to credit card debt than academic failure." And in an extreme case, a National Merit Scholar headed for law school was reported to have hung himself in his closet after racking up more than $14,000 in debt on twelve different credit cards.
The impact on students also poses numerous long-term problems. With many college graduates already facing significant student loan debts, the added burden of growing credit card balances can leave many young men and women entering the workforce with seemingly desperate debt problems. As a result, many young people are forced to choose jobs solely on the basis of the starting salary offered, without regard to suitability or personal satisfaction. This leads to further economic problems for the young worker when the job situation worsens, increasing the cycle of debt and credit card dependency. It also appears to have the effect of shrinking the pool of otherwise eligible and willing applicants for socially important, but less lucrative entry level jobs in fields such as education and law enforcement.
Financial Illiteracy in the United States
It would be too easy, and in fact unfair, to pin the entire blame for this growing phenomenon on the credit card companies and their representatives. While I believe that some regulation of credit card marketing is necessary – and I will address these reforms later – the problem is much greater than this. Indeed, credit card misuse on college campuses is just a symptom of a much greater problem plaguing the nation – the financial illiteracy of much of America.
Our education system is, in many ways, the envy of the world. Yet the same schools that have produced brilliant scientists, physicians and poets have also produced generations of financially illiterate Americans. We teach our children to master such difficult mathematics concepts as trigonometry and algebra, but we don’t teach them how to balance a checkbook. Many young people can discuss with great insight the history of ancient civilizations, but are not cognizant of their own credit histories or the significance of their credit reports. And as is clear by my earlier remarks, admission to college requires good grades and high scores on standardized tests, but no specific knowledge on how to use – or not use -- a credit card.
It is important to note that financial illiteracy is not simply a problem faced by our youngest generation of Americans. In fact, it is an epidemic. When the country’s national savings rate during a period of unprecedented prosperity dips below one percent, and when 12 percent of Americans have no retirement savings whatsoever, we realize that financial illiteracy could leave many America seniors desperately needing financial assistance. When a growing number of individuals – particularly the poor, elderly and minority groups – fall victim to the scams of predatory lending, we realize that financial illiteracy leaves many Americans vulnerable to the loss of their homes or retirement savings. And when the total household debt reaches $7.3 trillion; with an average credit card holder having over $8000 in debt, we realize that financial illiteracy has a devastating effect on our nation’s economy.
There are many organizations and individuals across the country trying to combat the growing problems posed by financial illiteracy. Groups such as Junior Achievement and the National Council on Economic Education have developed excellent curricula for promoting financial literacy among students of all ages. The Consumer Federation of America and Cooperative Extension have joined to create "America Saves," a national program that promotes sound personal financial practices in several large cities. Additionally, many of my colleagues have developed outstanding economic educational initiatives, such as Delaware Treasurer Jack Markel’s private-public partnership, "The Money School" and Ohio Treasurer Joe Deters’ free-to-the-public "Women and Money" seminars. These valuable programs, however, only reach a small minority of our population. And despite these efforts, financial illiteracy has grown over the past 25 years – a standard financial literacy test demonstrated a drop from a 57% average score in 1977 to 52% in 2000.
Legislation at the state and federal level has been helpful, but falls far short of solving these problems. Kentucky’s historic education reform of the late 1980s requires financial literacy instruction for all students, but most public schools in the state fail to address the subject, often because the teachers are uncomfortable lecturing on a topic with which they have little familiarity. The President’s recent "No Child Left Behind" initiative allows for grant money to promote financial literacy initiatives, but these programs are forced to compete with much more pressing educational needs such as reduction of class size and raising teacher pay.
Kentucky’s Experiment – Owensboro Saves!
My Commission on Personal Savings and Investment took a hard look at this growing problem and devised a potential solution. Realizing that we could not fix all of the problems created by financial illiteracy in the state in one fell swoop, we decided instead to gather our resources and focus our efforts on one community: Owensboro, a small city within a county of 90,000 residents.
On October 2, we will be launching Owensboro Saves!, a project uniting the entire community’s leadership – from elected officials to school superintendents, from college presidents to constituency group activists, from labor leaders to Chamber officials and key employers. This public-private partnership will sponsor programming over the course of the next year to promote better financial literacy among all residents of the region, of all ages and incomes. We will host seminars on how to avoid becoming a victim of predatory lending and how to complete an Earned Income Tax Credit form. Volunteers will become money mentors for residents struggling to save and invest. Activists will work with Catholic Charities to develop an Individual Development Account (IDA) program to enable the working poor to develop assets for buying a home, saving for college or starting a business. And we will hold a free "Women and Money" seminar, providing free advice to area women -- who earn less, receive fewer retirement benefits and live longer than men.
But even more significantly, we hope to initiate permanent educational initiatives to improve the region’s financial literacy. Working with the nationally-recognized Daviess County School Superintendent Stuart Silberman, we will work to ensure that every elementary, middle and high school in the county develops sound, mandatory financial literacy courses for its students, to be in place by the 2003 school year. We would like the financial literacy education to be systematic and widespread. To do so, we will build on existing resources and seek private funding and support from community businesses to refine curricula, publish educational materials and train teachers on financial literacy instruction.
At the same time, we are working with officials from the four institutions of higher education in Owensboro to develop strong financial literacy curricula for college freshmen. It is my goal that every incoming student will be required to take a mandatory financial literacy course upon matriculation. In the meantime, we will develop with school administrators a code of conduct for credit card solicitation to include this mandatory education as a prerequisite for owning a credit card.
We are aware that we will see both successes and failures with this experiment. But our goal is to find out what works, and then to build a model that we can use in communities across the state, perhaps around the nation. It is my belief that only through an intensive partnership of public officials and civic leaders can we effectively tackle the growing problem of financial illiteracy plaguing the country, and in particular, among our nation’s youth.
Our Commission also believed that some legislation was necessary to help combat the growing problem of credit card abuse on our college campuses. To better protect our young people, the Commission found that several actions need to be taken in Kentucky, through legislative, administrative and/or programmatic means:
1 . Financial literacy should be taught in every elementary, middle and high school classroom in the state. Principals and teachers can draw on existing curricula and resources, such as provided by the Kentucky Council on Economic Education, the Cooperative Extension Offices and/or the Kentucky Bankers Association.
2. Mandatory, meaningful financial literacy courses should be offered during freshman orientation of every Kentucky college or university. Commission members will offer their expertise to help design suggested curricula, in cooperation with the Council on Postsecondary Education (CPE) and the Association of Independent Kentucky Colleges and Universities (AIKCU).
3. Credit card companies should be required to register with colleges and universities in order to solicit on campus, and to abide by a Code of Conduct governing solicitation methods. This Code should promote full disclosure of credit card terms and prohibit the more egregious marketing practices, such as dormitory room solicitations and the offering of prizes, gifts or other monetary incentives to encourage applications from college students. This Code should be developed by the state's colleges and universities, with assistance offered by the Commission and organizations such as CPE and AIKCU.
As a first step toward implementation of the Commission’s recommendations, Commission Chair and State Representative Susan Westrom introduced House Bill 298 in the 2002 legislative session. The legislation would have required Kentucky colleges and universities to develop codes of conduct for credit card solicitations on college campuses prohibiting practices such as free gifts. It also instructed these schools of higher education to require mandatory debt education and counseling sessions for incoming students. There was no ban on credit cards or even on marketing; we recognized that such solutions would be ineffective since any one can be reached through the mail or off-campus, where there would be no ability to monitor. Rather, the universities – who supported this measure – would be charged with ensuring the best interests of their students.
House Bill 298 sailed through the state House unanimously and passed a Senate committee without opposition. However, in the last few days of the session, the Senate leadership mysteriously did not allow House Bill 298 to come up for a vote. This failure has been all too common across the country – a GAO survey revealed that in the past few years, most credit card reform legislation in state legislatures has died the same way – buried in a committee, without an opportunity for legislators to cast an up or down vote.
I am very hopeful that as the public becomes more aware about this problem, pressure will be too strong for legislators in Kentucky and across the country to abandon this needed legislation. I am also hopeful that the rest of the country will join states like Arkansas, Louisiana and Virginia who have addressed these issues on the legislative level.
But I believe more legislative action is needed – on the federal level. Credit card companies are national, sometimes multinational conglomerates, and for any regulation to be effective, it needs to come from the U.S. Congress. These corporations have few ties to the university communities they target, and, as a result, are often unresponsive to local concerns.
I believe that Congress can and should impose a real code of conduct covering the actions of credit card companies on all of the nation’s college campuses – prohibiting incentives such as gifts, and banning the more aggressive sales practices such as the recruitment of student groups that use peer pressure to complete applications. Credit card companies should be forced to determine before approving a card whether the student could even afford to pay off a balance. Teaser rates – low introductory rates that balloon into much higher rates after only a few months -- should be restricted in marketing to college students.
Further, company disclosures should not be limited to the fine print of credit card agreements and solicitations, where fees and penalties are often hidden or obscured. All credit card materials should provide clear examples of how long it will take to pay off the maximum debt permitted when the card holder makes only minimum payments, and examples of how much will be paid in interest by the card holder maintaining a balance over time. This common sense type of information is currently provided by banks to borrowers obtaining a home mortgage, and it helps inform borrowers of the true long-term cost of their debt.
Still, we will only be able to fully combat this problem with a much more comprehensive effort of promoting financial literacy. Mr. Chairman, I urge the members of this Committee, and I urge Congress to make financial literacy a high priority for American education. When you develop standards for our students and teachers to reach, please make knowledge of key financial concepts a requirement. And when you determine funding for our nation’s public schools and universities, please provide support for producing and publishing sound financial literacy curricula and training for our nation’s teachers.
A Public-Private Partnership
While such federal measures will be valuable, a Washington mandate will not solve the nation’s financial illiteracy problem. Ultimately, the solution will come in communities such as Owensboro, Kentucky, Gaithersburg, Maryland or Terre Haute, Indiana, where community leaders must join in a public-private partnership to better educate their citizens. Local leaders – from the worlds of politics, education and business -- must join together to ensure that residents of their communities have a firm grounding in personal finance concepts.
But it will also require a concerted effort from those in the industries who profit from the accumulation of personal debt. In the process of my Commission’s work, I have met with several representatives of the credit card industry. These individuals seem to be the same hard-working, ethical business leaders who have helped to make our nation and our economy unparalleled throughout the world. And they have shared with me their sincere desire to protect our children from the unfair and aggressive practices of those "bad actor" credit card companies who they say are a small minority of their industry.
That’s why I challenge the credit card companies to join us in our national effort to protect college students from credit card debt and promote financial literacy. Today’s college students rarely review educational brochures and web sites sponsored by the credit card companies, no matter how well-meaning or comprehensive they may be.
Today, I challenge the credit card industry to put its money where its mouth is. I ask the companies to make a substantial monetary commitment to the development of mandatory financial curricula for our nation’s schools and colleges and to train teachers to provide effective instruction on these issues. We do not need to re-create the wheel – we simply should build on existing resources provided by the outstanding organizations that have been working on these issues. Funding can help us produce and publish materials that young people will read, understand and apply to their financial behavior.
Similarly, I challenge all of those in the financial industry who profit from lending and investment to make similar commitments. While this will pose some up-front costs, in the end, our whole nation will benefit from a more financially literate citizenry.
The only truly successful efforts in this area reflect what I believe is the proper role of government. This is a problem that cannot be resolved by government or private institutions acting alone. Instead, government should help equip people and community organizations with the tools they need to solve their own problems. Through partnerships with private industry and community leaders, state and federal government officials can make a significant impact in better preparing our citizenry for the 21st century economy and the challenges it poses. Only by working together – elected officials, industry leaders and community activists -- can we tackle the problems posed by our nation’s financial illiteracy.
Ultimately, credit card debt is an issue of personal responsibility. But it is unfair to hold college students accountable for behavior when they are subjected to high pressure marketing tactics and do not have the financial literacy to make proper economic decisions. Once given proper education on credit card use and misuse, individuals will then be accountable for their own financial behavior. And by empowering our citizens with the skills to manage their finances effectively, we can help reduce our national reliance on social welfare programs and personal bankruptcy.
And maybe, a decade or so from now, there will be some new rites of passage for our nation’s youth. A rite of passage for every third grader to learn about the magic of compound interest and the importance of savings. A rite of passage for every eighth grader to study the stock market and American financial institutions. A rite of passage for every high school senior to take a course on family budgeting and income management. And finally, in some future September – before the football games, before the fraternity rituals – a rite of passage for every college freshman to be given solid instruction on credit and debt management to prepare them, as they leave their parents’ nest, to build their own nest eggs.
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