Daily Aid 103: Should students have credit cards?

Student Financial Aid News

From NASFAA:

“Student-loan companies, faced with the threat of extinction, are finding a glimmer of hope in the Senate’s budget blueprint for the 2010 fiscal year,” The Chronicle of Higher Education reports. “The spending plan, which will be unveiled later today or tomorrow, will not instruct the education committees in Congress to undertake the deficit-cutting process known as budget reconciliation. The omission could make it harder for Democrats to push through President Obama’s plan to abolish the guaranteed-loan program. That’s because budget-reconciliation bills, unlike regular bills, are filibuster-proof and require only a simple majority to pass. If the Senate took up the president’s plan through the reconciliation process, it could pass with only 51 votes.”

Commentary

We’ll see how the political process goes, but if you’re so inclined and believe that student loan companies (or at least some of them) do provide a competitive benefit to the Department of Education solely as lender, I encourage you to sign this Consumer Banker’s Association petition.

Unquestionably, there have been student loan companies that have behaved badly, gaming the system in any way they could. Unquestionably, there have been and continue to be student loan companies that provide terrible service and terms on their loans – especially private student loans – that border on usurious thanks to Congress’ creation and approval of tough bankruptcy law changes in 2005.

That said, the majority of people I have worked with in the financial aid industry, the majority of the professionals in other student loan companies, are people who do actually believe in what they do – provide access to college through lending to people who otherwise would not be able to afford to go to college.

Eliminating the FFEL program does nothing to solve the cost of a college education. If the President and Congress eliminate FFEL, it will still cost as much or more to attend (insert name of school here) next year as it does this year. It will still require borrowing, and it will still require scholarship hunting.

More important, consider that the Department of Education doesn’t create nearly the resources that student loan companies do – like default prevention, scholarship guides, etc. Do we publish Scholarship Search Secrets, our free eBook on finding scholarships, as a means of building brand awareness? Absolutely. Does Scholarship Search Secrets still provide benefit to students? Absolutely – ask students who have used it to land tens of thousands of dollars in scholarships if it’s of value, like Nolan Hergert.

Let me throw out for comparison two scholarship guides to show what the private sector creates versus what a government program creates:

Scholarship Search Secrets, 5th edition from the Student Loan Network

How to find scholarships, from the US Department of Education

If you’re a student, which would you rather have? If you’re looking for money for college, which guide will be more useful? This is the role of the private sector in student lending – to do better than the government and simultaneously to compete with other companies in the private sector to provide the best, most useful financial aid resources available.

Eliminating the private sector from student lending makes all that go away. Is reform needed? Absolutely. Abolishment? I question that.

Disclosure: If it’s not already blatantly obvious, I work for the Student Loan Network, a private sector student loan company that would be impacted negatively by Congress’ proposal to eliminate student loan companies.

Scholarship Update

From the Chronicle:

Google is handing out $4,500 stipends to a select group of college students who will spend this summer contributing to open-source projects, including ones that compete with Google’s own software.

Google is offering fewer stipends this year than last year — 1,000 this year compared with 1,175 last year. But Ms. Hawthorn said that the company is committing the same amount of money to the project as last year — $5-million — and focusing more energy on mentoring and support for the participating students.

Details and application at our free college scholarship search site.

Mail Bag

Kathy writes:

My 19 yr old college soph. has NO interest in owning/using a credit card but I believe he should have one in order to establish credit so that when he graduates he will have an easier time of renting an apt./purchasing a car/setting up utilities. Currently his only debt is subsidized Stafford loan. Am I correct or should he remain without a credit card? Thanks.

A very good question. To establish a basic record of credit, a student loan is a good start, but to get the maximum benefit for building a high credit score, the FICO algorithm tends to like to see about 2 trade lines. Here’s a quick glance at a FICO formula scorecard presented by Fair Isaac to the Federal Trade Commission. It’s not the exact formula, but it gives you a good idea of what credit scores look for:

Take a look especially at strongly positive and negative numbers in the chart. Owning your home is a great score booster – logically, of course, it’s because there’s something for a creditor to seize if you default on a loan. In occupation, the higher your likely pay scale, the more impact. The longer you’re employed, the better.

Number of inquiries is attention-getting – once you get turned down more than twice, at least according to this scoring model, it rapidly begins to negatively affect your credit score. Once you exceed 30% of your credit line utilization – for example, you owe more than $300 on a credit card with a maximum limit of $1,000 – your score declines quickly.

Does this answer whether your son should get a credit card? The answer is tentatively yes if he only has the Stafford loan – look at the line titled # Rev trades outstanding – this is number of trade lines. Having 1 or 2 trade lines is a good thing. Having a credit card grants 16 points to the score on the line titled Dept St/Major CC.

I’d recommend the following based on this credit guide – which admittedly isn’t the exact formula of today’s credit score, but is close:

1. If your son can rent off campus with you as a cosigner or guarantor, that might not be a bad idea.

2. If he can work, even a little, that’s a good thing.

3. If he does get a credit card, take a look at our StudentPlatinum.com credit card guides for student credit cards to find a card that fits his needs. You might be asked to co-sign on it or provide some debt guarantee, and that’s not a bad thing.

4. If he does get a credit card, make sure he keeps credit line utilization under 15% of the maximum limit – no more than $150 balance on a $1,000 card, for example.

5. He absolutely should have a checking account and a savings account set up at a bank or credit union.

6. Don’t apply for more than a couple of credit cards – multiple inquiries can significantly damage a credit score.

7. Above all else, if he does get a credit cards, never, ever be late with payments. Ever. Be early or on time, always make at least the minimum payment, and strive to not carry any balance at all.

Getting started with a student credit card as a sophomore is also not a bad idea as long as he maintains a solid payment history, as the bonus for years on file goes up significantly around year 3 – once he graduates, having that trade line active and in good standing will be very helpful to him.

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Reminders

+ Financial Aid Podcast Show Notes at FinancialAidNews.com.
+ Free scholarship search secrets eBook at StudentScholarshipSearch.com/ebook
+ Online degrees programs and directories at Edvisors.com
+ Free college scholarships contests!
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+ The Financial Aid Podcast is a publication of the Student Loan Network.