Student loans and credit cards are both financial hurdles that many young adults will have to jump upon entering adulthood. They are both forms of credit that can be useful financial tools or sources of deep fiscal debt. While not the same thing, student loans and credit cards do have some areas in common.
The federal government is one parallel between college loans and credit cards; the government enacts funding, legislation, and laws to ensure that college students have desirable options for credit at the early stages of adulthood.
Should a student get a credit card?
A credit card is a good tool to have for emergency costs. However, the trap that many college students fall into with credit cards is the lack of restraint with use; too many college students use credit cards like free money, and they run up high interest debt that will take years to pay off.
College students should have a credit card to use for emergencies and to start to establish a credit history, but they should only have the card if they can use it in a responsible manner. This includes only using the card for emergencies, for buying items that can be paid for and paying off the balance as soon as possible.
Other options for students who will not be able to use credit cards responsibly are debit cards, secured credit cards and prepaid credit cards.
Should a student get a student loan?
According to CollegeBoard.org, over 62% of college students from four-year institutions have some sort of financial debt related to paying for tuition.
Student loans are a good idea for paying for college because they generally have very reasonable interest rates. At-need students can find government-based student loans below 5% interest, and those loans that are not need-based are generally around 6.8% interest. Other benefits of student loans are that their payments are usually deferred until after graduation, they are government subsidized and their interest is deductible from income taxes.
Private loans are generally higher that government-based loans, but they are another option for students and their families.
The area where student loans become a financial burden is if a student is unable to find a job after college to begin to pay the balance, such as during an economic downturn. Generally, interest rates and fees rise once a student defaults on a student loan.
Should credit cards be used to pay for tuition?
Generally, credit cards should not be used to pay for tuition. Credit cards usually have a higher interest rate than student loans or other forms of credit to pay for college. Also, the payments on credit card balances must begin immediately. If a payment is late or under the minimum payment, then the interest rates generally jump to very high levels.
However, if a graduate has a good, steady job, and a mastery of the use of credit cards, then a credit card can be used for payment on a student loan with the intent of paying the balance as soon as possible.
Are there any reasons why a college student could not get a credit card?
Prior to legislation in 2009 under the Credit Card Accountability, Responsibility, and Disclosure Act (CARD), credit card companies often used college campuses as recruiting grounds for young customers- with the blessing of the college or university in exchange for a fee from the credit card companies. However, after the Credit CARD act, credit card companies have much more restrictions on advertising to college students.
The act included the following provisions related to college students and credit cards:
- Credit card companies must give reasonable explanations regarding their activities on college and university campuses.
- A credit card company cannot offer students who are under 21 a credit card without proof of the means to make the payments or a co-signer.
- Credit card companies cannot offer promotional gifts as an incentive to get students to fill out a credit card application.
What are the best credit cards for students?
Each student will have different needs for a credit card, but general things to look for include low interest rates, few additional fees, and possible rewards programs. Comparing credit cards is an excellent way to find the best deal.