As the Consumer Financial Protection Bureau (CFPB) gears up to launch this Thursday, I have a few recommendations on behalf of young adults and college students in America. As we know, many in this generation lack the financial literacy necessary to make educated choices when it comes to credit and managing their money. Banks and lenders sometimes take advantage of this, as well. Specifically, I have three suggestions that can further protect this demographic:
1. Specify income requirements for student card holders.
The 2009 CARD Act states that banks cannot extend credit cards to those those under the age of 21, unless they have a qualified cosigner and/or an “independent means of repaying.” Without a clear explanation of what constitutes as “independent means,” some banks are taking advantage of this loophole and citing student loan income as sufficient “means,” when it’s actually debt. In fact, a survey released last fall found 29 percent of students under 21 who obtained a credit card since school began this past fall used student loan proceeds as part of the income reported to credit card companies when applying for the card. It would be best to require applicants to provide pay stubs and a letter of employment to verify they have an “independent means of repaying.”
2. Require projected expense budgets from all federal student loan borrowers.
If students had a better sense of their future budgets, they could understand the weight of carrying student loan debt. Tidewater Community College, in Virginia will soon begin requiring its students to complete two budget worksheets in order to be eligible for student loans. According to USA Today, the school’s federal loan applicants will need to accurately describe their financial situation before and after graduation and explain how they’ll realistically be able to pay back those loans and meet the monthly payment requirements upon graduation. Can this become mandatory across all schools and federal student loan applicants?
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3. Provide students with clear sense of how much they will owe upon graduation.
While the federal government discloses the terms and repayment requirements of student loans to borrowers via the National Student Loan Data System, it would be even more helpful to inform prospective borrowers before they agree to their loans, exactly how much their monthly payments will be upon graduation and how much they need to earn in order to comfortably pay that amount back. My advice is that student loan debt should not exceed 10% of one’s monthly budget.
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Image: Will Folsom, via Flickr.com