Young debtors due for shock, authors warn

• Financial lessons often hard-won

By Margaret Webb Pressler
Washington Post

Christopher Siwy thinks he's pretty good with his finances, especially for a 23-year-old.

Siwy just moved to Alexandria, Va., from Allentown, Pa., and with a starting job in information technology, he has no problem paying $160 on his student loan every month. He even saves a little bit out of each paycheck so that someday he can buy a condo.

But when Siwy wanted some wheels, he turned to the most popular financing plan for someone his age: a credit card. He put a new $7,000 motorcycle on a credit card with no interest for a year, and he plans to pay it off before the year runs out. But if he can't, he says, he'll switch it to another interest-free credit card.

Had to have it

"I had to have a motorcycle," he said with a grin.

Siwy is part of a generation of consumers who have embraced and used debt in a way that no generation has before. The polar opposite of the postwar generation, which feared debt, today's young adults view credit cards as a welcome and easy path to the lifestyle they see around them.

"Now credit is an entitlement — it's not connected to having a job and being a producer and understanding how much debt one can afford," said Robert Manning, a professor at the Rochester Institute of Technology and author of "Credit Card Nation."

Financial experts are alarmed about this carefree use of plastic because the debts that many twentysomethings are incurring are stacked on top of towering levels of student loans. Yet these young consumers often seem oblivious to the harm that could follow the spending they're doing today.

Elizabeth Warren, a Harvard Law School professor and co-author of the new book "The Two-Income Trap," said the comeuppance could be severe.

Most people who file for bankruptcy protection in their late 20s and early 30s, she said, "are people who got into trouble back in their late teens, but have rocked along making minimum payments, falling a little behind, often denying to themselves how much financial trouble they're in."

The biggest factor pushing up the amount of debt carried by young adults is student loans, which have skyrocketed along with college tuition.

According to a study done last year by Nellie Mae, the student-loan financier based in Braintree, Mass., the typical student graduating from a four-year college has close to $19,000 in student loans. Just five years earlier the average was $11,400.

But on top of those low-interest loans, young adults increasingly leave school with substantial credit card debt. In the 1990s, financial markets became more sophisticated and better able to manage the risk of consumers whose creditworthiness wasn't obvious. The result was that credit card companies started aggressively courting nontraditional customers, including college students.

Nellie Mae's credit checks on student loan recipients showed that in 2002, 83 percent of college students held credit cards, compared with 67 percent in 1998. The average student's balance was $2,327 in 2001, up 24 percent from the average balance of $1,879 in 1998. The average graduating senior carried credit card debt of $3,300.

Credit card use appears to be drifting even younger. RIT professor Manning said his research shows the use of credit cards among high school students has tripled in the past two years.

The big problem experts see with all these free-flowing credit cards is that young consumers often don't make the connection between their spending and their financial resources. While the rising debt from student loans is a direct result of increasing tuition bills, the growth in credit card debt is about instant gratification and the inability to live within one's means.

It's not that young consumers don't know they're in a bit of a bind. But many just assume they'll eventually have the money to pay their bills.

"It's embarrassing to ask your parents for money," said Audrey Waters, 23, an editorial assistant at the Wall Street Journal who said she had just paid the minimum balance on one of two credit cards she's maxed out. "I have a good job. I make decent money, and I still can't make ends meet."

The idea of adjusting her lifestyle to her income doesn't seem to have occurred to her. Waters may be out of credit — she jokes that she has no idea how she's going to pay for Christmas — but she isn't rushing to change her spending habits.

At the Consumer Credit Counseling Service of Southern New England, clients a few years ago were typically several thousand dollars in debt and had nowhere else to turn. Now, many people seeking help have been able to rack up $12,000 to $15,000 in credit card debts before running out of options.

Young bankruptcy filers

Though bankruptcy filings among 18- to 24-year-olds have been rising — doubling in the 1990s — they still represent just 3 to 4 percent of all personal bankruptcy filings. The bigger risk for this age group comes in the next stage of life, which brings suddenly higher bills.

Two young single professionals might get married, find themselves with a house, a couple of cars on credit, continuing student loan payments and every penny of their income committed every month. They get by, but they have no room for life-altering events, such as pregnancy, job loss or severe illness.

Financial lessons often hard-won

A recent survey by Myvesta, a Rockville, Md.-based financial education firm, showed that 64 percent of consumers ages 18 to 24 don't even know the interest rates they pay on their credit cards.

Others don't understand that it can take decades to pay off a $3,000 credit card balance if you pay only the minimum each month.

Some colleges are starting to offer financial education classes, and nonprofit organizations like JumpStart of Washington are pushing for improved personal financial literacy in the nation's schools.

Nonprofit credit counseling programs, too, perform a number of outreach programs to reach people before they get into trouble. But how do you teach restraint?

"Simply going through financial education doesn't necessarily make you smarter and better able to handle money — it makes you more confident that you know what you're doing," said Steve Rhode, president of Myvesta. "Children especially learn more from watching their parents, from the media, from friends and from experiences."

Indeed, twentysomethings who have no credit card debt and are living well within their means are likely to say they learned it from their parents.

Adrienne Coyle, 22, works for the Mortgage Bankers Association in Washington, but that's not why she religiously avoids credit card debt. It's because her father drummed it into her starting in high school that credit cards should only be used if you have the cash in the bank to pay the bill.

But not all parents have the same influence. And it's those kids who may have to learn their financial lessons the hard way.