Bankrupt by 25: people under age 25 make up the fastest-growing age group filing for bankruptcy. Easy credit, bigger student loans, and financial, illiteracy are fueling the trend

New York Times Upfront, April 5, 2004 by Dirk Smillie

Vivienne Decker, an 18-year-old freshman at the University of South Carolina, doesn't have a ,credit card and doesn't want one, for now anyway. "I'm a shopaholic and I know I can't trust myself," she says.

But Decker isn't surprised to hear that she's part of the fastest-growing segment of the population seeking bankruptcy protection. She learned a lesson from her 21-year-old brother, Pip, who racked up $3,000 on his cards, charging everything from travel expenses to fraternity fees. It took him a year of part time and full-time jobs to pay it off. "Right now," she says, "I do everything with cash."

For many teens, freshman year of college is the first time they have real control over their finances. Often, that means signing up for their first credit card. (You must be 18 to own one.)

ARE CREDIT CARDS TO BLAME?

But many find that it takes only a year or two for their new found financial freedom to turn into a big liability. In 2001, 150,000 people under 25 filed for bankruptcy, a 150 percent increase over 1991. (Bankruptcies increased 58 percent for the population as a whole over the same period.)

While bankruptcy laws allow people in financial trouble to eliminate of restructure their debt, filing for bankruptcy is not a panacea: It can stain your credit history for 10 years.

Some experts say part of what's fueling the bankruptcy boom is more aggressive marketing to young people by credit-card companies. They "target high-school and college-age people because they see them as the only growth opportunities in a saturated market," says Elizabeth Warren, a Harvard law professor and bankruptcy expert.

A good example is Decker's school, where no fewer than 15 credit-card vendors are promoting cards. Free T-shirts, movie tickets, coolers, and shopping coupons are used as enticements. Some schools offer cards with university logos; others charge card companies for the privilege of setting up sales tables on campus.

Credit-card companies say it's simplistic to blame them for the bankruptcy boom among young people. "There are a lot of factors behind bankruptcies," says Catherine Cummings, vice president of consumer affairs at MasterCard, who notes that most students pay off their bills.

Indeed, experts say mushrooming college costs are a major culprit. The cost of attending four-year universities has climbed 66 percent over the past decade. By the time the average college student graduates; he or she has an average of $19,000 in debt (compared with $11,400 five years ago), according to student-loan provider Nellie Mae. The Senate Banking Committee reports that 73 percent of college freshmen used student-loan money to pay off debt, notably credit-card balances.

LEARNING TO MANAGE DEBT

The key is to limit the debt you take on, says Joline Godfrey, chief executive of Independent Means, which provides financial education for those ages 5-25. To do that, she advises, "Own just one credit card." And she says young people should learn how to manage their money early on.

But for many teens, financial literacy isn't exactly a hot topic. Only nine states require students to complete a course that covers personal finance in high school, according to surveys of state education standards.

Some colleges now realize that students are arriving on campus without the skills they need to manage their finances. While the University of South Carolina welcomes card vendors to campus, it also offers classes like University 101, an introduction to campus life, which includes visits by bank representatives who offer tips on using credit wisely and encourage students not to run up high credit-card balances.

There are also several nonprofit organizations that provide financial literacy tools for young people, including Consumer Jungle (www.consumerjungle.com) and Jumpstart Coalition for Personal Financial Literacy (www.jumpstart.org).

Dirk Smillie is a reporter for Forbes magazine in New York.