Educating To Prevent Student Credit Card Debt

Many professionals in the financial industry warn against the dangers of student credit card use. They fear that young people will let their credit card use run out of control. Instead of fearing that young people will fail, try educating them about credit card use. After all, the benefits of getting a credit card while young far outweigh the risks.

The Risks Involved

Many young people have the perception that using a credit card is the same as paying with their bank debit card. They do not consider the extra fees or the risk of building debt. These people think that they can just go ahead and use their credit card for any purchases that they cannot afford at the time. This type of thinking can lead to a huge credit card balance. With young people, this can be particularly dangerous, as they do not have the income to pay off the balance. Credit cards allow young people to dig a financial hole that they do not have the resources to climb out of.

As their credit card debt builds, young people often don’t recognize the problem until it is too late. Eventually their debt gets to the point that the minimum monthly payment only pays off the interest charges. Instead of seeking help with their debt, many young people ignore the problem and, worse yet, they even try to get a second credit card to build more debt. As these young people are trying to prove their independence to their parents, they are often too embarrassed to ask for help. It can lead to a feeling of helplessness.

Education is the Key

The root of the problem is that young people are never taught how to responsibly use credit cards. The school system chooses not to teach such life skills as money management or credit card use. This leaves the responsibility solely in the hands of the parents. Unfortunately many parents are starting to lose touch with their children just when credit education is most necessary. There are also some parents who do not know about responsible credit card use themselves.

Young people need to know how to use a credit card responsibly and how to avoid credit card debt. They need to know to only use their credit card for as much as they can reasonably pay off each month. They need to know all about credit card interest charges too. Without credit education, it is far too easy to make mistakes with your credit card.

The Benefits of Getting a Credit Card Younger

Sure there is the convenience factor of having a credit card when you are just out of high school. More importantly, a credit card helps build credit over time. The earlier you start building credit, the easier it will be to make large purchases in the future. Anytime you need a loan from the bank, the bank will look at your credit history. The longer you’ve built credit, the easier it is to get a loan. Plus you will pay lower interest rates. Without built up credit, you might even get declined for that loan.

Credit cards also give young people the independence that they need. Who wants to phone their parents each time they want to order something online? What about when you sign up for a video rental account or when you register for phone service? A credit card is a must. A credit card can even act as a financial safety net in tough times.

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Tax Credits For Education Costs

Tax credits are available for qualified education expenses paid by taxpayers who are continuing their education. A qualified education expense is defined as an expense that is paid during the tax year for fees and tuition requied by an eligible educational institution for the purpose of student enrollment and attendance. It does not matter how the expenses are paid, only that they are valid. Expenses that are not considered valid are those paid for room and board, medical expenses, student health fees, transportation, personal living expense, insurance, course-related books, supplies, equipment, or any non-academic activity or non-credit course. This basically leaves only tuition costs as valid education expenses.

If a deduction for education expense is taken on any other portion of the personal tax return, it cannot be used in the calculation of a Hope or Lifetime Learning credit. If a Pell grant or a scholarship is received, the taxpayer must deduct the amount of the grant or scholarship from qualified expenses. Since most Pell grants and scholarships are taxable, taxes may be imposed, but the tax credit can be taken as well. Taxpayers can use any prepaid amounts made on the current years tax return if all other guidelines have been followed.

The Hope credit and the Lifetime Learning credit cannot be taken jointly. A taxpayer must select one or the other. The Hope credit can be taken only in the first two years of college as defined by the educational institution. It cannot total more than $1500. The Lifetime Learning credit is set at a maximum of $2000 for 2005. It cannot be taken together with the Hope Credit, even if expenses exceed Hope limits. If this is the case in the first two years at the educational institution, the taxpayer may include the excess on Schedule A.

Educational credits are limited by the level of income and the adjusted gross income totals. When calculating these credits, taxpayers must consider their income and expense levels and their current student status, since the Hope credit expires after the second year of higher education. Excess expense deductions can be taken under the itemized deduction expenses on Schedule A, if a Hope or Lifetime Learning credit is at the maximum.

Taxpayers and eligible dependents of taxpayers are allowed to take these credits. In general, the expenses of dependent students are claimed by their parents or legal guardians. Students who cannot be claimed as someones dependent can take the education credit even if they are not paying the expenses.

Everyone who can take the credit should do so. Higher education can be very expensive, so anyone furthering their education in order to improve their future financial situation should take advantage of the relief provided by the education tax credit.

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Finally, A Debt Deal Gets Done

The Budget Control Act of 2011 is poised to become law � just in time to meet the August 2 Treasury deadline and reassure world financial markets. The framework of the new law is complex and shows that both Democrats and Republicans can claim some victories.

The federal deficit will be reduced by at least $2.1 trillion. That figure comes from the non-partisan Congressional Budget Office. The savings will be realized over a decade … although it isn’t yet clear where the bulk of the cuts will be made.1

�More than $900 billion will be saved through the first wave of cuts.
oDiscretionary spending on defense and non-defense programs will be reduced by $741 billion over a 10-year period. This includes a $350 billion cutback in defense spending at the Pentagon (a Democrat goal in the negotiations).
oAnother $156 billion in savings will emerge as a result of shrinking interest costs on the national debt.
oAnother $20 billion will be cut from education loan initiatives and through efforts to identify fraud and abuse in other mandatory federal programs. (Student loan funding will be reduced to $22 billion by 2021, but Pell Grant funding will increase by $5 billion by 2015.)1,2

A bipartisan committee of 12 will have to recommend between $1.2 trillion and $1.5 trillion in additional federal budget cuts by November 23.

�This committee will likely propose cuts to Social Security, Medicare and Medicaid and perhaps further reductions to the defense budget. Its membership will be handpicked. House Minority Leader Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) each get to select three Democrats; House Speaker John Boehner (R-OH) and Senate Minority Leader Mitch McConnell (R-KY) each get to pick three Republicans.
�Congress has to vote on their recommendations by December 23. If the bill is defeated, then automatic budget cuts will kick in on January 2, 2013 – at least $1.2 trillion worth, divided almost evenly between defense and domestic spending. (Social Security, Medicaid, military pay and veteran’s benefits would be exempt; Medicare would not be, according to House Speaker Boehner.)
�In addition, a Congressional vote on a balanced budget amendment to the Constitution will occur before the end of 2012. An approved balanced budget amendment would have to be ratified by two-thirds of the states. (This was a key victory for Tea Party Republicans.)2,3,4

The debt ceiling will be raised by up to $2.4 trillion. It will be raised incrementally from the current $14.3 trillion level, dependent on a series of triggers:

�The first trigger: the bill’s passage. Congressional approval amounts to a formal declaration that the federal government is less than $100 billion away from hitting the debt cap. Once the Budget Control Act of 2011 is made law, President Obama may immediately raise the debt limit by $400 billion.
�The second trigger: the initial $400 billion increase. This move initiates another formal request to hike the debt ceiling by another $500 billion dependent on Congressional authorization. It is widely assumed that Congress will disapprove this request, with President Obama vetoing the disapproval and Congress failing to override the veto. The probable outcome: the debt limit rises by the desired additional $500 billion.
�The third trigger: what Congress does by December 23. Here are the possibilities that could play out during the holiday season:
oIf Congress fails to pass the deficit-reduction bill generated by the bipartisan committee of 12, then President Obama can formally request another hike in the debt limit � a $1.2 trillion increase. Congress would likely reject this request, President Obama would use his veto power in response, and Congress would likely fail to override the veto.
oIf Congress passes the deficit-reduction bill, then President Obama gets automatic authority to raise the debt cap by an amount equivalent to the budget cuts defined in the new law.
oAlternately, if Congress passes a balanced budget amendment and sends it to the states, President Obama immediately gains the authority to raise the federal debt limit by $1.5 trillion.3

Tax hikes for the rich? Not immediately. In a key Republican victory, the two-step bill does not include tax increases or new levies for those in the highest tax brackets. House Speaker Boehner said July 31 that the forthcoming 12-member committee could not approve tax hikes � it would be �impossible� under current federal budgeting rules. Yet with the expiration of the Bush-era tax cuts increasingly probable in 2013 and the possible elimination of some deductions and exemptions in the tax code to generate additional revenue, there is a good chance many Americans will pay out more to the IRS in the near future. The White House says $1 trillion could be saved alone by not extending the EGTRRA/JGTRRA cuts further.5

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