Managing The Perils Of Student Debt

As a University of Central Florida undergraduate, Jennifer Cannon managed for four years to ward off the specter of credit-card debt. But by the spring semester of 2003--her senior year--her scholarships had dried up and her student loans had topped out. She feared that securing a private bank loan would be a hassle. So the 23-year-old Cannon--who worked full time with a full academic load--turned to plastic to pay for living expenses, availing herself of zero percent interest rates (for one year) on two new cards. Add to that the month she took off after graduating in May, and she ended up with $5,000 in credit-card debt, with one card maxed out. That's on top of $28,000 in federal loans. No wonder that the debt demon, she says, "is always in the back of my mind."

Cannon's experience is typical these days. Tuition and costs are rising, and the pool of grants and subsidized loans doesn't always keep pace. Ten years ago grants made up 50 percent of student aid, while loans accounted for 47 percent, according to the College Board. Now grants have shrunk to 39 percent of the pie, while loans have grown to 54 percent. A 2002 study by loan provider Nellie Mae showed that average undergraduate debt had risen 66 percent, from $11,400 to $18,900, over the prior five years. Monthly payments on that debt, however, increased only 13 percent, from $161 to $182, because of low interest rates. While the bulk of undergraduate debt remains federally subsidized, students are increasingly relying on a burgeoning market in private bank loans and, more troublingly, credit cards. The Nellie Mae study found that 27 percent of undergraduates used plastic to help pay for their education, with a median balance of $3,400 at graduation. Says Robert Manning, an economic sociologist at the Rochester Institute of Technology: "This is the first time we've had such loan and credit-card debt with the worst employment climate in a decade."

Manning's research, which he presented to the U.S. Senate Banking Committee in 2002, reveals some remarkable trends. In his study that year of George Mason University students, he found that majorities of students had maxed out a credit card at least once, used one card to pay off another, and even relied on their loans to pay down their credit-card debt. The impact of getting saddled with large balances at double-digit interest rates can be severe, he says, forcing students to go part time or even drop out.

Faced with that disturbing picture, some policymakers have tried to curb the reliance of students on credit cards. Legislators have introduced bills in numerous states to limit the campus-marketing efforts of credit-card companies, while many college administrators have imposed their own restrictions and begun offering financial-education programs for undergraduates.

What can students themselves do? Begin by considering alternatives like private student loans, suggests Sandy Baum, an economics professor at Skidmore College. Though these involve some paperwork--which scared away Cannon, the UCF student--the terms are usually better than those of credit cards. When it comes to overall debt, look into postgraduation loan-consolidation programs that lock in combined debt (for student loans only, though) at low rates. There are also loan-forgiveness programs for students entering certain fields, like teaching. "Borrowing has become more of the culture," says Baum. For students, the challenge is to do it wisely and avoid crippling the chance of a bright future.