MAIN Education

The High Price of Student Debt
Loans & Credit Cards Can Be Bad News For College Students

Debt is getting to be a very familiar word to high school and college students. With financial aid grants increasingly hard to obtain and the costs of going to college skyrocketing, many students turn to easy credit for an answer to the tough questions, "How can I pay for college?" and "How can I afford to buy all of those books and supplies?"

Financial aid administrators have been warning about the loan to grant imbalance for years, but for many families, paying for a college education means taking out a loan - or many loans. There just are not enough grants available to give money to all the students who need help. Covering the cost of living on campus and buying expensive text books is so much easier with the credit extended to college students. Lenders make payments easy for the borrowers and as long as the debt is justified by getting a college education, it seems to make sound financial sense.

So why is student debt a problem?

Start with the easy access to credit cards available to most college coeds. Take the real case of one freshman at a New York State University. A generous offer of a $300 limit credit card seemed like the perfect answer to the problem of paying for books. The complications started when the low limit on the card was soon exceeded and the fees for going over the limit began to add up. With the interest and penalty payments adding up, the balance on the card was soon many times the original amount. The student could not pay off the card and the debt was referred to a collection agency and reported to the credit bureaus.

Having learned a hard lesson, this coed did not apply for any more credit cards and found part time work to pay for books in the following semesters. Hard work and lots of studying resulted in a 3.4 GPA and after four years the student graduated and expected to be able to find a good job without any problem.

By graduation the credit card balance on that $300 limit card from the beginning of freshman year was over $2000 dollars. Not very worried, the student began applying for jobs. As one employer after another checked the credit scores and found bad credit, the prospects of getting that good job began to dim. In desperation, this new graduate turned to mom and dad who paid the credit card balance off. With interest, collection fees and other miscellaneous fees the amount they had to pay was more than $3000...for a credit card with a $300 limit.

"We are also seeing credit card marketers targeting younger and younger populations," said Norma A. Mendoza, assistant professor of marketing and logistics in the Sam M. Walton College of Business. "Students 16, 15 or younger are now able to obtain credit cards, for which their parents may be ultimately responsible." She recalls a college class where one student confessed to having 20 credit cards, all with maximum balances.

Credit Cards are not the only problem

Student loans are a fact of life for most undergraduates and even more common among graduate students. With no payments or interest during school, these loans are a good way to finance an education. Low interest and a ten year payback period that starts after the student is done with classes, can make these loans the perfect solution to the middle class college dilemma of paying for a good school. So where's the down side to this? With a $23,000 maximum for undergraduates and a $138,500 limit for total undergrad and grad studies, paying back Stafford Loans can be a heavy burden on an entry level salary. Monthly payments of several hundred dollars are not uncommon. Getting deferred payments or a more realistic repayment plan through loan consolidation is possible, but many students fail to do the paperwork and wind up with defaulted loans. A defaulted student loan can block many civil service opportunities, make buying a car or a house impossible and even affect a college graduates ability to rent an apartment.

Mendoza points out that background checks, including credit checks are increasingly common in employment situations, particularly for positions in banking, information technology or other positions where there might be a temptation or opportunity to steal money. An employee with credit problems may be unable to use a credit card to travel on business and be forced to explain the situation to an employer. "Bad credit or excessive credit card debt is considered a character flaw," she explained.

The ability to borrow can be a good thing, but knowing the pitfalls and realistically planning ahead to avoid them can be just as important as finishing school to the future of today's college students.

Find out more about financial aid from government soures at the Guide to Federal Student Aid.

Related Resources: