Below zero

Student loans leave most recent grads in massive debt -- just when they're starting out with first jobs and apartments

by Leslie Robarge

You don't have to have three children, a two-and-a-half-bath beach house, and a family dog to understand debt. On the contrary -- these days all you have to be is a college graduate. And if you want to achieve some or all of the above, it will probably take a little more foresight than you think.

Take Deb Goeschel, for instance. Her most recent financial-aid statement from Boston University (where she received her master's degree in journalism in January) shows that she owes $32,000 in loans. Goeschel, who just turned 30 and recently landed a job as a newspaper designer, makes around $25,000.

"I don't go out anymore. I don't go to the movies. I don't buy myself books. I can't even afford $1.50 for a coffee in the morning," she says.

Julie, who requested that her last name not be printed, shares Goeschel's anxiety about debt. Her situation, however, is a little different. Before leaving Boston University in 1997 in the middle of her junior year, Julie accrued approximately $12,000 of debt. But unlike Goeschel, Julie says she spent the first year after she left school ignoring her debt. She defaulted on two of the loans.

After receiving "all of the nasty letters that just wouldn't stop coming," Julie decided that she should get a better grip on her finances. "Now I guess I realize that I do have to pay this debt off," she says.

Unfortunately, the financial predicament both Goeschel and Julie find themselves in is not so uncommon for undergraduates and graduates juggling college loans and credit-card debt. (For tips on dealing with debt, see "Foolish Advice.") The average recent graduate with a bachelor's degree owes $11,400 in student loans and $2000 on credit cards, according to Diane Saunders, vice-president of public affairs at Nellie Mae, a national provider of student-loan financing and services. The average graduate with a master's degree, according to Saunders, owes $24,500 in loans and almost $5000 on credit cards. If a student pursues a master's degree immediately after college, the average loan debt increases to $31,700.

Despite the significant debt most students carry, many of them have no idea how bad their financial situation is, says Richard Fossey, associate dean and associate professor at Louisiana State University and co-editor of Condemning Students to Debt (Teachers College Press).

"A significant percentage of students have no clue as to how much they owe in loan debt," he says.

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Debt accrued through academic loans is a relatively recent phenomenon. In 1965, the Higher Education Act (HEA) was passed in order to enable the neediest students to attend college, says Diane Saunders, who is also the author of the study "Life After Debt: Results of the National Student Survey, 1998." When the program was first implemented, between 60 and 70 percent of the available funds were distributed as grants, with the remaining 30 to 40 percent of the money extended as loans. During the 1980s, says Saunders, that ratio was reversed in order to make HEA money available to more students.

But as Fossey points out, university tuition is rising at twice the rate of inflation, so more and more students need to borrow money in order to pay for school. Meanwhile, the government is creating more payment options, including one that extends payment over 30 years.

"It just makes it easier for the politicians to saddle people with debt. No other type of loan has that long of a payment period except for mortgages," Saunders says.

Compounding the problem is the credit-card debt many students run up during their school years. Take someone like Goeschel, who supported herself in graduate school on $1000 per month earned through teaching assistantships. Between the time she earned her undergraduate degree from the University of Connecticut in 1991 and the completion of her graduate studies, Goeschel racked up $5000 in credit-card debt. Since getting the card seven years ago, she's always paid the minimum balance due -- but has rarely paid more than that. The result is that she hasn't paid off much, if any, of the principal debt.

"At first it was a way to pay for my books throughout the semester or to buy a new sweater," she says. "And, of course, I was so convinced that I was going to be so much smarter about the cards than anyone else. But until you can afford to really attack the payments, the debt just stays."

According to Saunders, the prospect of long-term credit-card debt is even more dangerous than student-loan debt, because the interest rates are so high. With 67 percent of undergraduates averaging 3.5 cards each and 95 percent of graduate students averaging six cards each, students seem to be supplementing their school loans, tuition grants, and money earned through teaching assistantships with help from VISA, MasterCard, and Discover.

"I tell students not to pay for everyday things on the credit card because you'll be paying for that pizza for the next 10 years if you do," Saunders says.

Fossey agrees that, for students, high credit-card debt is like playing with "gasoline and matches."

"These days young people want a cell phone, an apartment, call waiting," he says. "Things that they don't really need, but have had all along." The temptation to fund these wants, along with necessary items like books, with credit cards is too great for many students to resist, he notes.

Fossey also points out that few prospective students bother to investigate whether their potential post-school income will be enough to pay off student loans. Students often choose their schools according to criteria such as location, student body, or campus life and not based on what they can realistically afford. Saunders believes that students "should borrow by range of discipline and study," not by which university sounds like it's the most fun to attend.

Julie explains that she chose Boston University because it sounded like the best place, and the farthest from where she went to high school in Louisiana. She never realized exactly how much she was borrowing. "Obviously you borrow the money and it's clear that you have to pay it back," she says. "But being 17 and 18, you don't comprehend how much you really have to pay back."

Julia Porter, a graduate student at Louisiana State University School of Education who is completing her doctorate in education leadership and research, says that her survey research on the role financial-aid counseling plays in students' understanding of their loan debt shows that many students believe there was not enough information available to them when they were deciding which loans to take out. According to Porter's studies, even with all the financial-aid resources available at universities, students still feel they have been misled about how much they have borrowed and what type of loans, subsidized and unsubsidized, they have taken.

"There are just so many students and so few [loan] counselors," she says. "The counselors are trying to do the best they can, but with six to seven counselors and thousands of students, people fall into the gaps."

Julie agrees. "They shouldn't make such huge loans to people who are just 17 and 18. You get out of school and begin your life with debt," she says.

The bottom line remains that most students are like Goeschel and Julie: they need to take out loans to pay for school. And, as Goeschel realizes, they need that schooling to position themselves to make money in the working world.

"These days to get an education we put ourselves in the hole just to get better," she says. "It will be a while before making money becomes a reality for me."

Leslie Robarge, a recent graduate of Boston University, realized the magnitude of her debt while working on this story.