Budget Basics

August 9 , 2006
by Sarah Klein

The hidden cost of debt

Stress, bad credit, even potential bankruptcy — these are all the obvious results of debt. But student debt can mean delaying important life decisions.  "When young people are saddled with debt, they can't buy a house, take entrepreneurial risks, take low-paying but necessary jobs," Asher says.

Or they may even reconsider their chosen career. The traditional rationale for student debt mirrors the adage "You gotta spend money to make money." Though a student may have to pay a lot for a degree, the degree will ensure a better-paying job after graduation. But the adage doesn't ring true anymore — particularly for graduates entering traditionally low-paying fields, such as teaching or social work.  "The burden of student debt makes these already under populated fields even less appealing," Asher says.

Earlier this year, the Public Interest Research Group examined how rising debt would affect graduates pursuing public service careers. The study found that 23 percent of public college and 38 percent of private college graduates would have unmanageable debt as starting teachers; 37 percent of public and 55 percent of private college graduates would have unmanageable debt as starting social workers.

In other words, the debt accumulated to obtain a degree couldn't be repaid based on the pay teachers and social workers receive.  The thought has crossed Ybarra's mind; she's pursuing a degree in sociology and hopes to one day teach. While she's planning to attend graduate school, she worries about adding even more debt. "I wonder, by the time I'm done, how much will I owe then?"

But she'll continue with her studies, despite the low pay of her chosen career.

"It is worrisome, but I'm not stopping now."

Student loan payments are deferred until six months after graduation; as a result, some students "drag their heels" with their studies. Others deliberately peel back on courses, because they simply can't afford to pay for a full load.

Michael McGuiness is a senior at Oakland, and has been employing the "slowly but surely" method in his education, making certain he never borrows too much and can pay it off each semester. By diligently working (at one point he was working four jobs — "I'll be honest, I'm lucky if I have time to study," he says) and taking on a small class load, he's been successful — up until this last semester. He now has a $4,000 outstanding balance, which he'll have to take out a private loan to pay for — and the school won't allow him to enroll for new classes until the outstanding balance is paid.

"I'm all tapped out," he says. "I made it my personal commitment that I wouldn't do this with [private] loans, and I have to now. And I'm pissed-off."

McGuiness is also president of Oakland's student government association, and chair of the Association of Michigan Universities, an alliance of student governing bodies that addresses student issues. He's seen endless cases of students' lives uprooted and even destroyed by debt, and is frustrated and angry with the way the growing problem is being addressed.

"The approach and philosophy is not student-centered. Time and again, decision-makers in Lansing, on campus and in D.C. are not thinking about educating college students in an affordable way. That is not the focus when they make their decisions."

In McGuiness' eyes, lawmakers are biting the hands that should one day feed them.

"Obviously, the economic situation in Michigan is bad," he says, "and the best way to invest in it is through education. Google was interested in Ann Arbor because of U-M and the area's highly educated work force. The main way to entice businesses and growth in the area is by using education as an enticement. That's intensely important."

Plastic safety net

Mark and Sara Nichols met in 2001 in a Detroit nightclub, drawn together by their shared passion for music. Then 24, Sara was just starting out as a CPA and DJ'd by night. Mark, 27, was a producer for BBDO Detroit and an electronic musician. They were young, in love — and massively in debt.

Sara had three credit cards to the tune of $15,000, and Mark had two, totaling about $20,000.

While they managed to avoid student loans, they maxed out their cards with what debt expert Draut refers to as "survival debt." Sara charged her books, supplies and food, and later used her cards to help her make her off-campus apartment livable. Mark's debt was of the entrepreneurial nature, charging expensive equipment he needed for his music, and his self-released first album.

When the couple married in 2003, they didn't register at Target or Marshall Field's. They asked for cash — so they could realize their dream of buying a home.

Buckling down, they managed to pay off about $10,000 in two years, and bought a home in Ferndale. Sara drops about $400 a month on her credit card bills, Mark about $500. While both do well in their respective jobs, the monthly payment is still a big hit for them financially.

"We never use the cards for anything unless it's an emergency," says Sara. "We try to be really strict about making larger-than-the-minimum-required payments, even if it means living paycheck-to-paycheck until the debt is gone."

According to Draut's book, the average 25-to-34-year-old spends nearly 25 cents of every income dollar on debt payments — more than double what people the same age spent in 1989. She says more and more young people are relying on "the plastic safety net."

"When there's nothing left over, nothing to tuck away in savings, you rely on credit cards," she says. "When you get a cavity, or the car breaks down, those expenses get charged. If you lose your job, credit cards become the way to keep the lights on and food on the table."

And it's tough for college kids to resist the lure of the plastic safety net; the college demographic has been the target of a very aggressive marketing onslaught on campuses.

Howard Dvorkin, founder of the nonprofit debt consolidation company Consolidated Credit Counseling Services, acknowledges that college students are a primary target of credit card companies. "I've sat in meetings with marketing executives, and this one guy, well, I envisioned him eating his young. I could practically see fangs hanging out of his mouth when I mentioned college credit cards," Dvorkin says.

Given the massive lobbying power of lending companies, Dvorkin doesn't see the government hopping in to save the day. He mentions a bill proposed by Sen. Christopher Dodd (D-Conn.) that would require credit card companies to disclose in plain English how long it would take to pay off the total debt when making only minimum payments.

"It's really good legislation," Dvorkin says, "but it will never see the light of day. The American Bankers Association is one of the strongest lobbyist groups in the country."