WASHINGTON, D.C. -- School loans are proving to be an increasingly tough subject. The number of college students graduating with school loan debts of more than $20,000 has nearly doubled in recent years and most debt-ridden students have no idea what they are getting into -- or how to get out.

Like extensive credit card debt, money students borrow to get them through college poses a serious financial threat to their future home buying opportunities and other credit efforts.

Among college students who pile on the student loan debt, approximately eight out of 10 of them underestimated the total cost of their loans and will graduate with an average $4,846 more debt than expected. Younger kids and those with smaller incomes who can least afford to err, are worse at underestimating their debt, according to "Big Loans, Bigger Problems: A Report on the Sticker Shock of Student Loans," a research project conducted by student chapters of the State Public Interest Research Group (PIRG), a non-profit, non-partisan public interest advocacy organization with chapters on 100 college campuses.

"In this economy, a college education is the best investment you can make in your future," said Ivan Frishberg, director of the group's Higher Education Project.

"But with big loans come big problems. Students are forced to take out student loans to pay for college but most will end up with significant sticker shock when it comes time for repayment," he said.

The same sentiments were echoed recently when Braintree, MA-based higher-education lender Nellie Mae reported that undergrads rang up an average annual debt of $2,748 in 2000 -- up from $1,879 in 1998. During the same period, the percentage of credit-card carrying students with four or more credit cards rose from 27 percent to 32 percent, according to Nellie Mae.

School of hard money

"It's no accident that credit card companies are spending millions marketing to ignorant cash strapped 18-year-olds, knowing that they have little understanding of 22 percent interest, membership processing and late fees, let alone credit scoring," said Jordan Clark, president of the Washington, D.C.-based United Homeowners Association.

A responsible student who manages to maintain good credit throughout college and beyond aces a highly-rated, long-term payment history. Unfortunately, most students spend more time studying than punching a clock to earn a living necessary to pay for growing indebtedness.

Heavy borrowers risk credit failure and the accompanying snowball effect -- lower credit ratings become loan application rejections that further reduces credit standing.

"The irony is that by taking advantage of students, the lending institutions are helping to produce unprecedented numbers of credit risks who in the future will have difficulty qualifying for mortgages and other loans," Clark added.

It's difficult to determine which is worse. Credit cards are among the most expensive form of credit. Student loans are forever.

"Many young people's lives have been ruined because of their student loans. At least with credit card debt, if worse comes to worse, a young person who gets in way over his or her head can declare bankruptcy and get a fresh start, even if it takes a decade or so for them to get there," said Elizaville, NY-based consumer advocate Nancy Castleman, co-author of "Invest in Yourself: Six Secrets to a Rich Life" (Wiley, $22.95).

"Not so with student loans. You're stuck with them for life, even though you made decisions about the loans at a very young age. And any time the you-know-what hits the you-know-where, and you fall behind on your payments, the 'system' is essentially merciless. The interest you owe gets added to your outstanding balance. So for decades and decades, you may be paying interest on interest on interest on interest," added Castleman, who also publishes a quarterly newsletter, "The Pocket Change Investor".

The PIRG survey of 1,012 currently enrolled student borrowers from 55 colleges and universities also revealed:

• The larger the debt, the more naive students were about its implications. Students with larger debts more significantly overestimated the percentage of their income they could afford to contribute to repayment. Among respondents with less than $15,000 in debt, 36 percent expected to dedicate more than the recommended percentage of their expected income to loan repayment, compared to 57 percent of students with debts of more than $30,000.

• Younger students were the most clueless. Freshmen and sophomores were more likely than juniors and seniors to underestimate the impact of interest. Among freshmen and sophomores, 84 percent underestimated the total cost of their loans, compared to 72 percent of juniors and seniors.

• Students over estimated how much they'll earn by more than $11,000. The average income for recent college graduates is $27,000, but surveyed students expected an average income of $39,016. Younger students expected an average income of $39,856, while older students expected to earn an average $38,096.

The study recommends increased consumer education, but also calls on Congress to adopt a $600 increase in maximum Pell Grant from $3,750 to $4,350. The Pell Grant is the cornerstone of federal student aid. PRIG also advocates new tax laws that provides a $1,500 tax credit for interest paid on student loans.

"Students with high levels of debt are already vulnerable to problems repaying their loans after they graduate. Now that we know they don't even realize the severity of their situation, we should be doing a lot more to put a lid on rising student debt," Frishberg said.

For more articles by Broderick Perkins, please press here.

Published: March 30, 2001

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A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom.