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Students pay dearly for debt

WASHINGTON -- Exploding student debt on American campuses is having wide-ranging but little-noticed social effects that are being felt in family relationships, in young people's attitudes toward their peers and their schoolS, and in their views about borrowing and saving, according to a new study of students and their money.

The long-term consequences of these shifts are not yet known, but the study's findings raise troubling questions for parents and colleges, as well as for the students themselves.The findings suggest that easy access to credit can undermine parental authority, allowing some students to burst free from family restraints at a time when they are not well prepared to do so. Credit also makes it easier for less affluent students to succumb to social pressures to live beyond their means. And it creates a class of debt-saddled alumni and dropouts who assign at least some of the blame for their predicaments to the colleges and universities -- blame that can show up in the form of decreased donations to the schools in later years.

The impact of debt -- both education loans and credit cards -- has been the subject of considerable debate in recent years, but much of the study has focused on the economic situations of students.

The financial services industry notes that many of these studies find the vast majority of students handle credit responsibly and find credit cards and student loans both crucial to their education and a convenience in their everyday lives.

But the new study, conducted by a sociologist rather than an economist, looked at students' feelings and attitudes as well as their financial situation. It concludes that credit problems are wider than earlier studies indicated and extend beyond the bank balances.

The report by Robert D. Manning of Georgetown University was released under the auspices of the Consumer Federation of America, which has long been critical of credit-card industry practices.

Its findings were mirrored by another study, released last week by the American Association of University Women, which found that credit card debt is a major obstacle for female high school graduates seeking to attend college and to college dropouts seeking to return to school.

The campus debt explosion is relatively new and is a function of college costs -- which have risen much faster than family incomes -- and aggressive marketing of credit cards to students by banks and other issuers. Together they have transformed "the cash-based economy of college life" that today's parents remember, Manning said last week.

"Clearly, credit and debt are shaping (today's) college experience," he said, thus shaping student's future lives and attitudes.

Manning, who has studied students and credit for years and has done extensive surveying and interviewing on area campuses, pointed to three key areas in which these changes are becoming visible.

First, the college experience makes debt acceptable. Manning has encountered many students who come from homes where parents have long emphasized the virtue of staying out of debt. But these students cannot afford college without borrowing, and they hear "college administrators emphasize that debt is unavoidable but a good investment," he said.

And students are bombarded with credit-card solicitations that often are couched in similar terms -- building a good credit record that will be valuable later on. The cards offer other seeming benefits, such as convenience (no running to the bank for cash) and security in emergencies (the car breaks down). And many schools seem to add their own imprimatur by offering "affinity" credit cards emblazoned with the school's name.

As Jeff, a Georgetown undergraduate, told Manning: "Everyone has to take on debt to go to college. ... Everyone is expected to have student loans. ... Even in my Midwestern (culture), which emphasizes that debt is bad, college loans are viewed as good debt."

That made it easier for Jeff to accept a credit card and run up a balance on it -- and then on another, and another. Today he has 16 cards with $20,000 in balances, a $10,000 debt consolidation loan and $30,000 in student loans. He is working two part-time jobs his senior year and hopes to land a good enough job at graduation to bail himself out.

Second, the easy availability of credit undermines parental control. When parents controlled the purse strings, they had considerable leverage over both behavior and spending. Credit card issuers once demanded that parents cosign for students' cards; today they no longer do.

Alcohol, tobacco and vacations are common credit card expenses, Manning said, adding, "I was astounded how many kids put down piercings."

Cards also allow students to hide misbehavior. One student told Manning he got his first card when he was arrested for drunken driving and hid the $500 expense from his parents.

Cris, a University of Maryland student, told Manning her "stingy" father complained when she or her mother so much as turned on an air conditioner. Her parents assumed she would behave herself at college because she had only small savings from her high school job. It never dawned on her father that banks "would give essentially unsecured loans to teenagers who lacked experience in managing their economic affairs or discipline in controlling their consumption," Manning said.

The new cards "did not ask questions about why she needed the money or moralize about her spending patterns," Manning said. As Cris slipped deeper into trouble, she stayed afloat only by adding new cards and shifting balances. Even becoming a part-time student so she could work full time was not enough. She tried to renegotiate, but the debt counseling service told her she was too far gone.

When she declared bankruptcy at 23, Cris discharged $22,522 in debts on 13 cards and a $5,000 consumer loan.

Third, many students want a standard of living they can't afford. Sometimes peer pressure is a key; other students who are used to having most of the things they wanted as teen-agers can't adjust to spending constraints imposed by college costs.

Manning has seen students try many strategies for staving off disaster, but a particularly pernicious one is to in effect refinance credit card debt with student loans.

At institutions where student loan limits are more than enough to cover tuition, students borrow the limit and use the extra to pay off or pay down credit card debt. The hitch: Government-guaranteed student loans are generally not dischargeable in bankruptcy, so they can continue to be saddled with what was in large part consumer debt.

A key trap, students repeatedly told Manning, is the very small minimum payments many credit cards require. Most students can manage $30 or $40 a month and often continue to borrow and obtain new cards until even the minimum payments are beyond them. By then, though, their actual debt is likely to be enormous.

Often parents bail them out, but many are stunned to find out how much their child owes.

"A lot of parents don't understand that by the time they hear about a kid having a problem, it's really big problem," he said.