Thrifty and Broke…

The real price of a college education today

By Susan Berfield

Nichols has a certain stoicism about her, which has helped her overcome
disappointments big and small. She was born in Oklahoma City in 1975, a
time of plenty for her family. Her father was prospering as a
commodities trader, and he liked to spend his money. Paige would turn
out to be the same way. But by the time she entered college in 1993,
their financial situation had become, she says, considerably more
“volatile.” Her parents had been able to pay for the education of her
two sisters, 11 and 13 years older than she, but told Paige they
couldn’t do the same for her.

finished up at the University of Tulsa in 1997 with a business degree
and $20,000 in student loans, which makes her, by official reckoning
anyway, a typical graduate. She is now paying off her loans, $300 a
month; at that rate it will take her until she’s about 50. “Twenty
thousand isn’t even that much, but it feels hefty,” she says. “I’m not
making any headway.”

Like many
who emerged from adolescence amid the promise of the late 1990s, Paige
never imagined that money would be the issue upon which crucial
decisions in her life would turn. But it is. She has been fascinated
with forensic psychology ever since reading a book in college about a
woman who studied serial killers, and she was accepted into a master’s
degree program at the Chicago School of Professional Psychology in
2004. Before long she reconsidered. “I dream big,” she says, “then
reality seeps in.” Paige would have had to borrow at least $32,000,
which seemed like “way too much to think about,” especially since
afterward she might earn less than she would in the corporate world. “I
could not justify putting myself in that financial jeopardy,” she says.
“But it could have been my life’s passion.”

belongs to the first generation that came of age with the Internet,
grew up marketed to at every turn, is too young to remember the Vietnam
War, Watergate, or the Beatles: There are all kinds of ways to describe
today’s 30-year-olds. But what may really come to distinguish them is
that they could be the most indebted generation in modern history.

new economic realities are at work. Many had to borrow serious money to
attend colleges that are ever more costly. And as soon as they entered
school, they were offered credit cards; by 30 many have accumulated
thousands of dollars of that very expensive debt, too. Imprudent
choices sometimes have compounded their troubles. The consequences can
be profound: Many of those 30-year-olds feeling unduly burdened by
their financial obligations have had to make compromises on some of
life’s vital decisions.

is a typical graduate not only because of the amount of her student
loan debt but also because of the way in which her attitude toward it
has shifted. In those early years, she felt unprepared for life on her
own and had what she calls an immature attitude toward money. She paid
as little as she could on her student loans, about $50 a month, while
working in Tulsa as an accountant at Deloitte & Touche and later at
WilTel Communications Group Inc. (LUK
) as a product manager. She could have handled making higher payments,
but that would have meant scrimping. Paige, though, had long ago
learned the prevailing cultural language of brand names and status
symbols. Living in reduced circumstances simply didn’t correspond with
what she thought she understood about being an adult. “My lifestyle was
a little out of whack,” she says. “I expected to be able to live the
way my parents raised me.”

Signs of Debt

Take a look at the faces and factors of today’s growing debt among young people.

Now, after two turbulent years
in Chicago, Paige is happily employed as a product manager for a Web
site called ShopLocal LLC, earning $65,000 a year. She’s hoping to buy
a place of her own before she’s 35 years old, maybe invest in real
estate with a group of friends, start saving more money for retirement.
“We were supposed to be the slacker generation,” she says, “but I think
we grew out of it.”

No Guarantees
In myriad ways, the economics of being 30 have changed for the worse. A
college degree is now the minimum required to find a place in the
working world that affords some job satisfaction and material comfort.
But it doesn’t offer protection against turmoil in the labor market, as
it once did. Nor does it guarantee such things as health insurance or a
retirement plan. And real earnings for college graduates without an
advanced degree have fallen four years in a row, for the first time
since the 1970s.

cost of higher education, however, has increased so dramatically in the
past decade and a half — up by 63% at public schools and 47% at
private — that more students have to borrow tens of thousands of
dollars to attend, ensuring that many of them are paying off those
loans well into their 40s. The median debt-to-income ratio now is about
8%. But fully one-quarter of graduates are paying more than 12% of
their income, a level many financial experts regard as worryingly high.
That burden will only grow: Interest rates on student loans are going
up for the first time in five years.

financial obligations leave them particularly vulnerable to life’s
discontents. Nellie Mae, the student lender, found that 55% of all
borrowers felt hampered by debt in some way in 2002: They changed
career plans, gave up on graduate school, put off buying a home,
getting married, or having kids. “This is the first generation who
won’t necessarily do better than their parents,” says Tamara Draut,
director of the economic opportunity program at Demos, a research and
advocacy organization in New York. “They’ve been told: ‘Apply yourself.
You’ll get a job, a home.’ For many young people that’s not the case.”

Turning 30 has long had iconic
status in American society: It is associated with a seriousness of
purpose, a willingness to plan for what still might be an indistinct
future. But student loan debt can diminish that sense of stability.
Michelle Chin, a scrappy, confident, 31-year-old graphic designer who
lives in East Los Angeles, says what bothers her most about her
financial situation is that she can’t save much money. She graduated
from Art Center College of Design in Pasadena, Calif., seven years ago
and now has $42,000 in student loans and $7,000 in credit-card debt. As
Michelle says, “I’d like to hold on to more of my cash, but that almost
feels frivolous.”

Thirty years
ago, when many of their parents attended school, it was entirely
possible to get through college with modest family savings and steady
work during the summers. Since the mid-1980s, though, tuition has been
growing far faster than many families can afford. The price of public
colleges, where about 80% of all students are enrolled, increased 28%
in the past five years alone, far more than in any five-year period
since 1975. At private colleges, the total cost increased 17%. Those
figures, it should be noted, already take inflation into account. At
the same time, outright grants have been shrinking as a proportion of
total financial aid. “The costs of education are moving from the
government to families, and in families from parents to kids,” says
Melanie E. Corrigan, associate director of national initiatives and
analysis at the American Council on Education in Washington.

Rite of Passage

These trends have intersected before — paying off college loans has
never been easy, and earlier generations have had to contend with weak
job markets — but they are felt more keenly today. Almost two-thirds
of students have to borrow money to get through school; as many as
one-quarter may be accumulating credit-card debt to help pay for
tuition. The median debt for college graduates in 2004 was $15,162, an
increase of 66.5% since 1993. That may not seem like a crippling sum,
but plenty of individuals owe much more. Back in 1993, only 4.2% of
graduates had loans exceeding $25,000. A decade later, 17% did.

30-year-olds are also the first generation for whom having a credit
card was a rite of passage. Most of their parents couldn’t get a credit
card until well after graduation. But beginning in the early 1990s,
students have been bombarded by tempting offers at a time when they
were just scraping by. For those whose financial education had scarcely
begun, it seemed like free money: Spend a couple of hundred dollars and
only pay the minimum balance of $10 a month. So students used their
cards to buy computers, clothes, gas, textbooks, and sometimes even to
pay for tuition. Living with debt has become perfectly acceptable: Last
year 76% of college students had credit cards and their average debt
was $2,169. “We wink at the magical thinking that credit-card companies
encourage us to engage in,” says Darryl Dahlheimer, a program manager
at Lutheran Social Service Financial Counseling in Minneapolis. “The
bitter 30-year-olds are the ones who are still paying off the pizza
they ate when they were 20.”

these students start out in the working world, many use their credit
cards to fund a richer lifestyle than they can afford, get by between
jobs, or cover emergency expenses. The average credit-card debt among
25-to-34-year-olds was $5,200 in 2004, 98% higher than in 1992. “Young
people are taking on a level of debt that was never possible for an
earlier generation because it’s not based on income,” says Robert D.
Manning, author of Credit Card Nation and professor of finance at Rochester Institute of Technology. “This is a generation that has a razor-thin margin of error.”

would argue that building up credit-card debt is in anyone’s best
interest. Most economists, though, believe that borrowing $20,000 or so
for a degree that, in the past anyway, would enable graduates to earn
$1 million more over their lifetime is a pretty smart investment. But
for those who have to borrow considerably more, or come from families
that can’t slip them a couple of thousand in a pinch, student-loan debt
can be a real burden. “We’re a society that values freedom of choice,
but debt can restrict and narrow choices,” says Gaston Caperton,
president of the College Board and former governor of West Virginia.
The real price of a college education may have to be calculated by
different means altogether.

Reality Check
It took William R. Love a full decade to get through college, mostly
because he kept quitting to make what money he could at places like
Burger King and Friendly’s Ice Cream (FRN
). Then, when he finally graduated from Rochester Institute of
Technology in 2002, he couldn’t find a decent job. His wife, Jessica,
pressured him to take whatever he could find, and eventually he did.
But he begrudged her; she was disappointed in him. A year later their
marriage collapsed.

Now, at age
31, he is about to finish his master’s degree in business at RIT.
William is charming and highly capable and has lots of ideas about what
he might do. He thought of moving to Chicago, a city he regards as full
of promise. But he’s realizing that to secure the $70,000-a-year job he
hopes for, he has to be willing to go pretty much anywhere. He would,
though, like to stay within driving distance of his parents, who live
in rural Pennsylvania; money for plane tickets home may be hard to come
by. William knows he will have to live frugally for years so that he
can pay off the $71,000 he owes in student loans and the $40,000
balance on his credit cards.

lives with his girlfriend, Savita Thakur, who is a 28-year-old
technical writer and part-time student in the same MBA program. But he
won’t be in a position to get married, have children, or buy a house
for a long, long while. “I have to meet my financial goals to pursue my
career properly. I can’t take on more debt and do that,” he says. In
this, he is not alone: Fourteen percent of graduates said in 2002 that
they had delayed marriage because of their loan obligations, compared
with 9% in 1987.

William met
Jessica at Marywood University in Scranton, Pa., where he completed his
freshman year and then dropped out. After she graduated in 1996, they
moved to Rochester, so that she could take a job as an auditor for a
bank there. When they were feeling pretty comfortable financially, he
returned to school and this time got through his bachelor’s degree in
management information systems in three years. But in Rochester, long
dependent on such companies as Eastman Kodak Co. (EK ) and Xerox Corp. (XRX
), there were few technology jobs available back in the spring of 2002.
By the fall, he was working on the sales floor at CompUSA, and at Sears
Roebuck & Co. (SHLD ), too.

In February, William found a job at Paychex Inc. (PAYX
), the payroll processing company; it was only temporary, but at least
he could put his education to use. When his two-month contract was
extended, William thought he had a good chance of being hired for a
permanent position. So in June he enrolled in the MBA program as a
part-time student. Halfway through his second quarter, he was let go
from Paychex and couldn’t find another job. In November, he took a
leave of absence from school. “The friction returned to our marriage,”
he says. “School was cutting into the time I had to look for work.”

parted from his wife a month later with two credit cards, $27,000 in
college loans, and a car that Jessica signed over to him. He used his
unemployment checks to pay the rent on a studio apartment. He lived off
his credit cards, relying on a small sum that his extended family gave
him to cover the minimum balance each month. He returned to school and
bought a $3,200 computer system, then a $1,500 digital camera. He lost
40 pounds from the stress of his divorce and bought all new clothes. At
the time, this hyperconsumption seemed normal to William, as it would
to many others of his age. “Our culture has trained this generation to
believe that success is measured by acquisition,” says Nathan Dungan,
the author of Prodigal Sons and Material Girls: How Not to be Your Child’s ATM.

the summer of 2004, William’s life began to unravel. The crises that
often discourage young adults were made more intense by his financial
troubles. An uncle who had been everything William admired died from
cancer. He began doing poorly in school and withdrew from two classes.
He was approaching the spending limits on his credit cards. “I knew if
I didn’t catch myself in time, I would be headed to bankruptcy,” he

Savita, his family, and an
adviser at school helped him cope with his personal losses. By January,
William had cut back on his spending and become meticulous about paying
his bills on time. His grades improved. He began thinking about how he
could manage his finances once he entered the working world. “I’ve
learned my lesson,” he says. “There’s a real disconnect between what
students today think they can have after graduation and reality.”

“Sense of Betrayal”
This is a generation with an unusual sense of entitlement. They were
brought up as consumers, comfortable with prosperity, certain of their
eventual success. For those who graduated when they were in their early
20s, America was at its most exuberant. Then came the recession,
September 11, a slow economic recovery, growing job insecurity,
pressure all around. “A college education doesn’t protect you from the
vicissitudes of global competition,” says Jared Bernstein, director of
the living standards program at the Economic Policy Institute in
Washington. Real earnings for full-time workers between the ages of 25
and 34 who have only a bachelor’s degree have, in fact, dropped by
almost 10% since 2000, by 5% in 2004 alone. This exaggerates the burden
of their debt. For many 30-year-olds, establishing themselves takes
longer and is more complicated than they thought it would be. “It’s so
much more difficult to achieve the adult milestones today than it was
30 years ago,” says Draut of the think tank Demos. “There is some sense
of betrayal.”

García Gamboa, who just turned 30, is articulate and energetic, someone
who while reading Madeleine Albright’s biography will ask a friend to
recommend books on European history for background. She was an
exceptional student and received scholarships that nearly covered her
first three years at Smith College. During vacations, her uncle gave
her frequent-flier miles so she could return to Houston, where her
mother insisted Cristina work at the grocery store he managed. All of
her summer internships had to pay: After her junior year, she worked at
Lockheed Martin Corp. (LMT ) during the day and Toys ‘R’ Us (TOY ) at night.

the beginning, Cristina’s mother, Bertha, didn’t see the difference
between a diploma from Smith and the community college where most of
Cristina’s high school classmates went. Her philosophy was simple:
Don’t pay when you don’t have to. Bertha, who moved to Texas from
Mexico when she was 17, wouldn’t use the term return on investment, as
Cristina does, but that’s how she looks at higher education. So after
Cristina graduated in May, 1998, with a double major in Latin American
studies and economics, it was a scandal that she returned home $21,000
in debt and unemployed.

Cristina quickly accepted a $42,000-a-year position as a Latin America analyst with Motorola Inc. (MOT
) in Miami, only to be laid off seven months later when the company
reduced its investment in the region. She moved back to Houston, worked
at a public relations firm with a Hispanic focus, and lived with her
parents. Her fiancé, Manuel Gamboa, had graduated from Massachusetts
Institute of Technology in 1997 with about $27,000 in student-loan debt
and $3,000 in credit-card debt, and he was living with his family in
Chicago while working at Navistar International (NAV ) as a design engineer. By May, 2000, they had saved the $25,000 they needed to host a wedding party for 400 guests.

and Manuel began their married life in Houston, where they could afford
to buy a house, instead of Chicago, where they couldn’t. Their $51,000
debt weighed on them, though, and they agreed to cut it in half before
they borrowed more to buy a place. They got it down to $26,000 in a
year. At the end of 2001 they purchased a $112,000 house eight miles
outside of Houston with a $4,000 downpayment. It’s a modest place, says
Cristina, and with their salaries they could have afforded something
“more grand,” but they didn’t even look, she says, because of their
student loan debt.

Cristina’s mother had been planning their lives, that’s when they would
have started a family. Instead, Cristina enrolled in a 15-month
master’s degree program in marketing at Northwestern University’s
Medill School of Journalism in 2003 and Manuel entered the MBA program
at the University of Texas at Austin (no more private schools for him)
the year after. When he finishes in May, 2006, they will have
accumulated an additional $100,000 in debt. They consider graduate
degrees a necessity in the business world, yet paying for them may well
constrain them in important ways in the years to come.

Feeling the Pinch
Cristina’s first job offer after Medill was to join SBC Communications’ (SBC
) leadership development program at company headquarters in San
Antonio. That’s about 80 miles from Austin, which made it a
less-than-ideal proposition. But Cristina was wary of being unemployed.
“It was frightening to owe $50,000 when we first got married. And now
we owe more,” she says. “We owe more in student loans than on our
house. You convince yourself that it’s good debt.” She started at SBC
in mid-January.

Cristina and
Manuel plan on paying $1,256 a month on their loans for a decade, which
is manageable if they live in an affordable city and both work. That
makes the prospect of having children anytime soon not too “realistic,”
as Cristina puts it. Their debt has put them in a bit of a quandary.
They want one of them to stay home with the kids for several years.
Cristina and Manuel had many ambitions when they decided to go to
graduate school: Among them was to secure positions that provided
enough flexibility, financial and otherwise, for their family. But that
time seems further off than they hoped.

days, Cristina is adjusting to life in a small town mid-way between San
Antonio and Austin, a long commute in a noisy car that needs new tires,
not being able to help their family as much as they would like, her mom
calling her office at night and saying: “You’re still there. I thought
you went back to school for a better job.” It’s not quite what she saw
for herself at this age. “I thought I would be living it up at 29,” she


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