Debt in America: Students Buried in Education Loans

Over the past year, Americans have made significant strides in paying off their debts, cutting the amount they owe on both credit cards and mortgages. There's just one area where debt is rising by significant amounts: Student loans.

(Note to readers: This is part of a four-part series on debt, you can read the entire report starting here. )

More people are borrowing more money for education than ever before. Worse, in many cases, college students are leaning on risky private loans rather than the safer alternative of federally guaranteed student loans. Why? Experts believe that they either don't understand the difference (until recently, it was hard to tell one from the other), or they're lured in by low starting rates, which can evaporate distressingly quickly.

"Debt has become a fact of life for more and more students -- and it can follow you well into adulthood," says Lauren Asher, president of the Project on Student Debt. "If you graduate with a lot of debt, it can affect the choices you make in life -- what job you take, whether you can get married, whether you'll take the risk of starting a business or even be able to save for retirement."

The latest data from Credit Karma, which compiles information from some 200,000 credit files of people using the site, indicate that the average American owes some $29,910 on student loans as of July 2011. That's up 4% since last year. If these amounts are indicative of the nation as a whole, they show a rapid rise in student indebtedness.

Government data from the 2008 school year (the latest government numbers available), estimated that the average graduating senior owed $23,200 -- nearly 30% less than the debt reported by Credit Karma.

Worse, a decade ago, less than one-third of students borrowed to finance education. In 2008, some 67% of students graduating from four-year colleges had borrowed to finance their education. Notably, the amount of debt and the percentage of students who borrow varies markedly based on the type of school you attend, says Asher.

According to the government data:

62% of graduates from public universities had student debt that averaged $20,200
72% of graduates from private non-profit universities borrowed an average of $27,650.
96% of graduates from private for-profit colleges borrowed an average of $33,050

It is important to note that student loans now are almost impossible to discharge in bankruptcy. It doesn't matter whether they're government guaranteed loans, which provide "deferments" that allow students to put payments on hold when they lose a job, or they're private loans, which have none of the government-mandated safeguards. A change to bankruptcy law in 2005 decreed that all student debts are non-dischargeable.

Students need to watch how much they borrow; whether they're borrowing from the government with a federally-guaranteed student loan or from a private lender; and make sure that their college has a good record of graduating most of the class. Why worry about graduation rates? The best indicator of whether a student will be able to repay student debt is whether the student graduates with the targetted degree. But few students realize that some schools graduate just a small fraction of those who enter as freshmen. Borrowing to attend one of these poorly performing schools is a ticket to chronic debt woes.

You can find graduation rate data at College Navigator, a site sponsored by the Department of Education. Plug your school into the search bar and then click on "retention and graduation rates." If you've already graduated and find yourself buried in debt, check out the government's income-based repayment program, which sets your payments based on what you can afford.

Credit Karma's data doesn't break out what type of school the student attended, but shows a rise in student debt in virtually every state.

The top 10 states for student debt:
1. Massachusetts, with average debt of $33,643

2. Maryland, with average debt of $32,938

3. Illinois, with average debt of $32,698

4. Georgia, with average debt of $32,345

5. New Jersey, with average debt of $32,274

6. New York, with average debt of $32,254

7. Virginia, with average debt of $31,797

8. Alaska, with average debt of $31,713

9. Connecticut, with average debt of $31,341

10. Pennsylvania, with average debt of $30,660.

Kathy Kristof is the author of Investing 101
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