Students in Debt: $1 Trillion Hole and More Dropouts

Student debt in America will surge past $1 trillion next year and has already surpassed credit card borrowing, promising to turn out the most hocked generation of college graduates in history.

For a great many of these grads things will work out fine. After all, student debt is "good debt" because it is generally tax deductible, can be deferred if you run into trouble and is a relatively small problem next to the alternative: no college degree and, as a result, less lifetime earning potential.

But the downside is considerable, especially when you combine student loans with unmanageable credit card debts and lump in a plain-vanilla degree that may not lead to a high-paying job anytime soon. The worst case, of course, is folks who take on the debt and never get the diploma.

In some instances, anyway, the debt itself keeps people from finishing college. They become too stressed and miserable to focus on their studies, or maybe they drop out in order to earn enough money to begin making payments on their debts.

In researching this subject for my next book, I found:

For one in three college students, debt makes it difficult to concentrate on their studies; this either delays their graduation or requires them to put forth greater effort to complete their degree.
For one in four college students, debt leads to either physical or mental health problems.
For one in six college students, debt leads to taking fewer credit hours per semester.
For one in 20 college students, debt leads to dropping out of school for at least one semester.

These are the overall numbers. When you look just at kids who are experiencing credit issues, the rates are much higher. For example, half of credit-challenged college students say that their money issues weigh on them emotionally and nearly as many report losing sleep or experiencing physical discomfort, according to the working paper Credit Practices and Financial Education Needs of Midwest College Students by Angela C. Lyons. Financially stressed students are also three times more likely to take fewer credit hours and six times more likely to drop out.

This kind of research is leading a handful of schools to make financial education a priority. Champlain College in Burlington, VT requires all students to attend two personal finance sessions, which mostly focus on good credit practices. That's fine, as far as it goes. But a couple of lectures isn't nearly enough. At the University of Illinois in Chicago, incoming freshman at the business school are required to take a one-credit-hour course offered online via the website MoneyU. At St. Joseph's College in West Hartford, CT, all incoming freshman must take the MoneyU course.

Robin Brierton, assistant dean of the college of business at Illinois, says financial stress is the top reason that students drop out. "Whether it's that they got themselves in a mess of credit cards or that they didn't know how to do a proper budget, or that college is just it just too expensive - it's financial," she says. "For a great deal of them, they just didn't budget properly because it's the first time they've ever had to do that."

How effective these kinds of programs are remains an open question. They haven't been around long enough to produce long-run reliable data. But Brierton insists that her school's financial literacy requirement reduces the dropout rate due to financial troubles by 10% to 20%. That's a start.

Photo courtesy Flickr user carmichaellibrary
More on MoneyWatch:
Â· Top 6 Ways Money Skills Give Students an Edge
Â· Top 6 Signals That a College Student is Abusing Credit
Â· The Top Reason Kids Don't Learn Money at School
Â· Teaching Kids About Money, What We're Up Against
Â· Financial Education Takes a U-Turn
Â· Taking Financial Education to the Next Level
Â· Financial Education: Where We're Headed

Dan Kadlec

Daniel J. Kadlec is an author and journalist whose work appears regularly in Time and Money magazines. He is the former editor of Time’s Generations section, which was written and edited for boomers. Kadlec came to Time from USA Today, where he was the creator and author of the daily column Street Talk, which anchored the newspaper's business coverage. He has co-written three books, including, most recently, With Purpose: Going from Success to Significance in Work and Life. He has won a New York Press Club award and a National Headliner Award for columns on the economy and investing.

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