Many Americans pay a lot more than the cost of student loans in order to attain a degree.
Over the past year, as the nation’s student debt rolls hit $1 billion, policy makers, parents, and students took a hard look at the costs and benefits of a college education. But, as new data from the Demos household survey reveals, student loans are just the beginning of the story. Alongside the rising cost of education and simultaneous declines in need-based financial aid, households turned to credit cards as a means to finance their investment in a better economic future. Paying for college with plastic often means higher interest payments, rising debt burdens, and for some students, the inability to complete their degree under the strain of tightening household budgets. A new fact sheet from Demos, College on a Credit Card, investigates the relationship between educational expenses and credit card debt, and shows that putting college on credit can be a very bad deal.
For households who carry credit card debt, educational expenses are likely to show up on their monthly bill. Sixty percent of indebted low- and middle-income households who paid for a child’s education reported that expense as a contributor to their current credit card debt. Among those respondents financing the education of themselves or a spouse, 71 percent report that it contributes to their current debt. With the average time to pay off credit cards estimated at over two years, these families spend months making additional interest payments well above those charges for public student loans. Some schools even charge a processing fee for the privilege of paying with plastic. The additional interest and fees mount atop the already rising price of higher education, adding to the total burden of college costs. And these debts are excluded from the kind of benefits for borrowers that are possible for other types of financing, like the income-based repayment plans that make public student loans more affordable than taking on private debt.
But it gets worse. For some of these households, the presence of credit card debt can make an education simply unattainable. Our survey found that 13 percent of those indebted households who paid for educational expenses on a credit card were forced to leave school in order to deal with their debts. That is more than one out of every ten students who believed that they could finance their education with credit who instead saw their investment collapse.
Why would these families take such a risk? Because the promised payoff seems indispensable in an economy with a $1 million lifetime earnings gap between high school graduates and the college educated, and unemployment rolls for men with only a high school diploma that topped out at more than 14 percent during the Great Recession.
Though the reward for a bachelor’s has grown, so has the cost of getting one.
In the past generation state support for higher education declined and tuition soared, a shift that reassigned the responsibility for developing an educated workforce from public investments to private debt. At the same time, state financial aid programs moved away from need-based financial aid, making it more difficult for low- and middle-income households like those in our survey to compete for scarce funds. For households without the liquidity to finance an education up front, or for those who get trapped into paying at the last minute when no other options are available, credit cards provide a means to attain the necessary skills for today’s labor market.
Clearly using credit cards to finance an education is a bad deal, but that awareness is not nearly enough to encourage low- and middle-income households to wait for more affordable alternatives. In the face of stagnant or declining incomes, rising education costs, and reductions in need-based financial aid, those who want to invest in their future pay with credit cards as other resources disappear. As long as credit offers the best available option for attaining a degree, families will use it. When they do, it provides both a hope for economic mobility through education and the obstacle to success that accompanies expensive and onerous debt.