Hernan Castillo is treading water, trying to survive under the weight of $5,200 in credit card debt and $30,000 in student loans. He's making payments on time, but the Orange County, Calif., resident sees little hope for getting out of the warehouse job he holds and landing a job as an accountant, the field in which he earned his degree. And forget about saving money for a home or retirement. He now firmly believes the money he spent earning a college degree was a waste.
"Every day I wish I had never gone to college," Castillo said. "It has been the biggest mistake of my life. Sometimes I wish I had gone to prison instead of college. At least I would have learned a trade or two and started being independent once I got out."
Castillo is one of thousands of student debtors who've found their way to the StudentLoanJustice.org Web site, propelled by last year's credit squeeze and the abrupt economic downturn, according to Alan Collinge, who runs the site.
A recent study by Sallie Mae shows college student credit card debt is skyrocketing. Graduates leave school with 41 percent more credit card debt than four years ago, with one in five owing at least $7,000 on plastic by the time they get their diploma. Worse yet, the study showed that more students – 22 percent -- make the minimum payment each month than the 17 percent who pay their bills in full. A full 82 percent said they carried balances each month, and were forced to pay finance charges, far more than the national average of about 50 percent.
Meanwhile, there are signs that student loan default rates are rising. It's too early to see the impact of the credit collapse of 2008 -- there's nearly a two-year time lag after graduation before students are officially in default on their loans. But the most recent data shows 7 percent of students who began repaying loans during 2006-2007 had defaulted by September 2008, the highest rate in 10 years.
Both types of debt work as a one-two punch to the finances when students graduate.
"It's quite typical that a borrower in trouble with student loans has significant credit card debt," said Collinge, who recently published a book titled "The Student Loan Scam." "It's causing severe distress."
But perhaps the knockout blow for recent graduates is this: They are entering the toughest job market in years. A recent survey by the National Association of Colleges and Employers found that only 20 percent of 2009 graduates who've applied for jobs have been hired, compared to a success rate of 51 percent in 2007.
A deeper look at student credit card debt
Signs of credit distress are obvious in the Sallie Mae study. The number of students who graduate with more than $7,000 in debt has doubled in the last four years. And they're racking up debt much earlier in life. Four years ago, 69 percent of freshmen had a zero balance on their credit cards, but only 15 percent now say they pay their bill in full each month.
Nine in 10 students said they used plastic to pay for school expenses like textbooks, and the amount they've charged has more than doubled. Four years ago, students told researchers they charged $942 for school costs. The recent study found that figure had climbed to $2,200.
The problem is simple, Tamara Draut, author of "Strapped: Why America's 20- and 30-Somethings Can't Get Ahead." Credit cards are being used to cover rising school costs because there is no other source to tap, says Draut, who criticizes U.S. college funding as a "debt for diploma" system.
"There's a lot of reasons why this is happening," said Draut, who is also vice president for policy and programs at Demos, a New York City think tank. "The cost of education keeps going up, and financial aid hasn't kept up with that increase. So students make up the difference by charging things."
It doesn't help that credit card companies invade college campuses each year, promising everything from free pizzas to free iPods to rock-bottom interest rates in order to entice students. Many colleges receive financial compensation from banks for giving them access to students. Some states, including Connecticut, are considering bans on certain college marketing practices.
New national credit card regulations currently being considered by Congress will help, Draut said. The Credit Card Users Bill of Rights passed recently by the House will prevent retroactive rate hikes in some cases, a practice that traps many college students who pay their bills a few days late and find their 5.9 percent rate jacked up to 29.99 percent. In some cases, that practice would be barred by the House bill.
And in July, a new federal program that allows former students to cap their monthly loan payments at 15 percent of their income kicks in. The program is designed to provide relief to graduates who enter traditionally lower-paying sectors like teaching or social work. In some fields, public service loan forgiveness will be available after 10 years of payments, and graduates working in any field will have their remaining balances forgiven after 25 years.
"Graduates should look into all their options," Draut said. Income-based repayment can be a lifeline for some graduates, she said, and the 25-year limit provides light at the end of the tunnel.
The program has limitations, however. For example, only federally sponsored loans are included. Private student loans are not.
Meanwhile, Collinge warned that students who chose to limit their payments based on income and don't cover the standard monthly payment, simply have the difference added to the balance of the loan. That means higher interest charges.
"Income based repayment is a pretty good program for current and future students, but there are some serious risks associated with it," he said. "If the borrower falls out of the program for any reason, they get socked with a huge balance." That means income-based repayment will be right for many graduates, a mixed bag for some and a bad choice for others, he said.
Students and former graduates like Castillo face a long series of such complicated choices. For example, while it might seem obvious that student loan debt is better than credit card debt, that's not always the case.
Federal student loans have lower interest rates and more generous repayment terms. In fact, the annual interest owed on a $48,000 federal student loan is less than the annual interest on an $8,000 credit card balance on a high-interest card.
But students who take on private student loans have a less clear choice. Private loans can assess credit-card-like interest rates as high as 20 percent. And graduates who run into financial trouble later in life have more legal options to rid themselves of credit card debt. For instance, student debt cannot be discharged in bankruptcy, while credit card debt can.
Castillo, who is struggling under the weight of both credit card and student loan debt, wishes he knew a lot more about the system before he went to school.
He's currently paying $300 per month on his student loans and about the same toward credit cards, but at 30, he feels he'll never get ahead. There's no hope of going back to school for retraining, and he's already very worried about retirement.
"I wish I could go back in time," he said. "When I signed those (loan) papers I never thought it would come to this point. I thought it would be easy to pay it back. I wish I had never gone to college."