A generation weighed down by debt

Two weeks ago, when Beth O'Connell ordered several books from Amazon.com, she received a distressing surprise: She had hit the limit on her credit card. Sorry, no books.

"This is my first maxing out," explains Ms. O'Connell, a publicist in Watertown, Mass., who graduated from Boston University three years ago. "I think I'm making decent money, but it's just not enough with all the bills I pay. It's not like I'm going out shopping and doing crazy things. I'm just trying to get by."

Trying to get by. Those four little words echo plaintively around the country as young adults struggle to get established and stay afloat. Saddled with record-high college loans and credit-card debts at a time when wages are stagnant and the job market is tight, they may be the most indebted generation of young Americans ever.

"These young adults are doing everything society tells them to do," says Tamara Draut, coauthor of a new study, "Generation Broke: The Growth of Debt Among Young Americans," published by Demos, a public-policy group in New York. "They're going to college, taking on tremendous student-loan debt, and working longer hours than ever before while in college. When they get in the real world, they can't get ahead because of the debt they went into to get the degree to get the good job."

Two trends are fueling the rise in debt: dramatic increases in college costs and the aggressive marketing of credit cards to college students.

"This is the first generation to shoulder the costs of college primarily through interest-bearing loans rather than federal grants that don't have to be repaid," Ms. Draut says. During the 1990s, college costs soared by an average of 38 percent. By the end of that decade, almost two-thirds of students had borrowed money. The average graduate in 2002 owed $18,900 in student loans.

To compound the challenge, rents and housing prices have increased faster than inflation during the past decade. Young adults are more likely to hold temporary positions and jobs that don't offer healthcare benefits.

O'Connell owes $20,000 in student loans and about $6,000 on credit cards. She must pay $175 in student loans every month for 20 years. "I have 17 years left," she says. She and a friend split the $900 rent for an apartment 20 miles north of Boston. Add to that a $250 monthly car payment, $200 a month for car insurance, and the cost of food, gas, and cable TV.

"It's very, very overwhelming at times," O'Connell says. "It's a never-ending cycle. I'm literally living paycheck to paycheck."

Many indebted young adults trace the beginning of their slippery economic slope to the first day of college. When they registered for classes, credit-card companies gave free T-shirts to applicants. Enticing offers - "0% interest!" - turned out to be no interest for the first month only.

"I signed right up," says Brandi Dobbins of Washington, D.C. "It gets a lot of people off on the wrong foot. Interest rates are about 21 percent. You start racking up interest, and pretty soon the interest is as bad as the bill is."

Although Ms. Dobbins remained debt-free in college, her $5,000 savings melted away as she established an apartment and bought a professional wardrobe for her job with a nonprofit group. Now, she moonlights three nights a week in a restaurant to pay off debts.

Unemployment also adds to the debts of Generation Broke. When Sarah Thurston graduated from college in 2000, she had $20,000 in student loans. After starting a job with an Internet company in New York that paid "an exorbitant amount of money," she assumed she would pay off her loans quickly. Six months later, she was laid off. After four months of unemployment, she took a job with another Internet company. Seven months later, she was laid off again.

"My unemployment check covered my rent, but I had to put groceries and the daily necessities on my credit card," says Ms. Thurston, who works for a publishing firm in North Adams, Mass. Today she has $10,000 in credit-card debt and $13,000 in student loans. To speed the repayment, she works as a waitress on weekends. Last month she reluctantly accepted a loan from her parents to pay off her credit card. That saves $100 a month in interest.

"Everyone I know has parents helping them out in some way, because it's impossible otherwise," O'Connell says.

But such loan are taking a toll on parents, say Draut. "[Parents] need to ramp up their retirement savings and are still helping to support adult children," she says.

While young people incur considerable debt just to pay for basics, they also get into the hole because of impulse spending.

"I grew up during the Reagan boom and the Clinton boom," Dobbins says. "My generation, we definitely missed the frugal genes. My mom could go shopping for a family of four on $75 a week with her coupons. I don't think I've ever clipped a coupon. It's just not in me."

Although debt is much on her mind, she and her friends, like many in their generation, maintain an ambivalent attitude toward it. "A lot of times we talk about it, but then we say, 'Where are we going to dinner tonight?' "

Her boyfriend, who is in his late 20s, has debts approaching $40,000. At least a quarter of his paycheck goes to pay off debts, Dobbins says. That's typical. The average indebted adult between 25 and 34 spends nearly 25 cents of every dollar earned on debt payments, according to the Demos report.

For Christie Hadley and her boyfriend, indebtedness means delaying marriage. Ms. Hadley, a publicist in Cincinnati who incurred debt during an internship, expects to have all her bills paid in two years. But her boyfriend owes $40,000 in student loans. "He doesn't feel financially ready for marriage until he has all of his credit cards paid off and has a down payment for a house," she says.

Beginning Dec. 1, three credit reporting agencies - TransUnion, Experian, and Equifax - will offer consumers a free credit report annually. Credit experts recommend that young adults, in particular, get copies of all three.

"Once they see what their credit reports are like, they need to get a reality check on what they owe," says Deborah McNaughton, president of Professional Credit Counselors. She suggests listing all credit-card accounts with balances, payments, and interest rates. Then formulate a budget to pay it off.

Americans between 25 and 34 have the second highest rate of bankruptcy, after those in the 35-to-44 age group. Yet Ms. McNaughton cautions against bankruptcy, unless all other efforts have failed. She recommends negotiating a lower interest rate with creditors or contacting a good credit-counseling agency. "Only if people see that they're falling more and more behind and aren't able to follow these programs would bankruptcy be an option," she says.

Although bankruptcy stays on a credit report for 10 years, it's possible to reestablish credit with secure credit cards with high interest rates. But such debt can be perilous, McNaughton cautions. "If you have a $2,000 balance and you only make the minimum payment, with no new charges, it will take 16-1/2 years to pay off. That adds up to more than $2,500 in interest fees."

For Jason Roth, who racked up large debts while working his way through college, financial reality hit home when he couldn't get $1,000 in financing to buy an engagement ring. "That moment turned things around," he says, explaining that he mapped out an aggressive repayment plan by living frugally.

Today he owes nothing on credit cards and has whittled down his student loan to $9,000. Debt collectors no longer call. Mr. Roth and his wife recently moved from Las Vegas to Phoenix to be able to afford a house. He only wishes he could have learned his lesson earlier.

"Every high school student in America should have to take some kind of financial-strategy class to learn about everything from banking, credit cards, savings, loans, and protection from identity theft," he says. "If I had had that type of class, I wouldn't have gotten into such a credit mess."