Why a 33-year-old turned to a risky loan when his baby's premature birth left him broke

For one young couple in Texas, it was a cause for celebration — a pregnancy — that tipped them into debt.

Joshua Shroyer, 33, says his family managed to get by until they received the surprising news in 2016 that they were expecting their third son. After a difficult pregnancy, both mom and baby made it through, but the infant arrived premature at only 26 weeks.

Health issues accompanying the pregnancy forced Shroyer's wife, Ivonne, out of work for about about six months — most of that time without pay. A public school teacher, she earns the family's primary income; Shroyer makes just $15.75 an hour as a grocery store employee. Without her contribution, things began to fall apart.

"We have to be a two-income household: we've got the kids, the student loans, the mortgage," Shroyer says. As medical bills mounted, the family used up their emergency savings and started living off credit cards.

Once they had maxed out their cards, the Shroyers fell behind and eventually stopped paying. From there, the situation "snowballed," Shroyer says. Their credit scores fell, their interest rates soared and credit dried up. The Toyota dealership didn't want to lease them another car.

"I don't remember what the tipping point was, but one month we just didn't have enough to cover the basic bills," he says. With three boys counting on him to put food on the table, he needed a way to cover roughly $400 in expenses. So Shroyer went to one of the only places he says would work with him: a local payday loan center.

"You don't want to tell your kids you don't have eggs, or there's no milk in the cereal today. I'm not going to do that. I'm going to put food in the fridge and pay the extra money."

The Shroyers took out a type of short-term, unsecured loan that is known as a payday loan and is fairly easy to get. Unlike a mortgage, you don't need to put up anything as collateral. In most states, all you need is a valid ID, proof of income and a bank account.

Although he only needed $400, Shroyer was offered an $830 installment loan that he agreed to pay back over nine months. "I had about $400 worth of bills to cover, but they don't let you borrow just what you need; you have to take what they approve you for," Shroyer says. "Of course, you could just give back the extra the next day as a payment, but I didn't do that."

Shroyer's approach is part of a disturbing trend. Each year millions of people, particularly young people, take out these types of loans at extremely high interest rates.

Within the past two years, 13 percent of millennials report taking out a small, short-term loan like a payday loan, according to a survey of approximately 3,700 Americans that CNBC Make It performed in conjunction with Morning Consult. That's roughly 9.5 million people ages 22 to 37 who have recently used high-cost loans.

Meanwhile, over half (51 percent) of millennials say they've strongly considered using these risky loans. The most common reason? To cover basic living expenses such as groceries, rent and utilities, the survey found.

But these types of loans come with major drawbacks. First and foremost, they are extremely expensive: The national average annual percentage rate (APR) for a payday loan is almost 400 percent. That's over 20 times the average credit card interest rate.

Installment loans like Shroyer's are also high-cost, but they typically offer slightly better rates and a longer repayment period. Shroyer will end up paying around 54 percent APR, significantly more than the average credit card, but less than the average payday loan.

The other problem with these types of loans is repayment. Pew Trusts found it takes borrowers roughly five months to pay off the loans and costs them an average of $520 in finance charges. And some loan businesses attempt to recover their money by pulling directly from borrowers' checking accounts, which borrowers grant access to as a condition of the loan. These unexpected withdrawals from the lender can rack up pricey overdraft fees — and damage credit scores.

Yet what mattered to Shroyer in the moment was being able to put food on the table quickly. He also calculated that taking the loan would help to start building back up his credit score by showing he could pay bills off on time again.

"I knew signing it that it was going to be high fees, high-interest — not the best thing in the world," he says. "But at the very least, I figured I'd have the money without any muss or fuss so I could pay the bills, keep the lights on, food in the fridge, gas in the tank."

Many millennials like Shroyer are struggling to sustain a middle-class life. Americans born in the 1940s had a 92 percent chance at making more money than their parents. Yet those born in the 1980s have only about a 50 percent chance of doing the same, according to a 2016 study by the Equality of Opportunity Project.

Meanwhile, the cost of education is skyrocketing. Public universities doubled in cost between 1996 and 2016. Shroyer, a graduate of the University of Texas, Arlington, has more than $40,000 in student loans. Combined with his wife, who has a bachelor's and a master's degree, their household is carrying over $100,000 in student loan debt.

"Student loan debt very well could be exacerbating the week-to-week, month-to-month challenges that drive payday loan borrowing," Nick Bourke, director of consumer finance at Pew Charitable Trusts, tells CNBC Make It.

Overall, one in four millennials has over $30,000 in debt, while 11 percent are more than $100,000 in the hole, according to a March poll conducted by NBC News and GenForward. That includes student loans, as wells as credit card and mortgage debt. Only about 22 percent report having no debt.

In many cases, millennials are in debt because salaries don't go nearly as far as they used to, says Alissa Quart, executive director of the Economic Hardship Reporting Project and author of the recently released book "Squeezed: Why Our Families Can't Afford America," and the costs of daily life have gone way up. According to Pew Research, the average paycheck has the same purchasing power it did 40 years ago.

"There are forces that are constructed against you, everything from your taxes to whether you can have job security," says Quart.

Shroyer's baby boy is now one and a half years old, and life is slowly returning to normal for his family. But the effects of going into debt linger.

Because their credit scores went down, the interest rate on the Shroyers' mortgage jumped, increasing their payment by $500 a month for several months. The extra interest has cost about $6,600 so far, Shroyer says. That's on top of the $12,000 in credit card debt the family is currently carrying.

Meanwhile, Shroyer is still paying off the payday loan, which he refinanced in July for another $434 and an agreement to keep paying $135 for an additional nine months. All told, he'll have borrowed $1,267, and he's on the hook for $2,160, for what was initially a $400 emergency.

"I'm paying the poor tax. We're broke, so they charge us extra," he says. "Things are definitely getting better now, but we're just being extra frugal."

Being cost-conscious affects every decision, from groceries — they buy Kroger brand when possible to score the 10 percent employee discount — to health care. "Daddy doesn't have money for dents and dings," Shroyer tells his sons.

Still, they know their situation could have been much worse. Shroyer says the emergency savings they socked away helped them hold onto the house and the cars.

"Emergency funds are the greatest idea," he says. "You have no idea when a real emergency hits how badly you're going to need whatever little acorns you've managed to stash."

Don't miss: Here's why 1 in 3 college-age Americans consider payday loans with interest rates of 400%

Like this story? Subscribe to CNBC Make It on YouTube!