The Debt That Won't Go Away

Sitting in the kitchen of his San Francisco apartment, Kyle McCarthy could not hold back the tears.

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“I know I have to pay ‘em. I-- I-- I know and I will,” McCarthy said, sobbing. “I just-- I-- I never said I wouldn’t, you know?”

But he has no idea how.

McCarthy, 28, has a master’s degree—and, he estimates, $72,000 in student debt. His job at a local Border’s bookstore barely pays him enough to meet his rent, let alone the demands of the collection agents that he says call him at all hours of the day.

“I’ve tried to work out anything for them, you know? Like I can pay this amount of money. I can pay $50 a month. And it was, ‘No.’ It was, ‘You need to pay the full amount now or we’re just gonna' take it out of your paycheck."

Now, McCarthy is bracing for possible eviction, and lives in fear the collectors will pursue his mother in Maryland.

“I can’t get out, you know?” he says.

McCarthy’s plight is neither as extreme or rare as one might think.

Just ask around.

Chances are your friends and co-workers have student loans. Maybe you do, too. You all have plenty of company.

The explosion of student debt is explored in the CNBC Original documentary, “Price of Admission: America’s Student Debt Crisis.” (Check for program times.).

In 2009, the most recent data available, 67 percent of graduates had debt, averaging $24,000 per student, up 6 percent from the previous year, according to the non-profit Project on Student Debt. The numbers are even higher at private institutions.

The figures do not include the growing number of loans taken out by parents, and only limited data on for-profit colleges, where student debt is typically much higher, but relatively few institutions report it.

Americans now owe more on their student loans than they do on their credit cards—a first, according to FinAid.org, which has created what it calls the Student Loan Debt Clock.

The organization figures America’s student loan debt is growing at a rate of $2,853.88 per second. At this pace, it will surpass $1 trillion in 2012. And there is no sign of the pace letting up. On the contrary.

“The need to borrow has grown for all types of students at all types of schools,” says Lauren Asher, director of the Project on Student Debt. “And the amount that students are borrowing is driven by the share of cost that students and families are expected to cover after aid.”

But Asher says college costs are rising faster than family incomes and faster than grants and scholarships. A lot faster.

Scott Cohn
CNBC Senior Correspondent

The cost of a college education is increasing two to three times the overall rate of inflation, according to the U.S. Bureau of Labor Statistics. College costs are even rising faster than the cost of medical care.

“Frankly, one of the big drivers is state budgets,” says Asher. With state finances under pressure, public universities are relying more heavily on their students, raising tuition and recruiting more out-of-state students who pay higher rates.

Add to that a growing system of for-profit colleges and universities, many of which cater to lower income learners, and the demand for borrowed funds is being stretched to the limit. And with the worst job market for graduates in a generation, some worry the whole system could go over the edge.

“There's a lot of similarities between what's happening with student loans and the housing crisis,” says Iowa Senator Tom Harkin, chairman of the Senate Committee on Health, Education, Labor and Pensions.  

But there is also a key difference: unlike a mortgage, in which a borrower can refinance or—at worst—face foreclosure and bankruptcy, student loans do not go away.

“They got it hung around their necks until they pay off every last dime of it,” says Harkin.

That is because by law, except in very rare circumstances, student loans cannot be wiped out in bankruptcy, and there are very limited options for refinancing or restructuring them.

Instead, borrowers face garnishment of wages, government seizures of their tax refunds and social security payments, and the loss of professional licenses—leaving them even less able to pay their student debts.

Thanks to the recession, the number of graduates finding themselves in that very predicament is rising. Student loan defaults have doubled since 2005, according to the U.S. Department of Education.

Seeing no way out, some are taking drastic measures.