In that time, student debt has passed mortgages and car loans as the largest category of outstanding debt. According to student lender Sallie Mae, the average student borrower now owes $23,300, with 10 percent of the country’s undergraduates on the hook for over $54,000.
To make matters worse, a tight credit market which has made lenders less ready to grant loans and more prone to pounce when new graduates fumble their early payments.
One frequent obstacle to getting a college loan is the student’s lack of credit history. In 2006, the "Big Three" credit-rating agencies devised VantageScore that emphasizes borrowers’ recent financial activity. By looking at VantageScore, which can tease out a track record out of as little as a month’s worth of behavior data, lenders can get a better idea of what to expect from “thin file” consumers like students. (Conventional credit scores require at least six months of data.)
But for many students, getting the loan is only half the battle. Managing their debt is where the trouble begins. “We’re teaching students how to dissect frogs, but not how to balance their checkbooks,” says Maxine Sweet, vice president for public education at the credit-rating agency Experian.
To help student borrowers learn the rudiments of personal finance, Experian has partnered with Consumer Action, the Jump$tart Coalition and other nonprofits to help students manage their loans. Wells Fargo, a major private holder of student debt, also offers basic financial education as a kind of insurance policy on the loans they grant.
“We want our customers to be successful financially across the board,” says Wells Fargo’s Bonnie Wallace. “We’re protecting our shareholders and underwriters, but we’re protecting our customers as well.”
The bank’s counseling extends to urging families to pursue low-cost, federal options, like Stafford loans, before filling the need gap with pricy private loans. (Read: Report Details Woes of Student Loan Debt)
Wells also offers incentives that trim students’ debt while teaching good fiscal habits. Students get basis-point reductions for graduating, and for making their payments consistently. The bank encourages its borrowers to open a Wells checking account and set up automatic payments on the loan, which, says Wallace, “significantly increases your success with your loans.”
Sallie Mae offers similar in-school payment programs on the Smart Option student loan, under which paying at least $25 per month can reduce the interest rate by between 0.5 and 1.0 percent. In May, the company estimated that 63 percent of its Smart Loan customers take advantage of this policy, saving anywhere from $3,700 to $5,300 per $10,000 of debt.
But the real reward of paying consistently is a positive credit history. “Take some time to keep those disciplines of good debt management in place,” says Sarah Davies, senior vice president, Analytics and Research for VantageScore Solutions.
She also urges students to stick with it for the long haul. “It’s pretty difficult to [positively] affect your credit score over thirty days, but if you are consistent over nine months, the credit score will work itself out.”
Students can show responsibility even – or maybe especially — when things go awry. “If you’re struggling with payment, call your lender,” says Wallace. “Anytime you are having trouble with your loan, you should contact your lender. Don’t wait; don’t hesitate.”
Experts and lenders say the industry’s efforts to make things easier are having an effect. “I see the progress; the change is dramatic,” says Experian’s Sweet. “I do think there is a great deal more awareness in young people. But it’s kind of like world hunger: it’s bigger than you can get your hands around.”
The cost side of the problem may be getting better too. “Higher education institutions are innovating ways, like leveraging technology, to bring down the cost,” says Haley Chitty, director of communications at the National Association of Student Financial Aid Administrators.
In addition, as enrollment increases, too, colleges will have more funds to dedicate to financial aid. “Some relief [will arrive] in the near future,” says Chitty. “It’s not necessarily all gloom and debt.”