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The Hidden Portion of Student-Loan Debt

More than six years after the 2008 financial crisis, American families have reduced household debt by about $900 billion.

But one type of debt has been difficult to clear: student loans. That debt continued to grow during and after the downturn, and is now greater than both auto-loan and credit-card debt.

As of the end of 2014, outstanding student-loan debt topped $1.3 trillion. About $1.1 trillion of the total came from federal student-loan programs; the remainder was from private lenders.

Those figures, however, don’t include other means of financing a college education. For example, students whose parents take out home-equity loans, or students who use credit cards to foot tuition bills, are not included in the student-loan-debt total.

How much of the pie is missing?

No data have been gathered on alternative methods of financing college, so “it’s a hard market to gauge,” says Eric Pajonk, a spokesman for the Federal Reserve Bank of New York. New research is underway to grasp the scale of alternative financing, he says, but there’s no timetable for when the results might be available.

Nevertheless, it’s clear that many Americans are finding other ways to finance their education.

Second Mortgage Heightens Risk

One source that families tap into is home equity. “It’s a bad idea,” says John F. Wasik, a blogger for Forbes.com and author of Keynes’s Way to Wealth. Dipping into home equity can cause problems later on, he explains. Among the risks:

  • A failure to pay off such a loan can result in the loss of one’s home.
  • Taking on more debt later in life can put retirement at risk.
  • High interest rates and mortgage fees increase the cost of an education.

Using that method of financing a college education is probably less common now than it was before 2006, he says, because home equity for many people has declined as a result of the recession.

Credit Cards Bring Higher Cost

In addition to the increased risks of alternate debt are increased costs. Students swipe their credit cards to pay not just for textbooks but also, in many cases, for tuition.

A 2014 survey by creditcards.com found that more than 260 colleges accepted credit-card payments for tuition — for a price. Those colleges typically charged a 2.6-percent convenience fee for the transaction. For a student paying a $10,000 tuition bill, that would add $260.

And, of course, students who don’t pay their credit-card bills in full each month could end up paying hundreds or thousands of dollars more in interest.

Student-loan debt is certainly rising. And it could be even higher than many people realize.

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