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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jun 14, 2013

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After graduation, most students struggle to repay their student loan debts. But a growing number are facing debts that have been exacerbated by drug, alcohol, and even shopping addictions.

A recent report by a local NBC affiliate found that some students are taking out federal and private student loans, using the funds to pay for their vices, and never pursing their education. 

Students’ addictions are fueling a new sector of loan fraud in the United States. Student loans are big business, and despite the minimal coverage of this type of loan fraud, it is somehow not surprising that students are finding a way to abuse drugs, alcohol, and other addictions.

College is a common time for addictions to develop according to Joe Schrank, founder of Rebound Brooklyn, a sober living facility.

“We often see a manifestation of it during the college years because we live in a culture where drunkenness is more than tolerated among undergrads, it is encouraged,” he said.

Schrank said many students feel entitled to live recklessly during these years. For some, the feeling will pass. For others, it will spiral into an addiction problem.

Dr. Ravi Chandiramani, medical director for the Journey Healing Centers, told that the minimal supervision and oversight experienced during college allows for autonomous decision making.

“Often this translates into unbridled experimentation with both licit and illicit substances,” he said.

Dr. Jeffrey Reynolds, executive director of the Long Island Council on Alcoholism and Drug Dependence (LICADD), said the trend of students using addictive substances has been accelerating in recent years.

Although substance abuse in college students is nothing new, the drug of choice is. Instead of drinking relatively inexpensive alcohol, students abuse prescription pills that can cost upwards of $20 for a Xanax pill to $40 for a Vicodin.

“If as your dependence increases, you need to take four per day just to feel normal, the habit quickly becomes expensive and fiscal impact is more significant than you might see in the case of alcohol,” Reynolds said.

But addiction can take many forms, even outside of substance abuse.

Michelle Nicholson did not have addictions to drugs or alcohol during college, but she was addicted nonetheless. Her vice: shopping.

Nicholson, a publicist and co-founder of Wasabi Publicity, said that during her undergraduate program at DePaul University, she spent part of her student loans on her shopping addiction. After being introduced to private lenders and credit card companies on her college campus, and being lured with “incentives, gifts and promises that would make any broke college student happy,” she began to use her newfound credit.

That year, her “living expenses” stretched to a $300 pair of boots.

As she pursued her education, obtaining a Master’s Degree from Pacific Oaks College, her vice became more of a problem.

“I had learned so many bad habits … I actually started to spend my check before getting it and I remember having to borrow money from family to cover tuition,” Nicholson said.

Instead of leaving her undergraduate program with a $5,000 loan and graduate school with $30,000 in debt, she ended up having $120,000 in student loan debt by 2002, the end of her graduate program.  

By having a solid credit score, and paying the minimum payments on the loans, she was able to further propel herself into debt. She paid for a mortgage and living expenses and supported an unemployed boyfriend, all with the help of private student loans.

Nicholson said she thought her choices were positive, but she failed to “read the small print.”

Her plan was to consolidate her debt and obtain a low interest rate on the federal student loans.

“Little did I know that private loans and federal loans could not be consolidated, and least they weren’t in my case,” Nicholson said. “So instead of having a 4 percent interest rate, I ended up with a 9-12 percent interest rate and it literally crippled me financially after graduate school.”

Nicholson shunned her social service and education degrees and turned towards a more lucrative career in business if only to be able to afford her loan repayments.

“The minimums were crippling for a person fresh out of school making less than a six figure salary. I knew I had to figure out a way to make six figures to survive,” she said.

She spent her financially successful 30’s paying back her student loans, while her business partner was able to invest in real estate.

“It really is a regret in my life,” Nicholson said.

Breaking the Stigma

Addiction, whether drug, alcohol or shopping related, is a deep rooted problem for many individuals. Adding in financial issues only further complicates it.

Schrank said an addict’s brain does not apply logic or consequence to situations.

“No addict handles money well, that is often part of the treatment process, addressing an individual’s relationship with money and setting appropriate boundaries for use of money,” he said.

Both Schrank and Reynolds believe the issue expands to a societal problem.

Reynolds blames silence — addicted students and their parents are not willing to discuss the issue, so it continues to grow.

“There is still an incredible stigma associated with addiction,” Reynolds said. “Many college students make lousy spending decisions and a certain percentage of young people who get involved with drugs and alcohol will go on to develop a full blown addiction that removes the concept of choice from the equation. That dynamic alone calls for more attention and oversight.”

The Heavy Cost of Addiction

The first rule of most recovery programs is to admit that there is a problem. By acknowledging that there is a drug, alcohol or shopping addiction, the addict is taking the first step towards rehabilitation.

Admitting the addiction can be easy for some, but later steps prove to be more difficult. The recovery process requires that the addict makes amends for their errors. In the case of debtors, some simply ignore their problems and refuse to repay their loans.

According to a January 2013 study by TransUnion, more than half of student loans are in a deferred status. This means that loan repayment has been temporarily delayed. Many of those students will never repay their debts.

But debts never truly disappear; they only transfer from person to the next.

Schrank said the tab for the mess created by addiction is paid by taxpayers.

“There should be a user tax on alcohol to absorb the cost,” he said. “Alcohol companies amass wealth and stick the taxpayer with the mess that is created by their product.”

The direct cost gets transferred to the taxpayer, but there are additional costs that end up being absorbed by responsible consumers.

Nicholson remembered a boss in college that refused to repay her loan debts.

“That so upset me,” she said. “In fact, it still upsets me today. We all pay. When the economy got so bad, I had a personal friend who ran up his credit cards. Mind you, he was making $90,000 a year so there was no need to run up credit cards. Instead of paying them back, he just filed for bankruptcy.”

At the same time, her husband’s credit card company demanded that he repay his debts or have the interest rate spike from 2 percent to 19 percent. Nicholson blames it on the system-wide abuse of credit.

“I assert my friend’s bankruptcy and many like him affect companies that then turn on those paying their bills to seek the profit they’re losing,” she said. “I know it’s not black and white like that, but what we all do with our money affects each other.”

Beyond the financial aspect, addictions fueled by student loan fraud can impact a student’s behavior patterns even after the standard university years. It can bleed into the economic develop as well.

“The impact extends into affecting the development of competent, productive future employees to feed the workforce,” Chandiramani said.

Reynolds agrees.

“Student loan debt that doesn’t result in a quality education and increased job opportunities, but that fuels one of our national’s biggest health problems, hurts our families, our economy, and our communities,” he said.

Restrictions and Education

One method of reducing this issue would be firmer restrictions on student loans and how they are dispersed.

Federal student loans are sent directly to the colleges to cover the cost of the education. Once the period is paid, the remaining funds are refunded to the borrower or student to assist them in paying for books, room and board and other supplies. Some private lenders are more lax on their disbursement methods.

One university is working to reduce the likelihood of loan abuse. For the upcoming semester, Columbus State University will implement a new loan disbursement program that gives student loans to the borrower after 5-6 weeks into the term, after the student attends class and completes the coursework.

Another method of reducing loan fraud and addiction is via education.

Reynolds said that reducing addiction is not impossible. He said that both parents and schools can educate students about the dangers of drug and alcohol abuse. The school can enforce stricter policies to prevent abuse, and give comprehensive counseling later on.

“The transition into college can be tough for many young people and parents need to balance the need for independence with the need to protect their kids’ safety, which might mean exerting more control over their finances,” Reynolds said.

When parents and academia are not enough, then lenders should also take notice.

“Lending institutions should be doing more to educate young people and parents about the express purpose of student loans, the realities of paying back those loans and the dangers associated with excessive borrowing,” he said.

Chandiramani disagrees and said that lenders have no oversight or obligation in this problem.

“They lend money and expect it to be repaid with interest within an agreed upon time frame. Nothing more, nothing less,” he said.