Imagine your first adult act -- before you buy a house, get married or have kids -- is filing for bankruptcy protection.

In 2001, that happened to more than 100,000 people under age 25, according to Elizabeth Warren, a Harvard law professor who conducts an annual study of bankruptcy filers. She expects fourth-quarter bankruptcy results, which are reported in February, to bring that total to a record level.

For the nearly 71 million people in Generation Y (those between the ages of 7 and 24), this raises a critical issue about their financial future. A closer look reveals a generation with easy access to capital and little knowledge of how to maintain a budget.

"These are kids who are still struggling with Chemistry 101 and second-year algebra," Warren says. "These are not sophisticated people who have taken out mortgages or held jobs or contributed to pension plans."

Welcome to Debt

Credit cards and college loans have put many students into the red before they even don a black robe and mortarboard.

According to a study from student loan agency Nellie Mae, average credit card debt held by college students increased 46% from $1,879 in 1998 to $2,748 in 2000. The number of college students with credit cards increased from 67% to 78% over the same span.

At the same time, the total amount for nonfederal student loans jumped 246%, from $1.3 billion in the 1995-96 school year to $4.5 billion in 2000-01, according to "Trends in Student Aid 2001," the College Board's annual study on financing college education.

Federal and nonfederal aid combined has increased by 136% over the past decade. According to the College Board study, nearly every statistic, from the number of kids receiving aid to the average loan amount to the total number of loans held, is increasing.

The total number of students receiving a loan rose from 3.8 million in the 1993-94 school year to 5.1 million in 2000-01. The average loan amount went from $4,243 in 1993-94 to $5,269 in 2000-01. And the total number of loans is up from 6.4 million in 1993-94 to 9.3 million in 2000-01.

The cost of college is also rising. From the 1990-91 to 2000-01 school year, the expense of attending a four-year public or private university rose 66%, according to the College Board. As the cost of college increases along with the amount of debt, Warren says many turn to credit cards and ultimately end up filing for bankruptcy. "They can't pay both the student loans and the credit cards," she says.

As a result, bankruptcies for those under age 25 have increased 51% from 1991 to 1999, according to the latest study from the General Accounting Office. The GAO estimates those under age 25 now account for 6.9% of all bankruptcies. "They will work for 10 years before they get back to dead flat broke," Warren warns.

Students Just Don't Understand

To make matters worse, when it comes to managing those debts, students underestimate what they owe and overestimate what they'll make.

"They don't understand how long it takes to pay it all back," says Neale Godfrey, author of

Neale S. Godfrey's Ultimate Kids' Money Book

, which offers financial advice to young people.

The U.S. Public Interest Research Group (U.S. PIRG) surveyed 1,031 students at 55 universities in March 2001 and discovered that 78% of all students underestimated the total cost of their loans by almost $5,000. Meanwhile, students were too optimistic about what they'd make. Students said they expected, on average, to take home $39,016 after college, nearly $12,000 more than the average postcollege salary.

One reason for the difficulties young people have managing money is the lack of parental guidance. "Parents do a horrible job of teaching their kids about money," says Godfrey.

Parents, Youth and Money 2001 Survey, a study sponsored by the American Education Savings Council and Employee Benefit Research Institute, reported that parents felt more comfortable talking to their kids about movies, drugs and current events than about finances. Only 25% of the parents said they were "very effective" in giving financial guidance. And 40% said their children understand financial matters "not too well" or "not well at all."

"It's pretty frightening. Only 8%

of college students said they were 'very knowledgeable' about planning for their finances. You'd think that after going to college,

they would have a little bit more of a comfort level," said Deanna Tillisch, director of Northwestern Mutual's Generation 2001 study, which gauges how 2,001 recent college graduates feel about the future.

For example, many students aren't aware that it's possible to postpone loan payments for financial reasons. The U.S. PIRG study found that only 35% of students knew about deferment and forbearance: the ability to reduce or postpone payments on their student loans. Only 14% were aware of income-contingent repayment, which determines the amount you have to pay each month according to your salary -- an option used most by people entering low-paying civil service jobs.

A Generation of Deadbeats?

The rising bankruptcy numbers for those under 25 suggest that already skyrocketing personal-debt figures could worsen as Gen Y ages.

Mark Schug, the director of the Center for Economic Education at the University of Wisconsin at Milwaukee, says the number of bankruptcies won't have a large affect on the economy, but that the repercussions for those who file for bankruptcy when young can last well into adulthood.

Obtaining a mortgage or a car loan becomes more difficult. At some point, if you do get approved for a loan, you most likely will have to pay a higher interest rate.

"

The bankruptcy is not wiped out on your record," Godfrey says. "It is like a scarlet letter."

To help solve this problem, a number of organizations have initiated financial education programs for young people. Schug cites the rise in national groups like the Jumpstart Coalition and new curriculum initiatives from the National Council of Economic Education as evidence of the trend.

But most young people will learn financial lessons the hard way. As Schug says, "That's the way the school of hard knocks works."

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