Students' dangerous debt
Associated PressSome experts predict waves of defaults - a subprime mortgage disaster all over again.
Published October 3, 2007
The near doubling in the cost of a college degree the past decade has produced an explosion in high-priced student loans that could haunt the U.S. economy for years.
While scholarship, grant money and government-backed student loans - whose interest rates are capped - have taken up some of the slack, many families and students have turned to private loans, which carry fees and interest rates that are often variable and up to 20 percent.
Many in the next generation of workers will be so debt-burdened they will have to delay home purchases, limit vacations, even eat out less to pay loans off on time.
"This is literally a new form of indenture ... something that every American parent should be scared of," said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers.
Parents are still the primary source of money for many students, but the dynamics were radically altered in recent years as tuition costs soared and sources of more costly private financing made higher education seemingly available to anyone willing to sign a loan application.
Students with no credit history and no relatives to co-sign loans (or co-signing parents with tarnished credit) were willing to bet that high-priced loans were a trade-off for a shot at the American dream. But high-paying jobs are proving elusive for many graduates.
Sallie Mae, formally known as SLM Corp., has been on the winning side of the loan bonanza. Its portfolio of 10-million customers includes $25-billion in private and $128-billion in government-backed education loans. However, private-equity investors who had offered $25-billion to buy the company backed out last week, citing credit market weakness and a new law cutting billions of dollars in subsidies to student lenders.
The question is whether everyone who borrowed will be able to repay.
Kristin Cole, 30, who graduated from Michigan State University's law school and lives in Grand Rapids, Mich., owes $150,000 in private and government-backed student loans. Her monthly payment of $660, which consumes a quarter of her take-home pay, is scheduled to jump to $800 in a year or so, confronting her with stark financial choices. "I could never buy a house. I can't travel; I can't do anything," she said. "I feel like a prisoner." A legal aid worker, Cole said she may need to get a job at a law firm, "doing something that I'm not real dedicated to just for the sake of being able to live."
Dr. Paul-Henry Zottola, a 35-year-old periodontist in Rocky Hill, Conn., faces paying $1,600 a month on his student loan on top of a $2,300 mortgage payment and $1,500 on the loan he took out to start his practice. His credit record remains solid but he owes more than $300,000 in student loans as he and his wife, Heather, an elementary school administrator, raise two young children. "It would be very easy to feel crushed by it," Zottola said. "All my income for the next 10 years is spoken for."
- What is your lowest interest rate and fee combination and how can I get it? Is the rate only for a limited period, or is it for the life of the loan?
- Is there a limit on how high the variable rate can go? How often is the interest rate adjusted, and how is it determined?
- What interest rate can I get on a fixed-rate loan?
- How long will I be repaying the loan? Is there any penalty for paying it off early?
- When do I have to start making payments? How long can I defer payments while I'm in school? If I go to graduate school and defer payments, how much will I owe when I do start making them?
- Will I lose my discount for paying on time if I have one late payment or if I ask for a change in the payment schedule?
- What proportion of your borrowers get the discounts you offer? Are your discounts guaranteed or are they subject to change later?
- Would you allow me to defer or reduce my payments temporarily because of economic hardship? Under what circumstances and for how long?
- How much can I borrow without reducing my eligibility for government or institutional aid?
Source: Project on Student Debt of the Institute for College Access and Success