BY MARCY GORDON
ASSOCIATED PRESS
U.S. student debt hit $85 Billion in 2006 up from $38
Billion in 1995
10/01/2007
The near doubling in the cost of a college degree over 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
individual 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.
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, Ms. Cole said she may 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."
Parents are still the primary source of funds for many students, but the
dynamics were radically altered in recent years as tuition costs soared and
sources of readily available and 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.
"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.
More than $17 billion in private student loans were issued last year, up from
$4 billion a year in 2001. Outstanding student borrowing jumped from $38
billion in 1995 to $85 billion last year, according to experts and lawmakers.
Rocketing tuition fees made borrowing that much more appealing. Consumer
prices on average rose less than 29 percent over the past 10 years while
tuition, fees, and room and board at four-year public colleges and
universities soared 79 percent to $12,796 a year and 65 percent to $30,367 a
year at private institutions, according to the College Board.
Scholarship and grant money have increased, yet for almost 15 years, the
maximum available per person in government-guaranteed student loans, which by
law can't charge rates above 6.8 percent, has remained at $23,000 total for
four years. That's less than half the average four-year tuition, room and
board of $51,000 at public colleges and $121,000 at private institutions.
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.
Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., Wells Fargo &
Co., Wachovia Corp. and Regions Financial Corp. are also big players in the
private student loan business. And there has been an explosion in specialized
student loan lenders, such as EduCap, Nelnet Inc., NextStudent Inc., Student
Loan Corp., College Loan Corp., CIT Group Inc. and Education Finance Partners
Inc.
The question is whether everyone who borrowed will be able to repay. Experts
don't track default rates on private student loans, but many predict sharp
increases in years to come.
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," Dr. Zottola said. "All my
income for the next 10 years is spoken for."
Meanwhile, complaints about marketing of private loans - like ads promising to
approve loans worth $50,000 in just minutes - are on the rise. The complaints
have made their way to lawmakers, who see a need to regulate the highly
profitable and diverse group of companies and the loans they make to college
students.
In August, the Senate Banking Committee approved a bill that would mandate
clearer disclosure of rates and terms on private student loans. The bill also
would require a 30-day comparison shopping period after loan approval, during
which time the offer terms could not be altered.
New York Attorney General Andrew Cuomo said many graduates who borrowed owe as
much if not more than most homeowners owe on mortgages. Unlike mortgages with
clear consumer disclosure requirements - even from nonbank lenders, private
lending is "the Wild West of the student loan industry," he said in a
telephone interview.
Critics say what happened in the mortgage market could happen in the student
loan market. Mr. Cuomo, who conducted a nationwide investigation, said the
parallels between the two markets are "provocative."
Demand for bundled student loans sold to institutional investors worldwide
fueled lending to students. The market for private student loan-backed
securities leapt 76 percent last year, to $16.6 billion, from $9.4 billion in
2005, according to Moody's Investors Service.
The student loan-backed securities market has yet to suffer noticeable effects
of a global credit squeeze that was triggered this summer by a mortgage
meltdown of borrowers with risky credit.
"Once the economy starts to slow, you're going to see a large increase of
these people in bankruptcy court," said Robert Manning, a professor at
Rochester Institute of Technology who has written about college students and
credit cards.
A 2005 change to bankruptcy law puts private student loans on par with child
support and alimony payments: Lenders can garnish wages if someone doesn't
pay.
Mr. Cuomo's probe revealed what he calls an "appalling pattern of favoritism"
for student lenders that provided kickbacks, revenue-sharing plans and trips
to college administrators in exchange for recommended lender status. Other
critics allege widespread corrupt arrangements propelled a student loan boom.
Lenders deny such charges, arguing that industry growth resulted from surging
education costs and that higher interest rates are justified for unsecured
loans to borrowers with blemished or insufficient credit records.
"Lenders take 100 percent of the repayment risk on flexible private-education
loans made to people with limited credit histories, on which they will not get
repaid for several years," Barry Goulding, a Sallie Mae official, told
Congress last spring.
New regulations could dry up access to education financing, he and other
industry executives argue. Some experts are skeptical, predicting waves of
student loan delinquencies and defaults on what is outstanding.
"Should private student loans suffer the same sort of failure as (subprime)
mortgages, as students graduate or drop out and find themselves unable to pay,
we will do serious damage not only to the lives of many students but also to
the economic and social fabric of our country that depends on college
graduates for its strength," said Luke Swarthout at the U.S. Public Interest
Research Group.