A recent report from the Education sector shows that 50% or about half of America’s college undergraduates go into debt in order to work toward their degrees. Contrast this with 32% in 1993 and this represents quite an increase over the past 18 years. The biggest increase in student loans has been in the private loan sector or those loans that are not originated through Federal programs. Private student loans were nearly nonexistent in 1993, but by 2008, they accounted for 14% of undergraduate borrowing. The multi-billion dollar private loan business is only part of an alarming upward trend in student borrowing. In 2008, about 65% of students at a four year private university borrowed in order to pay for their education with loans averaging just under $10,000 a year.
Graduating from college with nearly $40,000 in debt hanging over your head is a daunting prospect, especially if your degree is in a liberal-arts field that qualifies you for no more than an entry level job. Students have been willing to pay the hefty price tag operating under the assumption that degrees offer alumni good, well paying jobs. But in reality, starting salaries for recent grads were down across the board in 2010 and that is for those lucky enough to find employment.
One reason for the hefty rise in student loans is the fact that college costs, especially “out of control tuition increases” have steadily outpaced inflation over the past eighteen years. As long as college tuition price increases go up faster than grant aid, family income, and available Federal loans, students and families will have to borrow the difference from somewhere. The cost of a college education is rising faster than the cost of medical care and as much as three times as fast as consumer prices in general. Higher education has never been more expensive.
Students are getting into trouble with their loans due to the way the loans are paid out. Many of the students are getting their loan disbursements on a debit card. The debit card can be used for anything. Some of them use it for pizza, at bars and even buy a car. Many students use the loans for living expenses. The firms issuing the loans say their administrative expenses are lower by using a debit card. However, like other debit cards, students are charged fees up to $2.50 each when not using specific ATM machines.
Under Federal law, graduates can’t walk away from student loans by declaring bankruptcy. When colleges introduced students to lenders who underwrote big loans without any idea of what the students might earn someday, it was similar to the mortgage lenders who didn’t ask for borrowers to verify their income. Americans now owe more on student loans that they do on their credit cards – a debt fast approaching $1 trillion dollars with no end in sight. Unlike most other forms of debt, student loans carry almost no consumer protections and little ability to refinance. The current laws regulating student loans were passed in the 1980’s and, if you default on a student loan today, you could lose everything.
Student loan defaults have doubled in the last five years and are now approaching nearly a quarter million defaults a year. Current interest rates are all over the map for these loans. Many loans carry an interest rate of a range of 5.49% to 7.90%. Federal loans tend to carry a lower interest rate usually in the range of 1.5% to 4%. There are several repayment plans: standard, extended, graduated and even income contingent. One firm that specialized in student loans had a 25 year repayment term with no pre-payment penalties! I can’t imagine graduating from college with a loan that was as long if not longer than the mortgage on my house. The official student loan default rate is now (7%) as compared to the default rate on credit cards (8.8%) and home mortgages (9.1%). Because the government is lending most of the money, every default leaves the taxpayers on the hook. The schools keep the money, the students keep the debt, and the taxpayers lose.
The explosive college loan debt crisis is yet another example of consumers pursuing and purchasing items which they cannot afford. Move over Harvard. Choosing a school closer to home is looking better each day.