Smart Loan Shop

Getting a college degree is more important than ever. Over a lifetime of employment an average college graduate will earn more than twice the income of someone who graduated from only high school.

However, a true comparison is not quite as rosy. During his or her college years a full time college student forgoes income that the high school graduate who went immediately into the work force after graduating from high school would be earning. Not only that but the high school graduate is receiving what could be valuable on the job training while being paid for their services.

In addition, the college graduate who must go into debt to finance their college education has to repay what may well be a $100,000 debt by the time of graduation. That is a huge burden for someone just entering the work force to have to repay. The high school graduate doesn’t have that burden.

It is still better to earn a college degree as far as lifetime benefits are concerned. But for many students it may actually be better to earn a less expensive undergraduate degree by completing studies online and then getting a masters degree at an institution or perhaps by continuing with online study.

According to federal statistics student-loan debt encumbers almost two-thirds of the Class of 2006. With tuition costs continuing to rise faster than inflation and interest rates on federal student loans increasing, the debt load for future graduates is going to become so heavy that students will probably be forced to turn away from low-paying occupations like teaching, or social work.

“Student debt is something that’s grown very quickly and under the radar,” says Anya Kamenetz, author of “Generation Debt,” which characterizes student-loan debt at a tipping point. “The demand for a college degree is rising and the price of tuition is rising. So student loans are really the only path for a lot of students.”

The average student loan debt doubled in the 1990s, but the situation improved after that, says College Board analyst Sandy Baum: Among recipients of bachelor of arts degrees, both the percentage of students taking out loans and the amount they borrowed dropped between 1999 and 2004, according to the College Board.

Now, however, student indebtedness may be turning up again, Ms. Baum says, although at the moment there is no comprehensive data for this year.

“In the past few years, tuition prices rose a lot and Pell grants have not,” she says, referring to the federal program that gives funds (which do not need to be paid back) to undergraduates based on financial need.

For Zachary Pedigo, tuition costs made him drop out of the University of Texas at Arlington after only a year. He’s still working to pay off a $10,000 student loan.

“There are a lot of reasons I’m not in college right now, but the biggest is the cost,” says Mr. Pedigo, who hopes to open a recording studio in Granbury, Texas, with friends. “College was just too expensive, and getting more expensive every semester. It just seemed like a lot of stress to make it through school just to be paying off debt until you’re 30.”

For those who do graduate, the average loan debt was $17,600 in 2004 – $22,581 in the case of private colleges, according to the Center for Economic and Policy Research. Ms. Kamenetz says those averages are too close to the $23,000 maximum that undergraduates may borrow from the federal Stafford loan program over four years. For those graduating from top rated schools the debt load can be far higher.

“If students need to go over that maximum, it means they need to take out private loans with higher interest rates,” she says. “That means they’ll likely be paying more over a longer period of time, which slows down life even more.”

Of the three major variables affecting student debt – tuition costs, the job market, and interest rates – the latter has the gloomiest forecast, says Jacqueline King, director of the American Council on Education’s Center for Policy Analysis.

While tuition prices continue to rise, the acceleration slowed this year, Ms. King says, offering a positive projection for future college students. And the job market is relatively healthy, she says, opening up more doors for graduates. But interest rates will increase on July 1, when federal loan programs move from a variable rate system to a higher, fixed rate. Stafford loans will jump from the current 5.3 percent rate after graduation to 6.8 percent. PLUS loans, designed for parents, will rise from 6.1 percent interest to 8.5 percent.

“The class of 2006 will not be affected by this increase, but the entering freshman class will borrow under this new rate,” says King. “This could certainly have an effect on future graduates and how much they need to pay back once they are out of college.”

Interest rates on private loans can climb well over 12 percent. But lending companies, such as Sallie Mae, attract students by offering them far more money than the cap placed on the federal loan program, thus allowing many to attend more expensive schools.

With hefty repayments in their future, however, many students, including Boston University graduate Lowery, are walking away from low-paying government, nonprofit, and teaching jobs.

“I really want to work in advocacy law,” she says, “but from a practical perspective that’s not going to happen. I just won’t be able to pay back my loans.”

Income for teachers is simply too low for many graduates, according to a report released last month by the State Public Interest Research Group. The study found that more than a third of borrowers who graduate from private, four-year colleges would face “unmanageable” debt on a starting teacher’s salary, meaning they would need to set aside more than 8 percent of their pay to cover student loans.

More than half of black and Latino graduates would fall into this level of “unmanageable” debt, set by the lending industry.

Accumulating loan debt even pushes back many of life’s milestones, according to a survey that Baum conducted in 2002 for Nellie Mae, a major student lender, which is now a subsidiary of Sallie Mae. The report found that 38 percent of graduates held off buying their first house because of student loans, 14 percent put off marriage, and 21 percent delayed having children.

“We are the first society in history to take our brightest and start them out in debt,” says Allan Carlson, president of the socially conservative Howard Center in Rockford, Ill. “That’s just stupid public policy. We should encourage them to grow, not hold them back.”

Despite the uncertain forecast, college can be affordable if students and parents understand the potential pitfalls and plan wisely, Kamenetz says.

“People need to approach college like they approach purchasing a car,” she says. “Different people can afford different models. Don’t be deterred from going to college, but students need to be smart shoppers.”

Getting a college degree is not as easy and certainly not as clear cut as to how best to go about it as it used to be. A young person attending college these days had better become financially savvy in a hurry.

Tweet This Post