This article first appeared in the St. Louis Beacon, June 7, 2012 - Sammi Powers isn’t exactly in the situation she envisioned a year after graduating from college.
She has a degree in mass communications but works in customer service and lives back home with her parents in Fairview Heights. She got engaged in February, but she and her fiancée are nowhere near setting a date. And she has 75,000 reasons why, with a big fat dollar sign in front of them.
Welcome to the world of the reverse dowry, otherwise known as student debt.
“I did hope to be living on my own, but the way interest rates have skyrocketed on my private loans, there is no way I could possibly live on my own,” said Powers, 23, who has a degree in journalism and broadcasting from St. Xavier University but hasn’t been able to find a job in her chosen field.
Instead, she works as a customer service representative and pays between $850 and $900 a month — two thirds of what she makes — to whittle away at her $75,000 in student loans.
Her story is one with which many students, new alumni and college administrators are very familiar — one that includes credit counseling but also a nagging sense that debt is creeping up until the shock of repayment begins after graduation.
The dilemma is attracting a lot of attention in Washington, where rates on federally subsidized Stafford loans are set to double, to 6.8 percent, unless Congress votes by the end of June to keep them where they are. The issue, like most in this election year, has become bound up in politics.
Tuesday, Vice President Joe Biden, Education Secretary Arne Duncan and others convened to begin a push to make sure colleges provide students with simplified information on how much their degree will cost, how much they owe and how much they will have to pay when the loans come due.
All of this is happening in an economy where families who once might have been able to put away money for college now may find their savings depleted by a tough job market. So students need more loans than anticipated to help them get the degree they need to land the job that will bring in enough money so they can pay back the loans.
The cycle sounds vicious, but it’s also helpful.
“It’s easy to make negative comments about the student loan program,” says Tony Georges, director of financial aid at the University of Missouri - St. Louis. “But it’s a wonderful program. It allows students to borrow without any credentials at all. It has helped quite a few people.
“The problem comes in when students are not borrowing against future income. What job are you looking at? What is your potential for income? That is how you should borrow, against future income.”
By the numbers
There are lots of ways to gauge how serious a problem student debt has become.
One of the most telling may be a report last week from the New York Federal Reserve Bank that showed that in the first quarter of this year, Americans paid down what they owe in every category except one — student loans, which rose to $904 billion. In the 12 months ending March 31, while all other forms of household debt dropped by a total of $383 billion, the balances on student loans rose by $64 billion.
Outstanding student loan debt surpassed credit card debt in the second quarter of 2010 as the second highest form of consumer debt, after mortgages, the bank said. And delinquency rates of more than 90 days for student loans have increased steadily, from 6.13 percent in the first quarter of 2003 to their current level of 8.69 percent — higher than those for mortgages, auto loans and home equity lines of credit.
A group known as the Project on Student Debt broke the numbers down state by state, showing that in Missouri, the average debt for students who graduated in 2010 was $22,601, with 65 percent of new alumni reported carrying student debt; in Illinois, the number was $23,885, with 62 percent having a loan balance.
Still, the bi-state average debt was less than the national figure of $25,250.
For some students, the picture gets worse because not all of those dollars go toward paying college expenses. A new report from the U.S. Public Interest Group said that many banks are issuing loan money on debit or prepaid cards, then charging fees for students to access the balance.
It said that nationwide, more than 9 million students — 42 percent of all students nationwide — attend schools that have relationships with banks that charge such fees, which can be levied when a card is swiped, when there is an overdraft or when the card isn’t used after a six-month period.
'Don’t do it'
Those kinds of numbers prompted the Scholarship Foundation of St. Louis to issue earlier this year a combination guide and alert for students and parents with the deliberately provocative title of “Don’t Do It.”
Faith Sandler, executive director of the foundation that has been providing financial aid to St. Louis area students since 1920, acknowledged that the wording was “fairly inflammatory,” but it was designed that way for a purpose.
“What we were concerned about,” she told the Beacon, “was catching the eye and the ear of students and parents before they sign their life away.”
This statement catches the tone pretty well:
“Excessive student loan debt can cause students to leave school before finishing their degrees, delay or derail important career and life decisions, and wreak long-term financial havoc on families.”
Specifically, the alert cautions families to avoid total borrowing for any one year that is more than half the educational cost at a high-priced school or more than $10,000 at more moderately priced schools; to pass up PLUS loans — Parent Loan for Undergraduate Students — if parents are disabled or unemployed; to avoid unsubsidized Stafford or PLUS loans if the family will not be able to make payments while students are in school; and to steer clear of lenders who make their case via late-night television commercials, internet pop-up ads or other similar methods.
The general rule in such situations: “DON’T DO IT.”
Credit counseling and other help
A wiser course to follow, Sandler and others say, is for students and their families to take advantage of counseling that schools are supposed to make available before anyone signs up for loans. That kind of advice in advance can’t always prevent sticker shock when the loans come due, but it can help avert problems later on.
“So often they don’t know what they are getting into when they accept a financial aid package that includes a loan for which they may not even qualify,” Sandler said. “Because they are not creditworthy or do not have parents who are creditworthy, they later realize those funds are not going to be forthcoming, and it becomes a huge issue.”
Sandler and Georges at UMSL say that a big reason for the explosion in student debt can be traced to economic factors that go back further than the meltdown of 2008.
“It started before that,” Sandler said, “but it was definitely exacerbated by the ‘08 collapse. The slow slide into expecting that students would borrow to finance their education began in the early '80s. It was a shift from the idea of the Johnson era and the Great Society that the education of citizens is part of the greater good for all.”
Georges adds that today’s economic problems have changed the concept of what student loans are for.
“There are three ways you can pay for education,” he said. “You save for it, you get financial aid or you pay for it out of discretionary income. When you have folks who were holding a job that brought in an income high enough that they could budget for future college expenses, then suddenly that job is gone and you don’t have a plan B, families are hard-pressed to figure out how to pay for college education.”
And, he said, while student loans are supposed to pay for things like tuition and books, with money so tight, students are borrowing to pay for other expenses.
“The guaranteed student loan program was never designed to do what it is doing today,” Georges said. “It literally in some case is replacing a family income. Because of the economy, because of the job market, people have relied more on the student loan program for indirect costs of going to school, like food, housing, transportation and living expenses.”
Trickle-down effect of costs going up
Rising costs also plays a big role, they said.
“The last 10 years have seen dramatic increases in tuition,” Sandler said, “and that’s out of control. Tuition increases have been higher at public institutions in recent years. What people used to think of as affordable alternatives are not necessarily so any longer.
“It’s a trickle-down thing. Some institutions escape that because they have huge endowments over long periods of time that allow them to subsidize students who cannot pay full freight. That would be the top-tier Ivy League schools, and even schools like Washington U. But they will tell you they cannot be need blind in admissions. They have to admit a certain proportion of students who can pay full freight to be able to help the others.”
Mike Runiewicz, associate director for financial aid at Washington U., who will become director on July 1, said that students whose families have income of $60,000 or less get only grants or work-study aid, no loans. So when it comes to loans, “we are not talking about our neediest families. We are talking about all our other families.”
For the most part, he added, admissions decisions are made without regard to a family’s need.
“Only when we are trying to fill the very last spots in a class do we look at the need involved,” he said. “Historically, we know how much money a class of however many students we enroll is going to cost us. So when we admit students, we do a pretty good job of balancing our aid budget with the class. If we have overspent by a little bit, we might have to tweak the class a little bit.”
In addition to the standard entrance counseling, Runiewicz said his office has a staff of six people ready to advise students when they need help. If students apply for private loans that are generally more expensive, the office tried to work with them to see if there are other alternatives.
How can the system be changed? Sandler’s answer is simple: Award aid based only on need, not on merit, and reduce the opportunity for banks to make a profit on student loans.
“I would not award one dollar to a student who doesn’t need it,” she said. “Many colleges and universities direct their scholarship dollars to students they hope to attract because they want to rise on some rating somewhere. I would stop that practice, but unless everybody at once says, 'No, this is ridiculous,' you will still have institutions basically buying students.
“There are a lot of analogies between the mortgage crisis and student loan crisis. A lot of people think the student loan crisis is the next bubble. It should be a civic and social opportunity that should not carry with it making money, but there are a lot of middle folks who historically have made a lot of money.”
Georges adds that increasing the amount of money available for grants, not loans, would ease much of the problem. But in the end, the way the system is set up, once the students get the required counseling and are told what they are getting into, schools may not be able to do much more.
“What we call entrance counseling,” he said, “reinforces to the borrower that that is exactly what they are getting ready to do, borrow money. If it does nothing else, it means students can’t say nobody told me I was borrowing money.
“I could provide all the counseling all day long, but at the end of the day, if they say they want the loan, and they qualify, we approve it.”
Rude awakenings
Those approvals, which probably were welcome at the time they were made, often end up providing one of the toughest lessons students get in practical economics. Once they graduate, whatever grace period or deferment on loan repayment runs out, it’s time to start writing checks – month after month, as the balance shrinks slowly.
Credit counseling may be required, but the information doesn’t always register.
“It caught me unawares,” says Owen Woodard, now a graduate student at Webster University, whose outstanding debt is about $100,000.
“I knew the principal, and when you add the interest, when I got my first loan notice, I was kind of in shock, to put it mildly.”
Now 41, he worked at a variety of jobs before going back to school for a master’s degree in marketing.
“I was not a traditional student,” Woodard said. “When I found I was eligible for grants and loans, I was excited. I never had a sit-down conversation with my financial aid officer, where she would explain all the particulars about the loans and grants. I knew I would have to pay back loans, but I was never shown what the interest rate would be and what I would have to pay back.”
Carlos Restrepo, who has one semester left at Webster before he graduates with a degree in journalism, said he has a part-time job and two paid internships that he hopes will help him pay off a debt that is now at $20,000 and will grow by another $5,000 or more before he gets his degree.
A native of Colombia who came to the United States with his mother seven years ago, Restrepo, now 22, saved money by going to St. Louis Community College at Meramec for two years before transferring to Webster. In Colombia, he said, he never even thought about college, even though tuition there was much lower.
Now, he says, despite the payback burden that awaits, he is glad for the chance that higher education has given him.
“I’m not complaining,” Restrepo said. “There are so many opportunities here, and you take what you get. I think a lot of students are labeled as lazy. But all the people I know are working really hard to go to school and pay for their loans.
“It’s worth it. It is the most important thing, for me to get an education. Getting into journalism may not be the most savvy idea, but I love what I’m doing, and I think I’ll be able to find work.”
For Jeremy Katcher, 34, debt didn’t come from undergraduate school but from medical school at the University of Missouri at Columbia; he owed $130,000 when he graduated seven years ago with a specialty in allergy and immunology. The debt is down to $120,000 now, he said, with a payment of $400 due every month.
He feels secure that a career in medicine will help him erase the debt, even though salaries for doctors may not be what they once were.
Katcher said he qualified for economic hardship when he was earning a minimal salary as a resident, so he did not have to start paying the loans back until he began his practice. Many of his fellow medical students are in the same situation, he said.
“There were some who probably had rich mommies and daddies who paid for some if not all of their education,” he said, “and probably there were some special scenarios where there were scholarships. But medical school scholarships are pretty hard to come by. I think the vast majority of people had pretty significant loans.”
And Sammi Powers, living back with her parents as she tries to save for a wedding and pay down her loans, has advice for anyone just starting out on their college journey.
“I would look for as many grants and scholarships as you can possibly find,” she said. “No matter how annoying it is to write those essays, apply for whatever you can.
“The cost of education is so high, but without a college degree you can’t do anything. A college degree is the new high school diploma.”