Higher Degrees of Debt

March 1st, 2008

Recession and private loans leave students in the red

By Meagan Murray

Lindsay DeVries never thought that it would require an inheritance from her grandfather to pay back her private student loans.

After graduating from Ithaca College last May with a degree in speech-language pathology and audiology, DeVries left for graduate school at the University of Washington already $17,000 in debt to the federal government. She was able to defer her federal loans until 2014, but she approximates that she will have to pay back around $75,000 in federal loans—equaling an estimated $700-per-month installment plan.

In the private sector, however, DeVries had difficulty deferring the $12,000 she had taken out in loans from the American Education Services. DeVries said that AES accrued her interest up to $11 per day for a deferment. In a morbid twist of fate, the death of her grandfather allowed DeVries and her mother to pay off her AES private loans.

“Got lucky there,” DeVries quipped. “Everyone is in impossible debt only to get educated. And when we leave school, the dollar will be worthless, so we’ll be making less and paying on loans taken out when the dollar was worth more.”

Her outlook may sound a little bleak, but who can blame her? In DeVries’ defense, many analysts agree that the coming recession will have an effect on students’ abilities to pay back their tuition loans.

According to a Feb. 20 “Forecast” by The Economist, the predicted economic crisis in the United States is indeed a reality.

“We have revised down our forecast for U.S. real [gross domestic product] in 2008 and 2009 to 0.8 percent and 1.4 percent from 1.5 percent and 2 percent respectively. This reflects our view that the housing market will deteriorate more sharply than previously assumed as well as the impact of the deepening turmoil in the financial sector.”

The unstable U.S. economy is a result of several faltering dimensions: the continued plummet of the dollar, now at 1.4825 dollars to the Euro; a growing global economy; fluctuating federal tax programs; military spending for the war in Iraq; and, of course, the sub prime mortgage crisis.

Last month Congress approved a $168 billion federal stimulus package, designed by the Bush administration, that would extend rebates to U.S. taxpayers, give tax breaks to businesses and make more expensive mortgages available through the government and government-sponsored mortgage-finance companies.

“The data isn’t in on how different sectors of the economy are going to be affected by the recession, but we already see that the housing sector is currently being affected,” said Shaianne Osterreich, an assistant professor of economics at Ithaca College. “This will affect people’s jobs and also families’ abilities to have financial assets to help pay for college and [provide a] buffer when there are hard times.”

Osterreich said that the current stimulus package was formed primarily to temporarily boost consumer spending and will have little effect on creating new jobs. Moreover, she believes the faltering economy will lead students to take out more loans for tuition payments.

“Students are taking more loans than they have in the past because [the cost of] college education is going up,” she said. “Jobs that are paying them well enough to easily pay loan payments will be a challenge to find.”

It’s no wonder the federal government is cringing as students send in their FAFSA forms alongside their college applications. Nearly 70 percent of student financial aid is provided by the U.S. Department of Education’s Federal Student Aid program through either grants or student loans.

According to FinAid.org, a public service site unaffiliated with the government, 87.3 percent of students who attend a four-year private institution accumulate an average of $28,138 in federal loan debt, excluding PLUS loans, which parents take out. The current tuition at Ithaca College is $39,798 per year, so depending on the financial aid package given, most federal loans and grants don’t cover tuition completely.

This creates a demand for alternative loan options, often in the private sector. Many recent graduates like DeVries are finding that they can’t afford to pay back their private loans on time. It’s a scenario that Osterreich believes will continue in today’s profit-driven market.

“Private student loans can be really exploitative,” she said. “I wouldn’t recommend that anybody take private student loans, because a lot of times you can’t negotiate repayment schedules if you run into hard times. They’re happy to have you default, because they’re going to sell your loans or accrue interest on you.

“Federal government student loans really are designed to help people go to school for extremely low interest rates; it’s not a for-profit enterprise the way private student loan operations are.”

Carol Chernikoff is the chief lending officer at the Alternatives Federal Credit Union in Ithaca. As both a parent paying for her son’s tuition and someone who works in the lending industry, she sees the frustration from both sides.

“It’s the cost of higher education that’s so obscene. It’s a disgrace to this country,” she said. “We are looking at a system that’s broken and so elitist and exclusive at this point.”

While AFCU does not offer student loans due to the competitive rates of profit-driven national lenders, they refer members to College Payway, a national private lender that educates families about the choices they have when paying for education.

“We work with a lender we know we can stand behind,” Chernikoff said. “We are a community-based credit union to serve the underserved. We combine education with financial empowerment and literacy. I think going into anything, especially borrowing large amounts of money for education, with full disclosure—knowing what you’re doing and what you’re payments are going to be—is something we all need to have.”

More politicians are also beginning to pay attention to the expanding markets for federal and private student lending and the dangers of leaving the lending system unchecked. Sen. Chris Dodd, a Democrat from Connecticut, was making waves for improving higher education standards long before his presidential bid was snuffed out last fall. As chairman of the Senate’s Banking, Housing and Urban Affairs Committee, Dodd introduced the Private Student Loan Transparency and Improvement Act of 2007, which would amend the Truth in Lending Act. Private lenders would be required to inform applicants of their eligibility for lower-cost federal loans; provide more accurate and timely information to their customers about the interest rates, terms and conditions of their product; and allow for a 30-day grace period upon approval to allow the applicant to shop around for the best lending rates.

“It’s a pretty sensible approach to higher education,” said an aide to Dodd who specializes in banking. “What we’ve learned from what is happening today is that we’ve been inattentive of this market… Nobody said the sub prime market issue would explode to what it is today, and as a result, you have loans that were made with no documentation. We want to make sure that loans are made the right way in this particular market.”

Another of Dodd’s aides, who works with higher education, said that they are busy assembling a “list of shame”—an index estimating what tuition rates should cost based on the consumer price index. The index would take into consideration typical inflation rates and publicize any colleges or institutions that outpace the education inflation rate of tuition.

“The idea is to sunshine this issue,” said Dodd’s aide in higher education. The goal is to monitor tuition increases, particularly at public schools, and examine how these increases may relate to other budget decisions.

“States have to stop balancing budgets on backs of higher education, which is usually one of the first things to go,” said the aide.

A bill was passed in the House in early February that included some language from the Private Student Loan Transparency and Improvement Act. The next step, say Dodd’s aides, is to reconcile differences in Congress and present a package for President Bush to sign by April.

Chernikoff hopes that the federal government will realize the significant need for privatized loan regulation and take more responsibility for higher education.

“If the government doesn’t do something, this is going to explode on us, and schools are going to have a hard time getting students because they can’t afford it,” she said. “I’m not a pessimistic person, but if you step back and look at higher education and health care, who would have thought that the government would let things get this out of hand?”

DeVries said that she hasn’t lost complete hope in the lending system, but that doesn’t mean that she’s not bitter about the way the system is run.

“[Federals loans] are your best hope – lower interest rates and they are practically guaranteed,” DeVries said. “But I’d never take out those private ones again. During my undergrad I had loans, but I lived on campus and ate there, and it was no biggie. Now I have to watch everything to stay afloat.”

According to Dodd’s staff, while they have faced resistance from private lenders, some companies actually want better regulation in their market. “They want it well- regulated so that if there ever was a problem, no one can say this was the ‘Wild West,’ i.e. the sub prime market. It’s a way to ensure that the market grows and that people still have confidence in it.”

Like so many others, DeVries is still waiting.
Meagan Murray is a senior journalism major. Email her at mmurray1[at]ithaca.edu.

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