Wednesday, October 1, 2008

The Financial Risks of College

While the country is focused on home foreclosures and unemployment figures, many young people are entering a financial crisis of their own just as they begin their careers and start their own families. Those who have attended and/or graduated from college are increasingly burdened with debt.

About two-thirds of students borrow money for their education with an average debt load in 2003-4 of $20,000, a figure which has doubled in the last ten years. Some students, especially in the professions, rack up $100,000 or more in student loans. As reported in a New York Times article, Lucia DiPoy, a first-generation Tufts graduate of an immigrant family, has an accumulated debt of $85,000 with monthly payments totaling $900, an obligation which prevented her from volunteering at an overseas refugee camp.

Whereas state colleges once offered an affordable education to residents, tuition rates have increased by 35% over the first five years of the decade thanks to budget cuts. Grants have not tracked the rise in costs, and in some cases aid has decreased. Federal loans have stagnated in availability.

Private loan companies have entered the gap with variable rates as high as 20%, a “Wild West” of lending according to New York State Attorney General Andrew Cuomo. Last year, a scandal emerged linking private loan companies and financial aid executives who received gifts and/or owned shares in the lending company they were promoting. Recently Congress passed regulations to ensure more transparency in college lending though without imposing rate caps.

Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers stated: “When a student signs the paper for these loans, they are basically signing an indenture. We’re indebting these kids for life.”

Contrary to the more sanguine U.S. Department of Education default figure of under 5% tracking only the first two years post-graduation, an in-depth 2006 study by their National Center for Education Statistics department found that 10% of students defaulted on their loans over a ten year period. Minority groups are overrepresented. For students with over $15,000 in debt, the risk of default is around 20%. While federal lenders are more lenient with deferments, private lenders generally do not offer such safeguards.

A law protecting private student loan companies in 2005 makes bankruptcy virtually impossible. On the other hand, once a person goes into default, interest and fees can dramatically increase the total obligation. Alan Collinge, founder of StudentLoanJustice.Org, started with a $38,000 in federal student loans which ballooned to $100,000 in his three years after defaulting.

The presidential candidates are weighing in on the need for college education funding. Barack Obama proposes a $4,000 universal tax credit, which would cover about two-thirds of public college tuition. John McCain prefers to expand the current federal loan and grant programs.

Published at Il Sussidiario.Net

1 comment:

collegeloanconsultant said...

A tax credit does not directly address the costs of a college education. The student still has to come up with the money for tuition or loan payments. Maybe the student will apply the credit towards his education costs, and maybe not. At least increasing loans and grants would apply the money directly to education.