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Loan Education Becomes Prerequisite As Student Debt Balloons
Originally published on Sat April 6, 2013 4:55 pm
For students now sprinting toward the end of their college days, the finish line may not be much of a relief. More than ever, their gait is slowed by the weight of impending debt.
Thirty-seven million Americans share about $1 trillion in student loans, according to Federal Reserve data. It's the biggest consumer debt besides mortgages, eclipsing both auto loans and credit cards. And on it grows, an appetite undiminished by the recession.
Learning What To Ask
There are signs that students are catching on to the dangers, however. Dawit Lemma learned his own lessons about loans and is now passing them on to others. He's the associate director of operations at the University of Maryland's Office of Student Financial Aid.
He graduated from the University of Massachusetts, Boston, in 2004, years before the recession hit. At the time, Lemma says, he considered student loans another form of financial aid.
Now, he says, students are starting to ask questions he had never considered when he took out loans.
"They know more about the loan process. So they want to know about not just [the] interest rate, they want to know about repayment options, consolidations, forgiveness options," Lemma tells Jacki Lyden, guest host of weekends on All Things Considered.
'I Was Very Naive'
Emmanuel Tellez wishes he had been more inquisitive. Tellez graduated from Northeastern University in Boston in 2008. He majored in English, and on graduation day, he owed about $50,000. That debt has ballooned to more than $70,000 with interest and collection fees.
He says it wasn't a responsibility he was ready for when he applied for school.
"When I signed my promissory note, I was 17-and-a-half. I was very naive with regard to my expectations," he says. "I knew early on I wouldn't be living high off the hog being an English major. I didn't know the explicit terms."
Tellez says he would have been more wary of the kinds of loans he took on if he had known, for example, that he would not be able to discharge the debt in bankruptcy or that the federal government could garnish his wages if he defaulted.
What Can Congress Do?
There is a legislative effort to ease some of the potential burdens, as the interest rate for some federal student loans is set to jump to 6.8 percent from 3.4 percent in July.
Congresswoman Karen Bass is proposing to cap student loan interest rates at 3.4 percent. A bill the California Democrat has introduced, The Student Loan Fairness Act, would also require the federal government to forgive loans up to $45,000 if the borrower has been paying back loans consistently for 10 years.
Bass says the bill is not an overall fix, but it's a necessary step.
"There are a lot of problems that we're facing in our country. We really need to rethink how higher education is paid for — period. But until then, we really shouldn't pass this debt on to future generations," she says.
Moreover, she says, investing in education is essential for staying competitive with other countries.
A Bit Of Advice
Meanwhile, five years after graduating, Tellez is just trying to keep up. He has hired a lawyer to help him navigate what he calls the "labyrinth" of his private loans and has successfully consolidated his federal loans. Now he's chipping away at the total, paying about $500 a month.
Tellez, now a legal assistant/administrative assistant at a Boston law school, hopes future students can learn from his struggles.
"I tell my sister, who's now at [University of California, Berkeley], to be far more frugal than she imagines she has to be," he says. "One thing that I kind of had to learn the hard way is to scan all the documents you get and make sure that you have electronic copies because ... young people move a lot."
Today, Tellez is back in school part-time, pursuing a master's in public administration. This time, he says, he's learned his lesson: He's not borrowing. Instead, his employer is picking up the tab.
JACKI LYDEN, HOST:
This is WEEKENDS on ALL THINGS CONSIDERED from NPR News. I'm Jacki Lyden.
On a sunny Friday morning, students at the University of Maryland are headed to class. Next month, the class of 2013 will graduate. These are a group of students who enrolled in college after the crash of 2008. So how have they paid for it?
UNIDENTIFIED WOMAN #1: I'm paying completely the student loans.
UNIDENTIFIED WOMAN #2: Pretty much all of my tuition is being paid with student loans right now.
UNIDENTIFIED MAN: Yes, I have a lot of student loans.
LYDEN: And here's Ciara Clinkscales(ph), a senior.
CIARA CLINKSCALES: I had to take out $19,000 my freshman year, and I've taken out at least 6,000 a semester since then. I'm in debt.
LYDEN: And they're not the only ones: 37 million Americans share about $1 trillion in student loans. It's the biggest consumer debt besides mortgages. It eclipses both auto loans and credit cards - and on it grows, an appetite undiminished by the recession. And that's today's cover story: student loans, coping, recovering and rethinking.
EMMANUEL TELLEZ: My name is Emmanuel Tellez. I am a legal assistant/administrative assistant at a Boston law school.
LYDEN: We spoke to Tellez a year ago, and we checked back in with him this week. He graduated in 2008 from Northeastern University in Boston where he majored in English. On graduation day, he owed about $50,000. But Tellez defaulted on his loans after getting laid off. And today, his debt has ballooned to more than $70,000, thanks to the interest and collections fees. Tellez says he got lost in what he calls the labyrinth of his private loans.
TELLEZ: So I became very angry, and unwisely and hotheadedly decided I was not going to pay until I understood the full extent of the debt that I owed.
LYDEN: Tellez hired a lawyer to help him navigate that labyrinth. He's now consolidated his federal loans and is chipping away at the total. He pays about $500 a month. He says it just wasn't a responsibility he was ready for when he applied to college.
TELLEZ: When I signed my promissory note, I was 17-and-a-half. I was very naive with regards to my expectations. I knew early on that I wasn't going to be living high off the hog being an English major. I didn't know the explicit terms - the fact that you cannot discharge this debt in bankruptcy, the fact that your wages could be garnished by the federal government if you were to default. It would've been something that had I known, I probably would've been more circumspect in what kind of loans I would've taken out.
LYDEN: In other words, Emmanuel Tellez admits he made a serious mistake. And he hopes future students, including his own sister, can learn from his struggles.
TELLEZ: You know, I tell my sister, who is now at UC Berkeley, to be far more frugal than she imagines she has to be. One thing that I kind of had to learn the hard way is scan all the documents you get and make sure that you have electronic copies because, you know, people move - young people move a lot. We're very mobile.
LYDEN: Today, Tellez is actually back in school pursuing a part-time master's in public administration. This time, he says, lessons are learned. He's not borrowing. Instead, his employer is picking up the tab.
When we talked to Emmanuel Tellez last year, the interest rates for some federal student loans was about to double from 3.4 percent to nearly 7 percent. But in the spring of 2012, there was a lot going on. The Occupy movement had put the issue of student debt at the forefront, and it was an election year.
So Congress delayed the interest rate bump until this July, so the issue is here again. Representative Karen Bass, a Democrat from California, is helping to end the debate for good. Her proposal is to cap interest rates at 3.4 percent. It's all part of a package she hopes will alleviate the burden.
REPRESENTATIVE KAREN BASS: The Student Loan Fairness Act would do several things. It would permanently cap the interest rates at 3.4 percent. It would also say that a student who graduates college and pays their loan back for 10 straight years. After that, their loan would be forgiven. Now, of course, there's a cap to this, too, which means we are talking about debt that would not be beyond $45,000. So if you pay your loans back for 10 years, if you have anything left, then the federal government would forgive it.
LYDEN: So the government would forgive up to $45,000 per graduate. Now, that is a lot of money. So how do you square this with the sequester and the circumstances under which we live now?
BASS: Well, you know, there are a lot of problems that we're facing in our country. We really need to rethink how higher education is paid for, period. But until then, we really shouldn't pass this debt on to future generations. And everybody understands that if we want to have a society, number one, that is competitive with other countries, we have got to invest in the future, we have got to invest in our youth. And the number one way to do that is education.
LYDEN: So if the government's willing to cover much of the difference after a certain point, after, say, a decade worth paying a loan back, what's to stop tuition costs from continuing to skyrocket?
BASS: Well, first of all, it is only up to 45,000, but we also have to put pressure on every part of society. So there is the pressure that needs to be put on Congress. There's also the pressure that needs to be put on colleges too. We need to examine what the cost of tuition is. The idea that you could go to a four-year university - and for me, you know, who is older, I certainly remember going to college and could never imagine being in as much debt as it would take to purchase a home. And that's what many of our young people are faced with now.
LYDEN: California Democrat Karen Bass.
Most of 2013's graduates won't have quite that kind of house-sized debt. The average for borrowers is more like $25,000. But remember, student loan debt is still growing. And outside of mortgages, it's the biggest consumer debt.
Planet Money's Zoe Chace says we should look at the growing debt in another way.
ZOE CHACE, BYLINE: It means a lot more students are going to college. That's the main reason it's going up so much. Student debt per student is getting bigger, too, but the main reason that you see student debt getting so big is because more and more people are going to college.
LYDEN: Zoe, should we be worried about these debt-burdened students, graduates now, being a drag on the entire economy? And if they're leaving schools, thousands of dollars in the hole that perhaps they're not spending much on buying cars, clothes, all the other things that power the economy.
CHACE: Yes. On the one hand, if you have a ton of debt to pay back, if you have loans, you are not going to be spending as much money. But it's wrong to kind of compare the student that's really in debt with college loans to the student without. So the student without college debt, obviously, they have a lot more spending power. That's great. But what you have to do is you have to compare the student with student loans to the student that never went to college at all. That is a drag on the economy for sure. They're just sort of locked out of the labor force. They fall into the social safety net. That's a worse problem to worry about.
So you definitely see people with student loans, you know, not buying houses, not necessarily buying cars. And that's an issue. But I would say the thing to worry about more is when you have students going to college and not finishing because that is just obviously a bad investment. You have a ton of debt and you don't really have the power to pay it back.
LYDEN: Zoe, what about those people with hundred thousand dollar loans and a degree in something like, say, sociology?
CHACE: I do feel worried about those people. I know some of those people. But the thing is that's a really, really small percentage of people. And there are ways to refinance the debt that you have if you have something like $100,000. But again, if they had left school before getting that sociology degree, that would be a way worse situation.
LYDEN: Planet Money's Zoe Chace.
Long before the recession started, students had few worries about all this borrowing.
DAWIT LEMMA: I considered loans to be another financial aid. My belief at that point was if I get a first degree or a bachelor's degree, I can be able to repay these loans without any issue.
LYDEN: That Dawit Lemma. He graduated in 2004 from UMass Boston, where he supplemented his work study income with student loans. Now, he's a financial aid counselor at the University of Maryland, where he sees a different kind of student borrower, one much more wary than he was.
LEMMA: They know more about the loan process. So they want to know about not just interest rate, they just want to know about repayment options, consolidations, forgiveness options. Those are questions I never asked when I was in school.
LYDEN: Are there any red flags for you as a financial aid counselor when a student comes to you?
LEMMA: When a student comes to me, a red flag probably will be someone who's looking for a huge amount of private loans or alternative loans. Using loans for other than educational expenses, like buying a car, that has reduced drastically. But a student who would like to get more than our cost of attendance, we take that student seriously and counsel them about financial options, the federal loan program, and compare the two and give them all the options before they make the decision.
LYDEN: So how much money in loans does the average student at the University of Maryland leave college owing?
LEMMA: I believe, according to the federal government data, it's a little bit more than $17,000 on average for undergraduate students.
LYDEN: It must be a burden, however, for a young person to start life with a 17- to $23,000 debt in this economy - I realize that 17 is your average. How are the students you talk to every day dealing with this?
LEMMA: It's tough. Definitely if you have a higher loan amount like $17,000 and if you're graduating and what you're hearing around you is the job perspectives are not that bright, it's a depressing issue. But absolutely, most of the students I deal with have a bright outlook. They are almost 100 percent certain they will go out and compete and secure a position that will pay them to pay back these loans.
LYDEN: Dawit Lemma of the University of Maryland.
One hundred percent might be stretching it. But back out on McKeldin Mall at UMD, students Van Holmes(ph) and Eric Medlin(ph) reveal the kind of pragmatism that their financial aid counselor says he's seeing.
VAN HOLMES: Especially the career I chose, I should get a job right out of college. There shouldn't really be a problem. I should start making my money pretty soon.
ERIC MEDLIN: I did go to a community college and then transferred over here. So saved some money, so I knew I would have enough.
LYDEN: A generation that's much more cautious and still calculating that a diploma is an essential thing to have, but you need to calculate also how to pay for it. That's diploma reality check 101. This is NPR News. Transcript provided by NPR, Copyright NPR.