Q is a student at Pratt University. Currently she owes $53,000 in college loan debt, not including interest. She estimates that by the time she graduates, the cost of her education will have doubled, thanks to the interest on her college loans.
Q is not alone. According to the a report by the New York Public Interest Research Group, "the amount of money borrowed in the form of Stafford loans has doubled." The General Accounting Office adds that many New York college students will leave college more than $20,000 in debt.
Q's dire financial situation and that of countless other New York students dates back to the 1980s, when Ronald Reagan declared the end of big government and slashed the Federal Pell Grant. As a result, the National Center for Education Statistics reports, "post-secondary education funding decreased by 28 percent between 1980 and 1998." It may have been the end of big government but it was also the beginning of big business: As banks stepped in to fill the financial gap, the student loan business became a boom sector in the banking industry. These days, bank-backed student loans are fast replacing government grants as the cornerstone of student financial aid.
This trend has affected those most in need, poor and minority students. Although the number of minority students attending college has increased over the last decade, low-income, minority students can no longer depend on grants as the main source of financial aid for their college education. The Advisory Committee on Student Financial Aid reports that "low-income students face [an average of] $3,200 of unmet need [per year] at public institutions and $3,800 at private colleges." 66 percent of these students take out loans.
The future looks grim for those financially strapped students. The Advisory Committee on Student Financial Aid reports that "if substantial policy changes are not enacted, mainly low income students [with family earnings below $25,000] who are academically well-prepared will be denied access to higher education."
As loans increasingly replace grants, more disadvantaged students will be denied access to college. Thomas Mortensen of the Center for Study of Opportunity in Higher Education reports that "since the 1980s there has been a sharp drop in the portion of low income students getting 4 year degrees."
In the past, high school graduates could obtain well-paying union jobs to help move them into the middle class. However, with the decimation of union employment, college has now virtually become the only path to the relative affluence of the middle class. But for poor and minority students, taking a student loan, and with it, post-graduate debt, has become a catch-22 that impedes economic mobility.
Many students try to attend prestigious colleges in order to get a better job at the end of their studies. Sending a child to one of these schools on a low-income budget could bankrupt a family, consuming up to 162% of its income.
According to NYPIRG, the average college student borrows $4,357 per year. A one-year, federal student loan is currently capped at $2,625 to $5,500 for undergraduates, depending on which year of school they are in. While some students fill the gap by taking out additional money through the Parent Loans for Undergraduate Students program (PLUS), most students exhaust their low rate loans and then supplement them with higher-rate private bank products.
The growing college loan debt burden could deteriorate other parts of the economy. Rather than being graduating to oversized loan payments, many students opt out of college or leave early. And, according to Congressman George Miller (D-CA), "students saddled with large debts may think twice before entering public service or postpone the purchase of a first home."
Furthermore, it may be cheaper for both the taxpayer and the government to offer grants to disadvantaged students. To insure that the student loan industry is profitable for private lenders, the federal government promises to repay 98 percent of private student loans. In the long run, this guarantee to private lenders may cost the government more money than it would cost to give grants to students who need them most.
The rate of default in student loans is on the rise with a 1.5 percent increase in defaults in 2000, according to Higher Education Services Corporation, and may increase as the economy slows. Family income is the biggest determinant of default?students who have lower incomes are most likely to default
According to Jane Bryant Quinn, of the Los Angeles Business Journal, "private loans are made two ways: Directly through banks or other lenders; or indirectly, through college financial-aid offices. Some colleges simply hand out the banks? brochures." The bank products are frequently more expensive and interest rates may vary from 7.8 percent to 9.7 percent. These loans are made directly to students and the banks go directly to the students for payment after graduation.
Student loans, with their high earnings potentials, are big business. In addition to its default guarantee, the government provides interest subsidy payments to ensure lenders a "sufficient" rate of return.
Sallie Mae, which was founded 27 years ago, provides funds for education by buying federally guaranteed student loans under the Federal Family Education Loan Program. Sallie Mae buys and sells student loans as well as loan services. It sends out approximately 2.6 million statements each month, a number that is expected to increase to more than 4 million as the student loan industry expands.
Another big name in student loans is the Student Loan Corporation, of which CitiBank is the majority shareholder. Their website boasts that SLC is "the largest originator and the second largest holder of student loans in the USA."
Sallie Mae offers a choice for repayment of loans. Repayment options include standard monthly payments; graduated payments, where payments get larger over time; income-based loans, where a percentage of the debt is paid out of the monthly salary of the graduate; and extended payment which is paid back for 12 to 30 years.
But for those with little or no income, there are few programs to help students to help pay off their debt. One program is AmeriCorps, a national service program that does work with disadvantaged communities. Another is the Peace Corps, an international organization that services over 130 countries in areas such as education, health, environment and agriculture. Teach For America also works with students from any variety of majors with a bachelor's degree.
However, these programs, which typically require a two-year commitment, are not for everyone. They tend to involve low pay and, for low-income students with families to support, they often offer no choice at all.
The financial aid office of a college determines the amount of a grant a student will receive. They also determine if a school loan will come from a public institution like the federal government or private institution like a bank. Some schools are making their own deals with banks in order to deliver a "lower-cost product" to students.
Student loans are also bought and sold to other companies. In December 1999, Sallie Mae announced that "it has sold $900 million of the student loan assets to four student loan capital providers."
Source: NYC Independent Media Center
