Chapter 6. Student Loans

Americans are pretty well convinced about the value of a college education.

Three-quarters of those polled for The National Center for Public Policy and Higher Education believe a college education is more important today than it was 10 years ago. People know that low-skill jobs are disappearing rapidly thanks to advancing technology, changes in our economy, and increased outsourcing of jobs overseas. A college degree is no longer seen as a ladder up; it's a life raft in a stormy economic sea (see Table 6.1).

College degrees are also a profitable investment for most people. The College Board estimates that college graduates earn on average 73% more than a high school graduate over a 40-year working career.

As college enrollments have climbed, however, so have college costs. According to the College Board, the average cost of four years at a public university in 2004 was more than $45,000. The tab at private four-year colleges is more than $110,000. Those costs are more than one-third higher than they were 10 years ago.

The nature of financial aid has changed as well. Whereas most aid in the 1980s was in the form of grants, by the mid-1990s the greatest portion of student aid came in the form of loans.

These changes have led to a rather stunning rise in the level of student indebtedness. The average college student graduated with $18,900 of debt in 2002, up 66% in just five years. Those attending graduate school borrow another $31,700 on top of their undergraduate loans, a 51% increase.

Most people take on these enormous burdens at a time when they have no income, little credit savvy, and no clear idea how much this money will cost to pay back. Few realize what a crushing burden this debt can be—and unlike most other unsecured debts, student loans can't be wiped out in bankruptcy court, meaning that people are saddled with it for life.

I wrote about Michelle from Indiana in my previous book, Your Credit Score. She graduated with $120,000 in student loan debt, but her job at a university pays just under $50,000. She was contemplating bankruptcy, not realizing that a 1998 change in the law made it virtually impossible to erase student loan debt.

Kim also is staring at a debt she doesn't think she can repay. She went to college late, after she'd had four children. Now she teaches at a public school near Sioux City, Iowa, where a beginning teacher makes about $27,000. But her student loan debt is a whopping $87,000, and the small payments she can make don't even cover the interest owed.

“How will I ever be able to pay back this loan, plus the loans that I am now taking out for my two oldest children?” Kim wonders. “I have two more children who will be entering college in the next four years. I would love to be able to pay back these loans, but once again, how?”

Charles is in a similar fix, with student loan debt that's growing because his income is too low to make the minimum payments.

“I was prematurely forced to leave school near the end of my doctoral program because of a divorce. I have a huge student loan that I have no hope of paying unless I win the lottery,” Charles wrote. “I can't make the full student loan payments and am on an income-sensitive repayment program... My loan just keeps getting bigger and bigger. I have inquired in just about every way I can think of for some way to get relief from my loan. It seems there is none.”

Other student debtors find they can make their payments but can't afford to do much else. They postpone important goals, like buying a home or saving for retirement, so that they can pay down their student loan debt.

But putting off these goals is an expensive choice. A 22-year-old who put $4,000 into a Roth IRA, for example, could watch that money grow to more than $125,000 by the time she's eligible for full Social Security benefits. If she put off that contribution by 10 years, it would grow to less than half that amount—about $59,000. (Both examples assume an 8% average annual return.)

Few students are told about these potential costs, though, and most find no difficulty in getting loans to pay for as much education as they want. In fact, many students tell me they had no clear idea how much they had borrowed until they got their first bill six months after graduation.

Students do face maximums on how much they can borrow under federal student loan programs, but private lenders have no such limits. They usually give students, or their parents, the difference between their college costs and any financial aid they get.

Lenders can be so generous because they know how hard it is these days to default. Collection agencies have excellent systems for tracking down student borrowers and getting them to pay. The federal government can, and does, seize tax refunds and garnish wages when student loans aren't repaid.