Budget Basics

August 9 , 2006
by Sarah Klein

The double whammy

From USA Today to Time, the story is familiar: A bright young person has just reached one of the happiest days of their life — graduation — yet the moment is soured by the knowledge that they'll be paying for it for the next five to 20 years.

When Larry Gladieux read those reports, a thought struck him: What about the students who never got the golden egg?

"All the media coverage and most of the policy focus is on students in debt who graduated — and those are the students we least need to worry about. What about those who didn't make it?"

Gladieux and Laura Perna co-authored the study "Borrowers who drop out: a neglected aspect of the college student loan trend," for the National Center for Public Policy and Higher Education. Data from the U.S. Department of Education showed that more than 20 percent of student borrowers who were enrolled in 1995-1996 dropped out by 2001. That means 350,000 students were in debt with no degree to show for their troubles. The study also found that students who didn't complete their degrees are 10 times as likely to default on their loans, and twice as likely to be unemployed as those who completed their degrees.

"Many low-income students are in a double bind — they're working too much to focus on their studies, or they're borrowing beyond their means," Gladieux says. "Obviously, we need to do better in preparing students — educationally and financially — and making sure they have the resources to make it."

When students fall so far behind they can no longer make payments on their loans, they're considered "defaulted." And that spells trouble not just for the student, but also for the institution that offered loans.

Sharon Pearl, financial aid manager of Henry Ford Community College, explains that the federal government keeps track of repayments under the Federal Stafford Student Loan Program, and calculates a "Cohort Default Rate" based on the number of borrowers who are in default from each school.

"The lower the CDR, the better for both borrowers and institutions," says Pearl. "Schools strive to keep their rates well below 10 percent, and if the rate is too high they can lose their institutional eligibility to participate in the federal loan programs."

Most of metro Detroit area's major universities have a CDR of less than 5 percent, although Washtenaw Community College's default rate for 2003 was 11.8 percent.

Pearl is on the board of the newly formed Default Prevention Task Force of Michigan, which consists of educators, lenders and state government officials; they hope to develop strategies to lower default rate in Michigan.

Sucks-to-be-me

Not everyone feels sympathy for these students and their financial plights. In his review of books on youth debt, including Draut's, Slate writer Daniel Gross refers to the subjects as "The It-Sucks-To-Be-Me Generation" and "Twentysomethings who can't stop whining about how the economy is screwing them."

But in a March 13 article about student debt in The Nation, columnist Nicholas von Hoffman was clearly bothered by the impact of college loan debt on young people. He lamented the 29-year-old public interest lawyer who expects to finally pay off her loans by the time she's in her mid-50s, and the 28-year-old social worker with a $33,000-a-year job and $55,000 in school debt. "Many of them are going to go childless," he speculated, or will have fewer children, starting later than they otherwise would have.

Von Hoffman goes as far as to question whether there would have been a civil rights movement if an earlier generation of young people had been saddled with so much debt.

"Burdened with debt and desperate to have and keep a job, there is no way they can take a wild year off and certainly no time for protesting, organizing or causing the kind of social and political trouble young people cause from time to time."

He then goes on to plea, "Will somebody get angry and start yelling?"

They are. Among them: Project on Student Debt, Commission on the Future of Higher Education, studentdebthelp.org, studentdebtalert.org, and campus-specific groups and protests.

While Oakland's McGuiness acknowledges that a free college education for everyone simply isn't possible, he thinks the system is excluding far too many. "Education is a right, not a privilege. And now only those who are privileged have access to higher education, and student debt is a big part of that. When so many students are afflicted, then, yes, it will be a call to activism and action."

Some progress is being made: Many colleges have cracked down on credit card companies' solicitation on campus. Officials at Wayne State University, Eastern Michigan University and Henry Ford Community College all say the practice has been banned within the past few years.

Groups like Project Student Debt are nonpartisan, but they do look to politics for a solution.

U. S. Sen. Richard Durbin, D-Ill., and U.S. Rep. George Miller, D-Calif., have introduced legislation that would halve the interest rate on new college loans. According to the nonprofit group Campaign for America's Future, this legislation would save the average student borrower in Michigan $4,218 annually.

In a press release, the group writes, "Despite the positive impact this change would have on families struggling to pay for college, the Republican majority has refused to take action on either bill."

"While President Bush and his allies in Congress have given lip service to the importance of a college education, they have cut $12 billion from the student loan program, turning a blind eye to rising tuition and interest rates."

Draut recommends going back to a system where more college aid is in the form of grants, which don't need to be repaid. Many groups are calling for Congress to increase the maximum amount allowed in the Pell grant, the most common grant award to low- and middle-income students. Draut says the Pell has "completely lost its purchasing power."

Debt consolidation consultant Dvorkin would like to see a mandatory fiscal education class at the high school level, covering everything from the working of credit cards to student loans.  "Truthfully, if you catch them early enough, you can avoid the problem," he says.

Ybarra agrees that educating young people better about the perils of credit could help in the long run. "I think a lot of people are uneducated about credit cards, and got into trouble, and that's what happened to me," she says. Meanwhile, she'll keep plugging along.

"I considered taking a year off and working, but I'm 31, and I've waited long enough. I just want to get going and get through it." And amazingly, she even manages to find a silver lining to her situation:

"I look at other people who are doing same thing I am — working two jobs and taking classes full time — and they have children on top of that. So I guess I really don't have much to complain about."

Draut believes that hardworking students like Ybarra shouldn't have to struggle alone. "There's so much frustration and misunderstanding about what's happening to young people," she says. "There's this idea that everyone who's in debt is in debt because of frivolous spending, but there's a growing chunk of people financing their lives on credit as a way to make ends meet."

She believes our government and financial institutions need to step up, and at least meet students halfway. "Personal responsibility is an issue," she says, "but that needs to be matched by social responsibility."