Coping with Crushing Student Loan Burdens

I’ve been reading more and more stories lately on how the high interest loans are putting an extraordinary burden on recent graduates paying off what they thought were federally controlled student loans. These loans were extended via private companies, but carried variable interest rates that, like a lot of mortgages, fluctuate with current interest rates. The ending result? Sky rocketing interest rates on loans for tens of thousands of dollars and none of the benefits you get with federal student loans like deferment and locked-in rates.

The LA Times published an interesting article about a young woman who recently graduated with a degree in photography. After taking out $140,000 in loans, she now has to pay out $1,700 a month towards these loans. And with some of these loans at a debilitating 18% interest rate, paying $1,700 a month isn’t going to go all that far.

To give a frame of reference, if she had taken out the entire $140K in private loans at 18% interest, she would have to chuck away $2,010 a month towards her loan, and then she would only be able to pay it off (at that same rate) after 30 years, all the while racking up a total bill of $618,464 — almost five times the original amount! Add in a missed payment one month, and you can see how this issue is gaining momentum as one of the most serious problems for new graduates — coupled with low employment rates.

While I think that loaning organizations are practicing dubious policies and purposely muddling the information that is given to the students who apply for loans, I also believe that a large part of the blame should go towards schools for not educating students on how to effectively finance their college education and what to realistically expect after graduation. FinAid, an online comprehensive financial aid guide, says that a good rule of thumb for taking out loans is that “…your total education debt should be less than your expected starting salary.”

I think that most students would pass up $100,000 in loans for a photography degree if they understood that they’d likely be making less than $40,000 in their first job after school. It’s unrealistic to think that a six-figure loan will be easily paid off after school unless you’re diving into a career in banking — and I don’t think that colleges are cementing this understanding to their students. According to a quote from the LA Times’ piece, Luke Swarthout (a former advocate at the U.S. Public Interest Research Group) said “The students think it’s an investment in their future, and the colleges are willing to let them borrow heavily because it helps them fill in their enrollment.”

I, for one, was never required to take any classes or lectures on how student loans work or where to look for financing. It was just assumed that you would take out loans and they pretty much had the paperwork ready. All they required was a signature. I guess I was lucky that I did indeed have a Federal Stafford Loan with a locked interest rate of 6%. I also went to a state school with relatively low tuition, so my student loan bills were far less of a burden than many of the students that I’m hearing about now.

So, just for argument’s sake, where do you guys believe the fault lies? Is it in the hands of the private loan sector for purposely providing confusing information and not disclosing full loan amounts? Does the blame go to the college for not providing better financial aid counseling? Or does it belong to the students for being too naive when agreeing to these terms?