Field Report:

Debt Life

For college students about to take on major debt, SAFRA can’t come soon enough; just ask the ones it can’t help.

By Cord Jefferson
December 1, 2009

University of Missouri senior Kristen Overmyer didn't take out enough student loans during her freshman year and so turned to credit cards, compounding her debt. (AP Photo/L.G. Patterson)

Jill Mazzetta followed a dream to Emerson College. Despite scoring in the top quartile on Massachusetts' Comprehensive Assessment System exam, thereby earning herself free tuition to any Massachusetts state university, Mazzetta instead decided to matriculate at Emerson, the prestigious communications college she'd wanted to go to since she was a kid.

"When I applied, I knew the tuition would be pretty high," Mazzetta, now a senior majoring in book publishing, says. "But I was so impressed with Emerson’s programs that I decided I'd be willing to put up with the cost for a great experience." At about $38,000 per year for tuition and fees, Emerson is a particularly expensive private college—especially for Mazzetta, whose parents couldn't afford to help pay for her education. A scholarship from her high school and a grant helped her through her first two semesters, but like most college students, eventually she was forced to take out loans to stay in school. Today, almost four years after entering Emerson, Mazzetta is $80,000 in debt.

"I think I've gotten a great education," Mazzetta says. "But I'm worried about how I'm going to make my loan payments, because they're going to be massive." In 2008, 67 percent of students graduating from four-year colleges were doing so with student loan debt, according to The Institute for College Access & Success (TICAS). On average, they owed $23,200, much less than what Jill owes, but that number is also 24 percent higher than the average amount owed just five years ago. With no signs of this uptick slowing, and with a sluggish economy hampering opportunities for young people in the workforce, TICAS President Lauren Asher is concerned for the future of student borrowing.

"We're talking about very young people with very little financial experience," says Asher. "And they're being asked to make very serious financial decisions without much context." Asher is further alarmed by the tight grip private companies like Sallie Mae have on the student lending market. Federal institutions—like the Federal Family Education Loan Program (FFELP), which offers subsidies to private lenders to ensure lower rates, and the Direct Loan Program (DLP), which finds the government giving low-interest loans directly to students—are undoubtedly better for consumers. Unfortunately, funding limits, coupled with skyrocketing tuition costs, compel most borrowers to also take out private loans to supplement federal loans. Though private loans tend to be riskier and more expensive than federal Stafford loans, 15 percent of undergraduates have them, including Jill, whose $80,000 debt is almost 90 percent private.

"The problem" Asher says, "is that 64 percent of undergraduate private-loan borrowers in 2007-08 either didn't have any federal loans at all or hadn't maxed out on their $31,000 in Stafford loans. They've got no idea that they don't need to immediately go to private lenders."

The Student Aid and Fiscal Responsibility Act (SAFRA) seeks to change all this. By eliminating the FFELP, the Congressional Budget Office predicts SAFRA will save the government $87 billion over 10 years, thereby allowing it to do things like invest in community colleges and augment Pell grants, federal money students don’t have to repay. [Note: For more information on the SAFRA legislation, see our related article.] Furthermore, by expanding the DLP and making variable already capped interest rates on subsidized Stafford loans, SAFRA will allow students the opportunity to capitalize on low interest rates while simultaneously being protected from higher rates. And because SAFRA will find private companies competing to service the DLP loans, it’s likely that they’ll work to improve customer service to enhance borrower satisfaction.

Jason Walker is another heavily indebted student that might have benefited from the reforms outlined in SAFRA. A native of Tennessee, he left home to study architecture at the University of Miami, a five-year undertaking. Now one year out of college and still in Florida, Walker, a junior architect, is struggling to pay back his $122,000 in student loans, about $100,000 of which is owed to private lender Sallie Mae. (Jason initially received that money through JPMorgan Chase, but his loans were eventually sold to Sallie Mae without his consent, a common practice in the private loan industry.)

"I've done all the right things," says Walker. "I've worked like crazy for six years and I still can't pay for this." At their highest, Walker's loan bills were about $1,000 a month. But when his firm, citing the economy, asked the staff to take a 20 percent pay cut, he worked a deal with Sallie Mae to pay only the interest on his loans for two years, until he can get back on his feet. Once this period ends, Walker guesses his monthly obligation will once again jump up to $950. "At that point," says Walker, "I have no idea what I'm going to do." The good news is that private loan borrowing is down, and last year, annual federal loan limits increased from $23,000 to $31,000 for dependent undergraduates, and $46,000 to $57,500 for independent undergrads.

Experts are now increasingly interested in how to control student borrowing.

"We are very concerned some students are borrowing much too much,” Sandy Baum, senior policy analyst at the College Board, told the Washington Post late last month.

Asher echoes that sentiment, saying, "We've got a culture where overborrowing has become the norm, and we're obviously suffering the consequences now." For his part, Walker has come to terms with his decision to take on mountainous debt.

"I've accepted the fact that I'm not going to buy a new car and new things," he claims.

What he can't yet stomach is that he was forced to make that choice.

"I just wish I didn't have to settle," Walker says. "I wish I wouldn’t have had to say, 'OK, if I want to go to this school and get this level of education, I'm going to be struggling financially for quite a long time.' I wish things were different, obviously. But who doesn't?"

Cord Jefferson is an associate editor at Campus Progress.

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