In fall 2010, with two semesters remaining in her college career, Scarlett Wright suddenly found herself in financial peril.
After Wright accumulated $30,000 in student loans over three years, a University of North Texas financial aid officer dropped a bombshell. “You’ve reached your limit on federal loans,” Wright remembers her saying. “I’m sorry, there’s really nothing we can do.”
“I was caught completely off guard,” Wright said.
She had lost her full-time job at Half Price Books two weeks earlier, and a mounting pile of unpaid bills weighed on her mind. Her voice cracking, she recalls, she asked the loan officer, “Now what do I do? If I don’t get more financial aid, I won’t be able to finish school.”
The financial aid officer gave Wright a list of private lenders that make loans to UNT students. Wright made a phone call to one of them as soon as she returned home. “Welcome to Sallie Mae, the nation’s leading saving, planning and paying-for-education company,” chirped a voice on the other end of the line.
Ten minutes later, after filling out an online application, Wright received a $13,000 loan — enough to complete those final two semesters and earn her degree.
The passage of the Patient Protection and Affordable Care Act made Wright’s quick-and-easy loan process more feasible. Under the health insurance law, the nation’s largest education lenders — such as Sallie Mae, Chase, Citigroup, PNC Financial Services and hundreds of smaller banks — were kicked out of the federal student loan program.
Despite an intensive campaign by Sallie Mae and other lenders to keep their seats at the lending table, President Barack Obama said the decision to remove private lenders was “a triumph over an army of lobbyists.” House Speaker John Boehner, R-Ohio, labeled the move “a Washington takeover.”
What’s not in dispute is that millions of dollars in interest from student loans will now flow to the federal government, as opposed to corporate giants like Sallie Mae — money that lawmakers say will be used to help subsidize the enormous costs of national health care reform.
The student loan provision was added to the health law since some in Congress wanted to make the federal government a one-stop shop to get student loans. At the same time, it provides subsidies to encourage people to buy health insurance beginning in 2014.
The amount of student debt at the end of 2011 exceeded $1 trillion — eclipsing consumer credit card debt, according to the Federal Reserve Bank of New York. And with college tuition rising each year, the rate of borrowing is expected to keep climbing. In the last decade, student loan debt rose 47 percent, according to an analysis of more than 3 million credit reports provided to Reuters by CreditKarma.com, a credit score tracking site.
America’s college loan program was launched 53 years ago when President Dwight Eisenhower signed the National Defense Education Act, which — in response to an increasing number of college attendees — provided funding to educational institutions at four years per student.
Fifty years ago, tuition at Harvard was $1,520 a year. Today, it’s more than $30,000. That illustrates how the class of 2011 will hold the undesirable distinction of being the most indebted graduating class ever, according to Mark Kantrowitz, publisher of FinAid.org and Fastweb.com, websites that provide students with information on how to pay for school and get financial aid, jobs and internships.
College seniors who graduated in 2010 carried an average of $25,250 in student loan debt, according to a November 2011 report issued by the Institute for College Access & Success, a nonprofit organization that works to increase public understanding of rising student debt and its implication on families. The figure, according to the organization, represents a 5 percent increase from the previous year. In Texas, 56 percent of students carry student debt, with an average of $20,919 in loans, the organization reported.
Student debt and the Class of 2010
“We’re living in the Great Anxiety right now,” says Corey Troiani, a member of Occupy Denton, a branch of the Occupy Wall Street movement that swept up financially frustrated Americans from coast to coast.
“I really don’t know what I’m going to do with my degree and this debt,” Troiani said, sitting at a makeshift table amid a sea of handmade protest signs.
For many of the nation’s college students mired in debt, the Patient Protection and Affordable Care Act is likely to help relieve at least some of their anxieties. By executive order in October 2011, Obama fast-forwarded provisions of the act allowing the consolidation of all federal student loans, easing loan repayment requirements and forgiving federal loan payments altogether if the loans aren’t paid back after 20 years. The new loan program is “doing everything [it] can to put a college education within reach of everyone,” Obama said.
Known as the “Pay-As-You-Earn” plan, students will be able to reduce their monthly payments from 15 percent to 10 percent of their discretionary income. Moreover, if a student hasn’t managed to pay back the federal government 20 years after graduating from college, the federal government will forgive their balance. For those in public service jobs — teachers, nurses and soldiers — student loans are forgiven after only 10 years. New loans beginning July 1, 2014 are eligible for that treatment, according to the U.S. Department of Education’s FY 2012 Budget Student Loan Overview.
Alisa F. Cunningham, vice president of research at Washington’s Institute for Higher Education Policy, said she was not sure how the government would take care of the forgiven debt.
“I think this will probably be an accounting issue,” Cunningham said. “The debt would be on the books, but I don’t know how that would be addressed. The direct loan program, this would be part of the various financials they have to keep track of. I also don’t know the relationship between that and the actual program.”
Cunningham, who specializes in issues related to student debt and disadvantaged student populations, said there is not enough data to know how the changes in policy would affect the student loan program.
“It is all interconnected. We focus on low-income students, first-generation students. For them it is great that the Pell grants have increased,” Cunningham said. “There is concern they could be cut again and few people would be eligible. Those students would take more federal loans. We don’t know what is happening right now, since the data is old.”
The Department of Education releases data every four years to examine trends in student loan borrowing among undergraduates, she said. The next report will come out later this year.
“We could get a better sense on how the policy has affected things, once the report is released,” she said.
One of the things her institute will be keeping track of is the income-based loan program, one that is supposed to make federal student loan payments more manageable.
“The income-based loan program could be important for a lot of borrowers,” Cunningham said. “Are student borrowers taking advantage of the opportunity for them not to go into default?”
There are a lot of repayment options available, she added.
Students left ‘high and dry’
Students and college administrators have complained for decades about some of the lending practices of banks and other financial institutions. Private lenders found themselves earning millions of dollars in interest from student loans guaranteed by the federal government. Sallie Mae alone issued nearly $11 billion in federally guaranteed student loans for the first half of the 2008-09 academic year through the Department of Education’s Loan Participation program.
Yet, according to many students and college loan officers, some of those private lenders were often picky in providing loans to students — granting some and denying others with identical financial resources. Some private lenders would even renege on loan commitments without bothering to notify the students or the school, they said.
“We found private lenders to be highly unreliable in providing loans to students,” said Tom Melecki, director of financial aid at the University of Texas. “We had private lenders that had promised their federally backed loans to our students, then would quit two days before they were supposed to send the money to the students having never notified the students or us that they no longer intended to make the loan.”
In leaving UT students “high and dry,” Melecki said, many had to make a difficult choice: either drop out of school or borrow from relatives.
Lindsey Coyne, who graduated with a master’s degree in journalism from UNT in 2010, racked up a dozen loans totaling more than $100,000 from private and government lenders. Working as a customer service representative at a mortgage company earning $30,000 annually, Coyne said she expects to live a Spartan lifestyle for years to come.
A quarter of Coyne’s annual income — about $7,500 — goes toward replaying her loans. That’s more than her $625 rent, and more than the 15 percent she’s required to pay back under the new federal student loan program. Coyne figures that by setting aside 25 percent of her monthly salary to pay off her loans 12 times a year, or $8,250 in total, she’ll be debt-free in just more than a decade.
Cunningham said financial literacy is key.
“Some of them don’t know what to ask the financial aid adviser. They don’t understand that it is so complicated,” she said.
Cunningham said a lot of students don’t really look at their options before getting a student loan or whether the loans will cover the cost of a degree.
“Having the credential is important. The ones without the credential default [on their loans] at a much higher rate than those who have their credentials,” she said. “That’s the crux of it.”
While students wait to see how the new changes will affect their loans, Coyne said she is likely to not acquire any more debt.
“I’ll drive my car until it will absolutely not run anymore,” Coyne said. “I won’t go on any vacations. … I’m dead set against accruing any more debt.”
In the meantime, Coyne plans on getting her teaching certificate.
“And should I be fortunate enough to procure a teaching job, the idea that as a result I would have loan forgiveness after 10 years,” Coyne said, “it’s almost too fantastic to even think about.”
KARINA RAMIREZ can be reached at 940-566-6878. Her e-mail address is firstname.lastname@example.org .
The federal government took over subsidized and unsubsidized student loans as part of a funding package that is supposed to help offset the cost of implementing the Patient Protection and Affordable Care Act. The reform brings new limits for student borrowing, detailed below:
Subsidized and unsubsidized
Total borrowing limit
Total borrowing limit
Total borrowing limit
Source: U.S. Department of Education
SERIES AT A GLANCE
• SUNDAY: An overview of health care as it stands today. A look back shows reform isn’t a new concept. Results of Massachusetts reforms show unexpected results.
• MONDAY: Small businesses react to new law. Reform spotlights need for faster results from research.
• TUESDAY: Prevention is key to curing cost concerns. Workers with no insurance take health into their own hands.
• WEDNESDAY: Physicians struggle to maintain their business model. Patients try “accountable care.”
• TODAY: Texas lags behind other states in setting up insurance exchange, while reform banks on student loans.
• FRIDAY: Mental health treatment remains fragmented, affecting physical health care. Texas county jails are primary provider of mental health services.