Generation Debt

I wrote this story for my final project as a beat reporter for the University Daily Kansan. It was published on May 7, 2008.

Kolby Lanning borrowed $55,000 in student loans to finance his first three years at the University of Kansas. He will have borrowed $200,000 more by the time he completes his senior year and dental school at the University of Missouri at Kansas City, Mo.

Adding in the compounding interest on his unsubsidized loans, the Independence junior figures he will owe about $300,000 when he begins his career as a dentist in 2011.

“It’s hard to believe your debt can add up that much in such a short amount of time,” Lanning said. “I guess I never really took the interest into consideration.”

As college tuition and living costs continue on a steady, upward spiral, Lanning will graduate into what some credit counselors are calling “Generation Debt,” made up of students who financed their college educations by taking out ever-increasing amounts of student loans.

A growing dependence on borrowing from private lenders has compounded the situation as these lenders make it easy to get larger loans. These loans come with higher-interest rates than federally insured loans, which are capped by the government. Those lenders are now becoming harder to find as the economy and new federal legislation are forcing a growing number of them to suspend their student loan programs.

According to the KU Office of Financial Aid, the accumulated student loan debt the average KU student carried after graduation grew from about $13,700 in 1996 to more than $20,000 in 2007. The report does not include private loan debt.

The College Board reports that private borrowing made up about 25 percent of student loans in 2007 ­— up from 6 percent in 1997.

Robert Baker, Lawrence credit counselor for the Housing and Credit Counseling Institute, said the increase in student borrowing was one of the reasons “a lot of people think this generation will have more debt than any generation since World War II.”

Scott Shepherd

Scott Shepherd, Independence senior, will be about $50,000 in debt when he graduates in May after borrowing $46,000 to finance his four years in the School of Engineering.

The interest on his unsubsidized loans, which average out to about 9 percent, have accrued about $3,300 more to his debt since he started borrowing.

Shepherd said he expected to make $50,000 to $70,000 per year as a mechanical engineer, but he planned to live on only $17,000 per year until he paid his debt.

“I think the best thing to do is live that same lifestyle I lived in college and work to pay down these loans as fast as I can,” Shepherd said. “The longer I wait to pay it all off, the more that interest is going to add up.”

Shepherd borrowed $7,000 in government loans to pay his freshman tuition while working part-time at a car-audio shop to pay his living expenses.

He quit his job midway through his sophomore year when his grades started slipping and took out a $10,600 loan from the SLM Corporation, more commonly know as Sallie Mae, the number-one private student lender in the United States. The interest on the private loan was unsubsidized at 10.5 percent, while his government loan was subsidized at 6.8 percent.

Although he could have borrowed up to $23,000 from the government, Shepherd borrowed the rest of the money he needed for college from Sallie Mae because the private lender offered an easier and faster process for getting his loans.

“There was just way too much paperwork involved in getting a loan from the government,” he said. “A Sallie Mae loan was literally just a few clicks away.”

Shepherd continued borrowing from Sallie Mae over the next three-and-a-half-years to finance his tuition, rent, food and other bills, until he had borrowed $39,000 in private loans.

He now owes the government $7,000 and Sallie Mae about $42,300, which will continue to add at least $300 more every month until he pays down a chunk of his debt.

He said looking at his Sallie Mae online account made him feel paranoid.

“It’s just a big number to look at and I feel like I don’t have much control over it,” he said.

Amanda Jansen

Amanda Jansen, Wichita junior, figures she will be about $27,000 in debt by the time she graduates in 2010 after borrowing $19,000 in federally insured loans and $8,000 from her dad to finance her journalism degree.

No interest will have accrued on her loans until after she graduates because she plans on taking out only federally insured loans that are subsidized while she’s in school. The interest on her government loans won’t come into play until after she graduates in 2010, when new legislation passed in 2007 will drop her 6.8 percent interest rate to 4.5 percent. The interest will start adding about $100 to her debt every month.

“I have no idea how long it will take me to pay it all back,” Jansen said. “It’s a very scary thought.” Jansen said she planned on working in public relations. According to PayScale.com, the starting median salary for a public relations executive was about $34,000. She could pay off all her debt in 10 years making $204 monthly payments, which would be about 7 percent of her projected monthly income.

Jansen’s dad paid her tuition for both her freshman year and the first-semester of her junior year. She’s financed the rest of her tuition using $8,000 she borrowed in federal loans, $2,500 she received in grants and $8,000 she borrowed from her dad to finance a study abroad trip to Italy this semester.

Instead of using loans to pay her living expenses, Jansen worked full-time at Britches Clothing, where she made $9.25 per hour. “Having a job while I’m in school is the only way I can afford my living expenses,” she said.

Jansen plans on working full-time this summer at a restaurant in Wichita where she’ll live at home and save money so she won’t have to borrow more than $11,000 to pay her last two years’ tuition.

She hopes for more grants over the next two years so she can borrow even less.

“I’m trying to avoid borrowing as much as possible so I don’t owe as much when I graduate,” she said. “It’s scary to think about but compared to most others, I guess it’s not as bad as it could be.”

Adam Wood

Adam Wood, Lawrence junior, said he had already borrowed about $21,000 in federally insured loans, and figured he would probably have to borrow about $20,000 more to finance his last two years at the University.

He said he would probably be more than $40,000 in debt when he graduated in 2010.

“I try not to worry about my financial situation as much as possible because no matter how much I worry, it’s still going to be there,” Wood said. “The only thing I can really do is work as much as possible while I’m in school.”

Wood borrowed $4,300 to finance one semester of his freshman year, but health problems forced him to take his second semester off after being in the hospital for about a month.

He worked full-time the rest of that semester and the following summer at Qdoba Mexican Grill, to save up money for his sophomore year.

Wood borrowed $6,600 to finance tuition his sophomore year and worked about 30 hours per week answering phones at Affinitas to afford his living expenses.

He borrowed another $8,500 his junior year after he quit working so he could volunteer his time to Kansas Students for Ron Paul, which he said ate up about 40 hours of his week.

He needed to use his loan money to finance living expenses this semester after he decided to organize a student coalition, Students of Liberty, and ran for student body president.

He soon found himself broke and needed to take out another $1,500 loan to pay his rent and eating expenses.

“There were a lot of times I looked in the refrigerator and I had literally nothing to eat,” he said.

The stress and lack of sleep from balancing school, work and Student Senate obligations prompted him to visit Watkins Memorial Health Center in March.

“When you’re getting no sleep, you’re really stressed and on top of that, you have no money to buy food, you really can’t function that way for long,” Wood said. “I think this semester was the first time I ever thought about robbing a grocery store,” he said jokingly.

Wood now works at the Hawk Shop in Watson Library, where he’s struggling to meet his financial obligations until he makes it to the summer when he can start saving money for next year.

“If I can make it to this summer, I should be fine,” he said, “But, even then, stuff always comes up.”

Julie Connolly – Living with Debt

Julie Connolly, who is five years out of college and works full-time styling hair at Headmasters, is paying back the $28,000 she borrowed to finance her KU undergraduate degree and to attend cosmetology school in Chicago. The interest had compounded her debt to about $35,000 by the time she graduated in 2003. She still owes $26,000.

Connolly said she paid $214 of her student loan debt every month but only $50 of that paid for principal while the other $164 paid the interest.

“My goal is to pay back all of my student loan debt by the time I’m 40 years old,” she said, “But I’ll probably be paying back at least some sort of debt for the rest of my life.”

Connolly moved overseas after she graduated from high school and attended University of Maryland classes in Germany, where her dad was stationed in the military.

She borrowed about $10,000 over two years from Nelnet to finance her tuition and worked full-time as a bartender, which covered her living expenses.

She transferred to the KU School of Theatre & Film in 1999 where she said she borrowed about $9,000 from the government to finance three years of tuition and worked full-time at the Kansas Union to pay her living expenses.

She decided to switch gears in 2002 and moved to Chicago, where she borrowed another $9,000 from Sallie Mae to attend Pivot Point International, a cosmetology school.

“I decided one day that what I really wanted to do was hair and makeup and they didn’t have that program at KU so I went to Chicago,” Connolly said.

She said she used part of her loan money to pay $140 per month toward the interest on her Sallie Mae loan, and when she graduated in 2003, she owed Nelnet about $16,500, Sallie Mae about $9,000 and the government $9,000 — a total of about $34,500 in debt.

“I’m not really sure what my plans are for the future,” Connolly said. “For now, I’m just trying to enjoy myself while I climb out of debt.”

Where the industry is headed

Lanning said he had planned on borrowing the $200,000 he needed for dental school from GMAC Bank, which also lent him the $55,000 he’s already borrowed.

The only problem: GMAC Bank no longer makes student loans.

“It sucks because all the money I borrowed I owed back to one company and now I have to find another lender and it’s a huge pain,” Lanning said. “I don’t know where I’m going to get the money now.”

As capital continues to dry up in the global credit market, the availability of cash for student loans is drying up as well.

Mark Kantrowitz, publisher of FinAid.org, said a combination of thesubprime mortgage credit crunch and new federal legislation limiting profits for private lenders caused a growing number of lenders to suspend their federal or private loan programs.

He said this trend began when investors, spooked by an increase in defaults in the subprime lending industry, began pulling out of the asset-backed securitization market in August 2007. Asset-backed securitization (ABS) provides lenders with the liquidity needed to issue loans, plus some up-front profit, known as a premium.

Kantrowitz said that as turmoil spread from subprime-mortgage securitizations to the rest of the market, demand dropped and education lenders found it harder to find investors to secure their loans.

Lenders get money from investor and the then lend that to students.

“The capital market that’s supplied the money has been drying up, so when these lenders run out of money, they have to stop issuing loans,” he said.

On top of that, Congress also passed the College Cost Reduction and Access Act in July 2007, which Kantrowitz said cut the subsidies it paid lenders to encourage them to issue student loans. He said congress used the savings from these cuts to increase the availability of government grants and cut the interest rates on its subsidized loans.

Kantrowitz said the credit crunch and the new legislation have prompted 73 lenders, which represented about 14 percent of the federal loan volume and 76 percent of federal consolidation loan volume, to suspend their student loan programs.

He also said the interest rates will rise by about 1 percent on private student loans that aren’t federally insured as lenders who stayed in the business try to compensate for their losses.

He also said student with bad or marginal credit will be denied private student loans.

“There’s no signs of the problems getting better so it’s going to continue,” he said.

According to the National Association of Student Financial Aid Administrators (NASFAA), the government is attempting to offset this loss of private loan money by injecting $11.4 billion into its Federal Pell Grant Program over the next five years.

NASFAA reports that the money will be used to gradually increase the maximum government grant from $4,310 to $4,731 per student for next year and to $5,400 by 2012. It will also gradually cut the interest rates on its subsidized loans from 6.8 percent to 6 percent next year and to 3.4 percent by July 1, 2012.

Kantrowitz said the U.S. Department of Education should be able to absorb the influx of students who need financial aid, but, “It’s never been tested at this level before so it’s unclear whether it will be able to handle it,” he said. “In other words, you could call them up and have a busy signal for hours.”

While it will likely be easier for students to pick up extra government grants, it also means students, such as Lanning, who need more than the $65,000 the government will lend him, will have to turn to the few remaining private lenders for higher-interest, unsubsidized loans.

According to the U.S. Department of Labor statistics, the median salary for a dentist is about $136,000. If the interest rates on his loans don’t change, he should be able to pay off all his debt 10 years after he graduates by making monthly payments of about $3,476 ­— roughly 30 percent of his projected, monthly salary.

“I feel like I better kick in my sixth gear and keep trucking through school to become a dentist so I can live the good life and still pay back all these loans,” Lanning said.

— Edited by Matt Hirschfeld

Published in the University Daily Kansan on May 7, 2008

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