High-priced student loans cause headaches for grads, economy

The near doubling in the cost of a college degree the past decade has produced an explosion in high-priced student loans that could haunt the U.S. economy for years.

While scholarship, grant money and government-backed student loans – whose interest rates are capped – have taken up some of the slack, many families and individual students have turned to private loans, which carry fees and interest rates that are often variable and up to 20 percent.

Many in the next generation of workers will be so debt-burdened they will have to delay home purchases, limit vacations, even eat out less to pay loans off on time.

Kristin Cole, 30, who graduated from Michigan State University’s law school and lives in Grand Rapids, Mich., owes $150,000 in private and government-backed student loans. Her monthly payment of $660, which consumes a quarter of her take-home pay, is scheduled to jump to $800 in a year or so, confronting her with stark financial choices.

“I could never buy a house. I can’t travel; I can’t do anything,” she said. “I feel like a prisoner.”

A legal aid worker, Cole said she may need to get a job at a law firm, “doing something that I’m not real dedicated to, just for the sake of being able to live.”

Parents are still the primary source of funds for many students, but the dynamics were radically altered in recent years as tuition costs soared and sources of readily available and more costly private financing made higher education seemingly available to anyone willing to sign a loan application.

Rocketing tuition fees made borrowing that much more appealing. Consumer prices on average rose less than 29 percent over the past 10 years while tuition, fees, and room and board at four-year public colleges and universities soared 79 percent to $12,796 a year and 65 percent to $30,367 a year at private institutions, according to the College Board.

Scholarship and grant money have increased, yet for almost 15 years, the maximum available per person in government-guaranteed student loans, which by law can’t charge rates above 6.8 percent, has remained at $23,000 total for four years.

Dr. Paul-Henry Zottola, a 35-year-old periodontist in Rocky Hill, Conn., faces paying $1,600 a month on his student loan on top of a $2,300 mortgage payment and $1,500 on the loan he took out to start his practice.

His credit record remains solid but he owes more than $300,000 in student loans.

“It would be very easy to feel crushed by it,” Zottola said in an interview. “All my income for the next 10 years is spoken for.”

Ask your lender

Questions to ask lenders:

¢ What is your lowest interest rate and fee combination and how can I get it? Is the rate only for a limited period, or is it for the life of the loan?

¢ Is there a limit on how high the variable rate can go? How often is the interest rate adjusted, and how is it determined?

¢ What interest rate can I get on a fixed-rate loan?

¢ How long will I be repaying the loan? Is there any penalty for paying it off early?

¢ When do I have to start making payments? How long can I defer payments while I’m in school? If I go to graduate school and defer payments, how much will I owe when I do start making them?

¢ Will I lose my discount for paying on time if I have only one late payment or if I ask for a change in the payment schedule?

¢ What proportion of your borrowers get the discounts you offer? Are your discounts guaranteed?

¢ Would you allow me to defer or reduce my payments temporarily because of economic hardship? Under what circumstances and for how long?

¢ How much can I borrow without reducing my eligibility for government or institutional aid?

Source: Project on Student Debt of the Institute for College Access and Success