Hard Lessen

One Word: Plastic
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Greetings, new and returning college students. The years ahead will be full of learning and exploration, an exciting journey of self-discovery, etc. etc.

After you graduate, though, things are probably going to suck.

When you enter the job market, you'll likely be saddled with the kind of debt your parents would have blanched at. There's even a name for you: "Generation Debt," which is the title of not one but two recently published books. One, written by Anya Kamenetz, argues that thanks to mounting debt, young adults "are spending more time moving in and out of school, finding and losing jobs. Some of us move back home, and we put off marriage, children, and home buying."

And your college education ... that key to prosperity ... is probably a big reason why.

I say this as someone who racked up a five-digit sum in student loans myself. By the time I finished paying them off, I'd taken a second job ... teaching part time at the college where I'd incurred the debt in the first place. Some of my students, meanwhile, were paying their bills by doing work-study in the school's admissions office ... recruiting the next round of suckers. A couple of my graduating seniors were thinking of taking jobs at the school even after graduation.

In other words, a college campus can be a bit like a plantation. And not just because of the nice landscaping.

Compared to my students, I had it easy: In the past decade, higher education costs have soared, as has student debt. The number of students who take out student loans is spiraling, as is the size of those loans (see chart, "Borrowed Time"). Today, two-thirds of students borrow to pay for college, and the average student owes nearly $20,000 ... a jump of 60 percent in fewer than 10 years.

Paying those loans off is only getting harder: Over the summer, the interest rate on Stafford loans, the federal government's subsidized college-loan program, jumped from 5.3 percent for loans issued last year to 6.8 percent. Meanwhile, the University of Pittsburgh raised tuition another 6 percent, part of a nearly 50 percent increase over the past five years. Tuition at Penn State's main campus, already the most expensive state-funded flagship school in the country, posted a similar increase.

But take heart: Your misery is bankrolling the profits of some of the country's largest corporations. And your debt reflects everything from who occupies the White House to the collapse of the local steel industry. This "Back to School" issue will show you how that is, along with offering some tips to save you a few bucks. Because if you're going to rack up $20,000 in debt ... and you probably are ... you may as well learn something from it.



Let's say this up front. As crappy as it is to start life 20 grand in debt, it's usually even worse to start with no degree.

"If you have a bachelor's degree instead of a high school degree you earn $1 million more over a lifetime," says Mark Kantrowitz, the Cranberry-based publisher of a financial-aid Web site, www.finaid.org. (The site allows visitors to search for scholarship information, calculate loan repayments and otherwise reconcile themselves to the yoke of student debt.)

Ronald Wirtz, a researcher at the Federal Reserve, has suggested that borrowing for college "might not be quite the devastating act it's made out to be. For example, research suggests that increased loan debt actually has a positive effect on critical matters like ... degree completion." (Presumably because the only thing worse than graduating with massive debt is not graduating with massive debt.)

While it's foolish to go in too deeply, worrying too much about debt can be almost as dumb.

"You often hear about students taking a year off so they can earn some money by working, because they don't want to take on more debt," says Donald Heller, of Penn State's Center for the Study of Higher Education. "But for most students, if they get a degree and a decent job, it makes more sense to just borrow the money, go straight through school and get out into the labor force," where the degree can start paying for itself as soon as possible.

Even so, Heller says, "Students considering lower-income careers ... day care or social work ... have to be careful."

Indeed, an April 2006 survey by the Public Interest Research Group suggests that "burdensome debt likely deters skilled and dedicated college graduates from entering and staying in important careers" ... especially low-paying jobs in social work. Masochistic liberal-arts majors (is there any other kind?) can spend gloomy hours on Kantrowitz's Web site, seeing how much debt their degree can support. A student seeking a degree in English, for example, is urged to borrow no more than $32,306.69. Computer-engineering geeks, meanwhile, can support $54,421.99 in loans.

Plus, "For some people, this is the worst kind of debt you'll ever have," says Caryn Bilotta, of the Consumer Credit Counseling Service of Western Pennsylvania. It starts coming due, after all, just as you enter the workforce. It can squeeze you even harder if you've already racked up credit-card debt in college (see sidebar, "One Word: Plastic.") And, says Bilotta, "It can be overwhelming just to think how much you owe."

Bilotta notes that even if you've already taken out a loan, you can still reduce the post-graduation sticker shock. "Even if you've started school, it's not too late to look into different kinds of scholarships and grant opportunities," she says. And while federal loans offer a six-month grace period after graduation before the first loan installment comes due, Bilotta recommends you "pay as soon as you can." Every dollar you pay ahead of time, she notes, reduces the amount of principal you'll be charged interest for.

As your financial-aid officer has no doubt told you, college loans typically offer flexible payment plans, and student loan officers "are reasonable," says Bilotta. Federally backed loans "have deferment programs. If you're about to face a layoff, for example, you can call up your student-loan people and get a deferment."

But be warned: Interest rates keep piling up. When you find a new job, your debt will be even bigger than before. And the kid-gloves approach can conceal an iron grip.

"No Way Out," an ominously titled 2006 report by the National Consumer Law Center, notes that "The government can pursue borrowers to the grave." Student loans must be paid back ... even if you go bankrupt. Moreover, the government can garnish future wages, seize your tax refunds, and deny eligibility for future government assistance. "Unlike other types of debt," the report notes, "there is no statute of limitations."

In other words, you almost have a better chance of getting away with bank robbery than of dodging your student-loan debt.



Those strong-arm tactics have had an effect. In the 1980s, before the law enabled such collections measures, 1 in 5 students defaulted on their loans. Today, Kamenetz reports, the default rate now is down to 1 in 20. And not surprisingly, complaints are appearing in books like Kamenetz's and Web sites like studentloanjustice.org.

What's more, student loans are now big business ... and almost risk-free, since they're government-backed and bankruptcy can't erase them. In 1972, the federal agency chartered to issue student loans, Sallie Mae, went private. Today, Sallie Mae is a Fortune 500 corporation that earned $6.5 billion in revenue last year. Its CEO, Albert Lord, is notorious for building his own private 18-hole golf course. If you ever wondered where all those interest payments go, well, that might be part of your answer.

In the dizzying world of student debt, even government agencies act like corporations. Take the Pennsylvania Higher Education Assistance Agency (PHEAA).

Created by state government and governed by a board packed with state legislators, PHEAA boasts of aiding 150,000 students through one grant program alone. It is the state's largest college lender, and since it doesn't have stockholders to please, Kantrowitz says, "It gives better benefits to borrowers than for-profit firms do. Their 'profits' go to borrowers" in the form of aid.

Still, PHEAA's CEO, Richard Willey, made headlines last year for pulling in $437,603 in salary and bonus. That's small potatoes compared to Sallie Mae's Lord, who earned $33.6 million in one year, but it's enough to make Willey the state's top-paid official.

Moreover, this summer PHEAA denied reporters access to financial records detailing travel junkets and entertainment expenses ... records other government agencies release routinely. The reason: As PHEAA has put it in legal filings, "Disclosure of any PHEAA trade secrets to a competitor ... would likely cause PHEAA to lose [its] competitive advantage."

If a government agency talking about "competitive advantage" sounds strange, consider this: In 2004, PHEAA was the subject of a hostile takeover attempt by ... Sallie Mae. While Sallie Mae offered lucrative financial incentives to state officials, PHEAA fended off Sallie Mae's offer. (The for-profit firm has been diversifying into other industries. Like, for example, the lucrative business of loan collection.)

Such shenanigans, say experts, offer a cautionary tale. One of the little ironies of college life is that students give competing beer specials more scrutiny than their five-digit loans.

Taking out a college loan, warns credit counselor Bilotta, "Can be like walking into a store and buying a T-shirt ... and then five years later finding out the shirt cost you $700."

Most colleges recommend to students a list of preferred lenders, and students frequently go with the first firm on the list, rarely checking to see if better deals are available. Few financial-aid officers are out to screw you, but they can be set in their ways. And that can cost you down the road.

Kantrowitz, for example, lauds one upstart newcomer to the student-loan industry: My Rich Uncle (www.myrichuncle.com). The for-profit firm, for which Kantrowitz formerly served as a consultant, offers some of the cheapest loan rates in the country. Right now, the company is offering loans with 5.8 percent interest rates ... a full percentage point below the going rate for federal Stafford loans.

The company has taken out full-page advertisements in national newspapers, challenging students to ask financial-aid officers questions like, "Do you participate in a revenue-sharing program with any lenders?" (Such programs, the ads assert, are "known as 'kickbacks.'") The ads haven't endeared themselves to financial-aid officers, but company spokesperson Karin Pellman says they're "intended to give students and parents some transparency. Preferred-lender lists can be anti-competitive."

Schools using preferred lenders ... or offering loans themselves ... may not be up to anything nefarious. They may, for example, recommend lenders they know are reliable, and plow "revenue-sharing" money into scholarships. Still, says Pellman, even in such cases, "You're funding one student by raising prices on another. Price is the thing that parents and students are most sensitive about."

But My Rich Uncle is out to make a buck too, and Kantrowitz acknowledges that the firm complains about preferred-lender lists because it appears on few such lists itself. The future of student debt is likely to become even more cutthroat. Consider, for example, the revolutionary financing concept on which My Rich Uncle was originally founded: allowing private investors to pay for students' educations directly ... with students pledging some of their future wages to someone else. The concept, known somewhat creepily as "human capital," has been shelved for now: "It's an idea whose time was too soon," Pellman says. Investors were cool to the concept, she says, and "I've heard people call [the arrangement] indentured servitude. But really, what's a loan?"

Good question.



Another good question: How did we get to this point? How did the ivy-covered halls of academia attract the interest of Wall Street? How did college get so expensive in the first place?

Students are fond of blaming the salaries earned by college presidents, or the money spent on new buildings. Conservatives like to blame ... all that student aid.

"Higher education tuition began to soar at about the same time our politicians decided that the government should make it possible for virtually everyone to go to college," opined Radley Balko in a July column for the Commonwealth Foundation, a conservative Pennsylvania think tank. "Most colleges today have far more applicants than slots in incoming freshman classes," so "there's no incentive to keep costs low."

Actually, say researchers, it probably works the other way around: The profusion of financial aid stems from the sheer number of people desperately trying to get into college. Students and conservative critics, they say, are both too cynical and not cynical enough. Education may be big business, but it's caught up in even bigger political and economic trends.

Take a look around your next intro-level class. See that kid not paying attention? The one you know hopes to just skate by and get his diploma? In some ways, he's jacking up the price of your tuition. A few years ago, he might not have been there at all.

"Our economy has undergone a fundamental shift in the past generation," says Penn State's Donald Heller. "In Pittsburgh and elsewhere, manufacturing jobs have gone offshore." So if you want a decent salary, college is increasingly the only game in town. That influx of students means there is less aid to go around.

Take Pell Grants, a federal subsidy students don't have to pay back. Over the past decade, the federal government has more than doubled the money available, according to the College Board. But the number of students seeking the aid, combined with the cost of tuition, has increased even more. Today, Pell Grants cover only about one-third of the recipient's college costs ... down from nearly three-quarters in the 1970s.

For the Pell program to keep pace with increasing tuition, says Kantrowitz, it would need somewhere between $10 and $15 billion. That's a lot, he notes, but "We're spending a lot more than that in Iraq."

Which brings up the other reason student debt is increasing: Politicians don't care that much.

More and more government aid, after all, is in the form of loans rather than grants (see chart, "Strings Attached"). During the Bush administration alone, aid in the form of loans has increased by nearly half ... more than twice the rate of increase for grants. As a result, the maximum amount you can receive from a Pell Grant hasn't changed in four years.

Increasingly, students are seeking grants from schools themselves. But unlike the Pell Grants, Heller says, most of this aid is based on students' merits, rather than need. Why? Because offering financial incentives to top achievers makes schools look better where it really counts: in the "college rating" guides.

Such guides measure a school's prestige by the grades and SAT scores of its students, Heller says. So "At many institutions, aid is being driven by the desire to attract students that move them up the US News & World Report rankings." According to Heller's research, between 1995 and 2004, college spending on merit aid exploded by more than 200 percent; grants to the neediest students, meanwhile, grew by less than half.

Politicians at the state level are following suit: In states like Georgia, government aid is being directed to high-performing students from middle- and upper-class families ... those who need help the least. The trend is less noticeable in Pennsylvania: "We tend to be more progressive in some ways, even though we don't think of ourselves that way," says Heller.

Otherwise, though, we have little to boast about. According to Illinois State University's Center for the Study of Education Policy, Pennsylvania ranks 44^th among states for per-capita taxpayer support of higher education. And at state-supported schools like Penn State or Slippery Rock, Heller says, "The number-one driver of tuition increases has been the [declining] amount of aid provided by state government."

Yet despite all the carping about college costs, higher education hasn't been an issue in this year's election for Pennsylvania governor.

Incumbent Ed Rendell touts a $75 million increase in grant funding, and the state's current budget boosts money for colleges by nearly 6 percent, or $111 million. Those increases helped keep tuition hikes down at state-supported schools like Slippery Rock, but weren't enough to forestall hikes at Pitt and Penn State.

In fairness, Rendell is working with a Republican-controlled legislature, and inherited the funding gap from Republican and Democratic predecessors. Nor does his opponent, Republican Lynn Swann, figure to be much more help: Swann's 143-page campaign book, A New Direction, makes no mention of higher-education costs.

So who will advocate for you and your classmates?

"If students got together and demanded more aid, they'd get it because they could be the swing vote in every state," Mark Kantrowitz says. "But they don't vote as often."

That may be the most important, and painful, lesson students have to learn.