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Continued: Part 3: It's payback time

  • Article by: KARA MCGUIRE , Star Tribune
  • Last update: April 30, 2009 - 5:47 PM

Danni Hulme-Lowe lives in her in-laws' basement in Woodbury with no plans to move out soon.

With $94,000 in undergraduate student loans, nearly every dollar earned as a school portrait photographer goes to her $1,000 monthly loan payments. Money that could buy the young couple a house is tied up with Hulme-Lowe's loans.

Is her communications degree from Concordia University in St. Paul worth it? The 25-year-old has her doubts.

Having a college degree has been offered up as a key to middle-class prosperity. But now, with unemployment at 8.5 percent, some graduates are having a tougher time finding a job and making good on their college debts.

That has the Dannis of the world wondering where their college advisers were when they were taking on their student debt. Colleges have come under fire for cozy relationships with credit card companies and student loan providers. Lenders, too, face criticism that they have little to lose if a student borrows too much.

As debt loads mount, so does concern that student loan debt will be the nation's next financial crisis.

"It's unsustainable," said David Laird, president of the Minnesota Private College Council. "There's a limit to how much students can and ought to be borrowing."

Ask college officials to put a dollar figure on that limit and most say "that depends." But the amount has been growing exponentially.

Undergraduate borrowing increased 157 percent from 1997 to 2007, according to the Minnesota Office of Higher Education. In 2007, Minnesota undergraduates borrowed $1.08 billion, up from the $949 million in 2005. The proportion of private student loans -- offered by banks that generally have higher interest rates and less favorable terms than federal loans -- rose 52 percent over that same time period, to $211 million.

After four years, that adds up. At Minnesota's four-year colleges, the average student debt burden for a student in the Class of 2007 was $24,169, compared with an average of $20,098 nationwide, according to the Project on Student Debt.

A majority of students make their monthly payments, and students with sheepskins still tend to make more money than those without a college degree.

A graduate of a public college who borrows full tuition and fees will earn enough in 11 years to repay those loans as well as the cost of forgoing a paycheck while in school for four years, according to the College Board.

The default rate for students loans hovers around 5 percent nationally and is lower -- 2.8 percent -- in Minnesota, according to the Department of Education. But preliminary data show the national rate is rising, and some studies show the default rate is higher for low-income students, dropouts and those with more than $15,000 in debt.

Could schools help more?

No one told Hulme-Lowe she was taking on too much debt, she says.

Many colleges don't require face-to-face student loan counseling, although financial aid officers will sit down with a student if asked. The University of Minnesota will require it beginning this fall.

In response to a new state law, the Minnesota State Colleges and Universities system (MnSCU) and the University of Minnesota provide some personal finance advice to students. Both provide brochures and offer Web resources on topics such as budgeting and credit card debt. MnSCU's brochure touches on affording loan payments and not borrowing more than necessary. The U of M's brochure contains common sense advice such as "think before your borrow"; student loans are only mentioned briefly.

But Kris Wright, director of the U of M's Office of Student Finance, said the school does much more, from skits during orientation to having financial literacy month in October. "Just because we offer the information doesn't mean they will act on it," she said.

At Hulme-Lowe's alma mater, Concordia University in St. Paul, loan terms aren't detailed in award letters. Students are sent to the Web for a counseling session that Financial Aid Director Carolyn Chesebrough estimates takes 20 minutes at most. Online counseling for a private loan is even shorter. When Hulme-Lowe asked the financial aid office about her loans, she said, the answers were inconsistent and "very vague."

In the fine print

Hulme-Lowe said she didn't realize that most of her dozen student loans -- the bulk of them higher-cost private loans -- were accruing interest during the five years she was in school.

Because private loans are often marketed directly to the consumer, colleges often have no clue about a student's private debt.

While in school, Hulme-Lowe didn't think much about whether her loan burden was too great. "I thought [a degree] would help me get a job quicker." It took six months and hundreds of applications to land her $10.50 per hour gig taking school pictures for Eden Prairie-based Lifetouch.

Chesebrough, a 23-year industry veteran who took the Concordia job last year, said she doesn't doubt Hulme-Lowe's claims given the limited resources for training financial aid office employees.

"They're overworked, they're understaffed ... and they've got an incredible burden of trying to keep up with demand," said Phil Day, president of the Washington-based National Association of Financial Aid Administrators.

Financial aid applications are up, and so are pleas to reconsider financial aid packages from families suffering layoffs or investment losses.

As the parent of a college student, Chesebrough knows that not all 18-year-olds and their parents are financially literate. She has been thinking about adding in-depth financial education for students that would include discussion of how much debt they can afford to repay.

For now, an unassuming chart pinned up in the school's financial aid center does the job of estimating a student's monthly debt payment after school. If Hulme-Lowe had looked, she would have seen hers was in the four figures.

One rule of thumb for how much debt to take on is to limit it to your expected annual salary. Another benchmark is that monthly payments toward student debt should consume no more than 8 to 15 percent of a grad's income. Hulme-Lowe's payments take up more than 80 percent in a good month.

Pressure from watchdogs

Federal watchdogs are pressing schools to do more to protect student interests.

A national investigation by the New York attorney general's office in 2007 found numerous examples of college financial aid officers who took consulting payments from providers of student loans and served on lender advisory boards that offered trips, gifts and other benefits. The chief financial aid officer at Capella University, a for-profit online school based in Minneapolis, was fired after the school learned he was a paid consultant for one of its preferred lenders. Most other colleges in Minnesota said they avoid such relationships because of possible conflicts of interest.

The abuses led to codes of conduct for college financial aid employees and changes in the Higher Education Opportunity Act in 2008.

This year in Congress, Sen. Herb Kohl, D-Wis., is pushing to restrict the terms credit card companies could offer full-time college students under 21. It would limit students' credit limit to $500, or 20 percent of their gross annual income. Parents who act as co-signers would also need to approve increasing a student's credit limit.

The bill follows a 2007 Des Moines Register investigation revealing that two of Iowa's largest public universities had deals with their alumni associations to endorse and promote credit card sales to students. The University of Iowa gave Bank of America access to databases that contained mailing addresses, phone numbers and e-mail addresses for students, parents and customers who bought tickets for sports events.

University of Minnesota spokesman Dan Wolter said the university's alumni association does have an agreement with Bank of America that allows it to market to alumni, but not to students. Under the university's TCF Bank Stadium naming rights agreement, TCF Bank markets debit cards to alumni and season-ticket holders of Golden Gopher Athletics sports, but not students, Wolter said. "It is a rather tightly controlled relationship in that no lists are ever turned over to TCF," Wolter said. A third party mails out the solicitations on behalf of TCF after the university has approved all mailing materials, he added.

The thing parents and students have to remember, said Minnetonka-based college consultant Todd Johnson, is that college "is a business.

"It's in their best interest to get students in; it's not in their best interest to explain financial aid," he said.

Johnson's business, College Admissions Partners, helps families through the complex college process.

Johnson says that if parents better understood how financial aid varies from college to college, they would steer their children to better deals and that less-generous schools would see their enrollments drop.

But Johnson and other college-planning experts don't think colleges are wholly to blame. Many families start college planning too late and borrow money without thinking about the consequences.

"It's a split responsibility," said Day, from the national financial aid group.

Financial aid officers can make mistakes, Day said. But in his experience, students and their parents rarely complain that they get too much in loans. Instead, they complain about not getting more. "But madam parent, mister parent, you have to take some responsibility for this as well. It should not be falling totally on the financial aid staff."

Where lenders could help

It's hard for a lender to determine how much student debt is too much because there are so many variables for a student's future income, said Michael DeVito, who manages Wells Fargo Education Financial Services.

"We're making a loan to a student today on the belief that they're going to finish school, get a job, earn a salary and be able to pay that back," DeVito said.

Colleges and lenders say the onus really is on students to decide whether borrowing for school is worth it. "They've got to really be thoughtful about the financial obligations they're taking on," DeVito said.

Bankruptcy attorney Monica Clark sees parallels between student lending and the mortgage crisis now hobbling the country.

Borrowers believe they are taking on "good debt" that will improve their standard of living over time. Subprime loans with less favorable terms were pushed on unsuspecting borrowers of both types of debt in recent years. Repayment for student loans can be stretched out for 30 years, just like a mortgage.

But homeowners have options that students don't.

"What makes student loans much different is you can't give them back," said Clark, a bankruptcy attorney at Dorsey and Whitney. "So when you have students with incredibly burdensome amounts of debt, it's not like a foreclosure situation where you have a homeowner who can relinquish a house and be free."

Hulme-Lowe's mother-in-law, Sue Hulme-Lowe, couldn't believe how much her daughter-in-law was lent with next to no talk of what that burden would mean for her future.

She is angry that Congress agreed to let judges modify homeowners' mortgage balances in bankruptcy. "Students, with tens of thousands, maybe hundreds of thousands of dollars in debt, won't be able to do that," she said.

A former Realtor familiar with the Truth in Lending Act, Sue Hulme-Lowe points out that the act specifically exempts student loans.

"Young people who don't understand how loans work should be provided more information, not less, than people buying homes," she said. "It's nothing short of a scandal, really."

Kara McGuire • 612-673-7293

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