We must help our students avoid racking up so much school debt. Many students come to my office feeling scared and hopeless, begging me to help them with their mountain of debt, because they have graduated without finding a job or are working at such low-paying jobs that they are unable to make payments.
Let’s call them “students in need.” Their families are unable to financially assist them, forcing them to borrow unbearable amounts in student loans.
For instance, several students who had attended a for-profit school came to me for help. They had been told a few months before graduation that they would not, in fact, be graduating. They were left with more than $100,000 in debt and no prospect of employment in the field they had so diligently studied for. Another student was unable to pass the bar exam despite several attempts, leaving $150,000 of debt and no prospect of a profession producing a commensurate income.
Furthermore, student loans are never dischargeable in bankruptcy except in cases of severe physical hardship. This is abusive.
Our country has done more to help our failing big businesses, big banks and defaulting homeowners than we have done for young people who don’t understand the significant financial ramifications of borrowing for their college tuition.
Let’s review the facts. As of 2013, a student who chose to attend four years in the University of Minnesota undergraduate program would pay $101,496 ($25,374 per year) for tuition, fees, books, personal miscellaneous expenses, and room and board. Add another three years of law school at $176,338 for a total of $277,834 over seven years.
This is like a mortgage without a house.
If this student amortized a $277,834 debt over 25 years at 6.5 percent interest, the monthly payment would be $1,875 — $22,500 annually. Many new graduates are not making the income that would allow them to pay such student loans back, forcing many to use income-based repayment options or chronic deferment, causing interest to accrue exponentially.
Compare home mortgages to student loans. Current interest rates for 30-year home mortgages are fixed at around 4 percent and 15-year mortgages at around 3.3 percent. Federal student loans vary from 4.66 to 8 percent, and private bank student loans can charge up to 15.74 percent.
But, unlike with student loans, before the home buyer commits, the loan agency must submit an amortization schedule to inform borrowers of the principal and interest rate so they know exactly how much they will pay back each month. Unfortunately, the full amortization of a student loan is usually not provided to students until they are ready to graduate.
There are simple policy changes we should implement that would result in more financial accountability for colleges and universities and more informed choices for students and their families:
• First, interest charged on federal student debt should be set at the same rate charged to banks.
• Second, require a Truth in College Lending statement to accompany each loan, providing an amortization of the cost of the loan as it grows each semester and a projection of the final debt.
• Third, inform co-signers of the potential consequences of that obligation. For example, if the student defaults on the loan, the lender has the right to take payments out of the co-signer’s Social Security income until the debt is paid off.
• Fourth, inform the student of the fields best suited to pay back the loan and the number of graduates with jobs in that field along with their rate of pay.
• Fifth, encourage schools to provide more “no frills” education (low-cost classes and no program fees) like the online classes offered by Arizona State University.
• Sixth, provide our debt-burdened students access to bankruptcy protection programs.
We must end this predatory lending practice, or tuition debt will be the next financial tsunami. Too many of our graduates are already unable to buy homes, raise families and contribute to strengthening our economy.
Priscilla Lord is managing partner of Lord and Associates, has served for several years on the University of Minnesota Athletic Advisory Committee and has represented students with loan debt.