Deep in debt
Illinois students struggle to repay loans
When Shelley Pethy started college in the early '80s, the process seemed simple. The Springfield native went to a local bank, filled out a few applications, and acquired loans to fund her associate's degree in fine arts at Springfield College. She went through the process again in 1995 when she enrolled at University of Illinois at Springfield to attain her bachelor's degree in anthropology.
But, Pethy says, she quickly found out after graduation that repaying the loans was what was complicated. When she got divorced and began raising her kids as a single mom, she couldn't afford to send monthly checks to the bank. She applied for and received an economic hardship deferment to halt payments and accruing interest.
In 2003 Pethy returned to UIS to get her master's degree in human services. She enrolled as a full-time student and worked part time, and applied for the maximum amount of loans to help support her family. This time the procedure was different, Pethy says. Her old loans had been sold to the Student Loan Marketing Association, or Sallie Mae, and thanks to legislation at the time, she was required to go through her "original" lender when she took out loans for graduate school. She faced a similar situation in 2005, Pethy says, when she moved to consolidate her loans.
"I ended up with several different
loans," Pethy says. "There was a big push for people to
refinance and consolidate loans. I was getting calls from other loan
companies, some were low-interest loans at 3 percent. But the law had
changed, and I could only consolidate with my original lender."
Even though Pethy didn't want to consolidate at Sallie Mae's then-steep 5.5 percent interest rate, she says, neither did she want to have five or six loans with different interest rates floating around unpaid. She called Sallie Mae and consolidated her loans using an Internet application.
Looking back now, Pethy calls the consolidation
process a "messed-up situation."
"I'm on the phone, at work, and I wanted to get it done," she says. "I thought I could call someone and talk about my options, but instead I had a customer service representative direct me to a form on the Web site. I didn't know answers to my questions, but I felt like I had to finish it.
"I ended up agreeing to things that I
didn't have time to think about. How many years did I want to pay?
Which payment options? I couldn't decide right then if they were good
Like Pethy, many college students don't know what they're getting themselves into when they apply for loans or make repayment decisions later. Financial aid professionals say the situation is further complicated by students borrowing more money, to compensate for rising tuition. According to the Illinois Student Assistance Commission, in 1997 students paid $3,629 to attend a public four-year school. Just ten years later, that figure had increased to $7,875. Tuition at private four-year schools has increased from $13,036 in 1997 to $22,311 in 2007.
The problem worsens for students who can't find a job or who suffer from personal or other economic difficulties. Currently, applying for deferments is their safest option. Neither private nor federal loans are dischargeable by bankruptcy, and if students stop sending payments and let their loans default, interest can accumulate and the Internal Revenue Service may get involved.
U.S. Sen. Dick Durbin, D-Ill., became interested in student loan snags and has introduced and won approval for several initiatives over the past two years. He was behind legislation that reduced interest rates on need-based federal loans, and his most recent efforts involve safeguarding students' financial security.
"Education is essential to moving into middle
class and beyond, but it's getting so expensive," says
Christina Angarola, Durbin's spokesperson. "He feels that these
education costs are increasing at a pace that makes it difficult for
students to keep up, and a lot of things can be done legislatively to keep
those costs to a reasonable level."
Andy Davis, executive director of Deerfield-based ISAC, makes it his job to know the ins and outs of college financing. His organization's mission is to make college affordable for Illinois students through federal and state loan programs, scholarship opportunities, a prepaid tuition plan, and the Monetary Award Program, an almost $400 million fund that provides need-based grants — that do not need to be repaid — to Illinois students who attend approved colleges.
Even though these options are available, Davis says, many students aren't aware of them and of their potential to reduce the cost of education. Students who don't fall into the category of "high-need" could apply for some of these programs instead of relying on pricier loans through banks and other private lenders.
"There are a number of folks who do not apply
for federal aid that they're eligible for," Davis says.
"We estimate that nearly $200 million a year of federal grant money
goes unapplied for in the state of Illinois."
More awareness is needed, Davis explains.
"The professional financial aid community gets stuck where they spend so much time talking about the challenge of needing the tuition, which has been going up, that some folks get the mixed message that there is no hope," he says.
According to ISAC, the highest-need student going to school in Illinois would be eligible for at least $10,000 in financial aid. That's not even counting the variety of scholarships that many schools and organizations offer, Davis says, like those for students who play the flute or descend from a Civil War veteran.
There's a huge difference, he adds, between the cost of tuition and what most families can afford to pay out of pocket, especially as the mortgage crisis, unemployment, and rising oil prices pummel the economy. ISAC estimates that $1.2 billion in loans was guaranteed to Illinois students last year, compared to $448 million that was awarded in scholarships and grants.
Gerard Joseph, UIS student financial aid director, confirms that he's witnessed a similar trend. During the school's 2006-2007 academic year, 1,846 UIS students borrowed more than $13 million through the Federal Family Education Loan Program, an initiative that allows students to tap federally guaranteed monies from approved private lenders. Forty students borrowed nearly $211,000 more in private alternative loans.
While UIS provides students with loan counseling, debt management, and financial planning sessions, Joseph says that "most are shocked when they realize how much student loan debt they accumulated pursuing a college degree." His staff advises students to minimize borrowing, he says, but unfortunately loans are usually needed to meet educational and living costs.
Davis of ISAC agrees that students should borrow as little as they need to finance college. Some borrow too much, he says, to pay for luxuries like bigger, off-campus apartments or new cars. Some students take out loans, but don't finish school. It's these students especially that suffer the consequences, Davis says.
"The worst place of all is to end up with a
large debt and ultimately dropping out of school," Davis says.
"Most of the really horrendous cases of people being overwhelmed by
debt involve the combination of large debts
"Once you get to that place, it's a
difficult place to be."
If students can't repay their loans, they eventually go into default. Defaulted loans are assigned to the federal government, which can then garnish the responsible student's wages and federal and state income tax refunds. If the student holds a medical or other professional license, it can also be stripped until the balance of the loan — including interest that has accrued during the entire default process — is paid.
"The way the laws are written," Davis
says, "there is not a lot of relief. What we would counsel people,
the best way to protect against that is don't borrow more than you
need and stay in school until you complete. Those are the watch words, the
best we can do."
Beginning in 1978, Congress made federally guaranteed student loans non-dischargeable in bankruptcy. At first students could discharge these loans after a five-year period or if they proved extreme hardship. Congress extended the limit to seven years in 1990, but then in 1998, it eliminated these exceptions.
The Bankruptcy Abuse Prevention and Consumer Protection Act became law in 2005, revamping the bankruptcy code and further tightening the reins on student borrowers. The new legislation allowed private loans to be non-dischargeable in bankruptcy.
Even though private lenders such as Sallie Mae, which announced in April that it would no longer offer federal loan consolidations to students, have begun to back away from the student loan operation, most lenders still advocate to exclude student loans from bankruptcy filings.
In June 2007 Durbin introduced legislation to eliminate private loans from protection from bankruptcy. Federal loans should be protected, since they are taxpayer-funded, he said, but private loans involve private profit and gain from student defaults. The bill has been strongly opposed by banks and lenders and has not yet moved forward.
"Private student loans are incredible
moneymakers for loan companies, and students end up saddled with sky-high
interest rates and mountains of debt," Durbin said in a press
release. "I don't think many 17- or 18-year-old students
realize the long-term impact of their loan decisions. Some of these private
loan repayment schedules – with their double-digit interest rates
– can follow a student borrower from graduation to the
Durbin has said that the law needs to be changed for a few reasons. First, it's unfair for student loan lenders to receive bankruptcy protection while other lenders do not, and second, there is currently no risk for private companies that lend to students who may not be able to repay.
The senator got involved with the college financing issue in 2007 with the passage of the College Cost Reduction Act. As a response to the then-Republican-led Congress' decision to cut $12 billion in federal student aid programs, Durbin proposed reducing the interest rate from 6.8 percent to 3.4 percent on need-based federal loans for undergraduate students over the next four years.
Two other Durbin initiatives – included in the reauthorization of the Higher Education Act – were recently approved and are currently awaiting President George W. Bush's signature to become law.
One of them, the Student Loan Sunshine Act, prohibits private lenders from offering gifts such as travel, lodging, and entertainment to college financial aid offices in return for their inclusion on "preferred lender" lists. The legislation also grants the government full disclosure to the reasons why private lenders are included on these lists. It's become clear, Angarola explains, that lenders and college financial aid offices don't always act in the best interests of students.
The second bill, the John R. Justice Prosecutors and Defenders Incentive Act, marks Durbin's attempt to fill the employment gap and allow students to choose work without worrying about low salaries. Durbin's new legislation offers students who sign on as prosecutors and public defenders $10,000 a year to pay on their loan debt. A minimum of three years of service is required, but students could earn as much as $60,000 on top of their regular salaries.
"It's a good way to keep people working
in the industry," Angarola says of Durbin's initiative,
"and just one small example of something that he's
Pethy didn't get that kind of chance. She dropped out of graduate school, raised six kids, and now works for the Illinois Lottery. She faces a mountain of debt that remains in deferment until at least October.
"Sixty-five thousand dollars later," she
says, "I'm just a secretary."
Pethy doesn't regret making the decision to go to school. Even though she doesn't have the job she thought she would have, she says, she's happy for her education and more than willing to pay for it.
What she thinks is wrong, Pethy continues, is the difficulty she and many other students still have with the student loan process.
"I feel like if I went and got a car loan, we would discuss it and I would know what I was getting into," she says. "A student loan is very fuzzy, and you don't know what you're doing in order to go to school.
"You think you have time to get out of school
and get yourself together, but you don't. What do you do at that
Contact Amanda Robert at firstname.lastname@example.org.