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USA TODAY
February 23, 2006 Thursday
FINAL EDITION

SECTION: MONEY; Pg. 1B

Students suffocate under tens of thousands in loans;
Higher interest rates hurt those forced to borrow as gap between aid, costs
grows

BYLINE: Sandra Block

Tom Dillon, 19, a pre-pharmacy major at the University of Connecticut, is
carrying $52,000 in student loans. And he's just getting started. When he
gets his pharmacy doctorate in four years, he expects his debt to exceed
$150,000.

Dillon's been drawn to pharmacy since age 5, when he found out he had
epilepsy.

"The first person who helped me was my pharmacist," he says. Dillon, who no
longer has epilepsy, would like to go into pharmaceutical research. But he
knows he'd earn more money as a pharmacist for one of the big drugstore
chains.

"When I get out, I'm going to have that $150,000 weighing over me," he says.
"What I decide is going to be dependent on that debt."

And the cost of that debt is about to rise. On July 1, the rate on new
federally guaranteed student loans will hit a fixed 6.8%, the highest rate
since 2001. It comes as the average graduate owes $19,000. Many undergrads,
though, have debt exceeding $40,000.

Those higher payments carry huge implications for this generation of college
graduates. The weight of debt is forcing many to put off saving for
retirement, getting married, buying homes and putting aside money for their
own children's educations.

Heavy student debts may also keep young adults from starting businesses,
says Diana Cantor, director of the Virginia College Savings Plan. Some
graduates will refuse to risk what little money they have on entrepreneurial
ventures. And securing loans will now be harder. "It's a real crisis,"
Cantor says. "You're strapped before you get started."

The average debt for a college graduate has soared 50% in the past decade,
after inflation, according to the Project on Student Debt, a non-profit
advocacy group. Just as record-low mortgage rates have eased the impact of
soaring home prices, low student-loan rates have let borrowers cut their
payments, softening the impact of rising debt.

"Low interest rates have served as a sort of amnesty for graduates with
debt, " says Robert Shireman, founder of the Project on Student Debt. "We
haven't seen what the real impact is of much higher levels of borrowing."

Now, with interest rates rising, that amnesty is about to end. The 6.8%
fixed rate for Stafford loans, the most popular student loan, will replace a
variable rate that used to be adjusted every July 1, based on Treasury
bills. Under the old system, borrowers could consolidate their loans when
rates were low. And they could lock in that low rate for the life of their
loans.

Today, students who don't want to borrow at higher rates have few other
options. Twenty-five years ago, students who wanted to avoid debt could use
money from part-time and summer jobs to help pay for college. But since
then, college tuition has risen at twice the rate of consumer prices.
Tuition has soared much faster than pay has for the kinds of low-wage jobs
that students tend to hold.

In 1981, a student could work full time all summer at minimum wage and earn
about two-thirds of annual college costs, according to an analysis by
Heather Boushey, economist for the Center for Economic and Policy Research.
Today, a student earning minimum wage would have to work full time for a
year to afford one year of education at a four-year public university -- and
that assumes she saves every penny, Boushey concluded.

Parents, meantime, face competing demands for their money. They're trying to
save for retirement just as their kids are starting college. Financial
planners have long urged people not to delay retirement saving to pay for
college. The idea was that students could borrow for college but that
parents can't borrow for retirement.

That was an easier argument to make when debt loads -- and tuition -- were
lower, says Amy Noel, a financial planner in Boulder, Colo. She still
believes parents shouldn't sacrifice retirement security for their
children's education. But she lays out options for her clients.

"If college is so important to you, what are you willing to give up?" Noel
says. "Are you willing to work four years longer?"

A cloudy future

Lenders note that even without the change in the law, rates on Stafford
loans would have risen above 6% on July 1, because rates on the benchmark
Treasury bills have risen this year. They also point out that the fixed-rate
formula will protect borrowers from sharp increases in future interest
rates.

But if interest rates drop, borrowers with loans issued after July 1 won't
be able to benefit. Graduates will still be able to extend payment periods
by consolidating their loans. But that won't provide any interest-rate
relief. That 's because the loan rates will be fixed.

Nickalous Reykdal, 22, an education major at Central Washington University,
expects to leave with about $15,000 in debt when he graduates next year.
Paying off that debt will be "very difficult" on a starting teacher's
salary, Reykdal says. "It's like having a huge cloud over my head --
worrying about how to pay this money off."

To avoid piling on even more debt, Reykdal has worked up to 25 hours a week
during the school year and 60 hours a week in the summer. He's now taking a
quarter off to work for a student organization so he can pay off a $1,500
credit card bill. He used the credit card -- which he has since cut up -- to
pay for "little things I didn't want to bother my parents about."

Reykdal hopes to find a job teaching math and science to children of
low-income families so he'll qualify for a federal loan-forgiveness program.
"I'm going to go to wherever the first low-income school will hire me,
because I need a job," he says.

The government limits the loan-forgiveness programs to a handful of teaching
and nursing positions and some members of the military. Graduates in other
fields who have trouble paying off their loans can extend their payment
periods for up to 30 years. But that will sharply boost the interest they'll
pay. For example, a borrower who takes 30 years to pay off a $20,000 loan at
6.8% will pay about $27,000 in interest. That compares with $7,619 on a loan
paid off in 10 years.

Borrowers can try to defer their payments. But they must prove they're
suffering from economic hardship. Loan forbearance, which provides a
reprieve from payments, is easier to get. But for most loans, interest will
pile up during the forbearance period. That further swells the student's
debt load.

Kimberly Bluford, 34, a social worker in Hampton, Va., has put her loans in
forbearance several times since graduating in 1997. Social workers in her
area don't make much money, and she was laid off from one job, she says.
"Even with a master's degree, it's a struggle."

Bluford's balance has gone from $22,000 when she graduated to about $29,000.
Her debt is exacerbated by a high interest rate. In 1999, when rates were
above 8%, she consolidated her loans; federal rules forbid consolidating
loans more than once, even if rates fall.

Bluford, who has a 6-year-old daughter, says she'll "probably be 60" by the
time her loan is repaid.

Though forbearance will expand a student's loan balance, the consequences of
default are worse. The loan might be turned over to a collection agency. If
so, collection fees would increase the balance.

The default will also be reported to credit agencies. And it will show up as
a negative item on a credit report. The government can also intercept
borrowers' tax refunds, garnish wages and withhold Social Security and other
federal benefits.

Erasing the loans by filing for bankruptcy is seldom an option. A 1998 law
designed to reduce student loan defaults requires borrowers to prove they'll
fail to maintain a minimal standard of living unless their student loans are
wiped out.

That standard is nearly impossible to meet, says Nora Raum, a lawyer and
author of Surviving Personal Bankruptcy. The bankruptcy reform law enacted
last year toughened the rules by extending the hardship standards to the
private student loans that borrowers often turn to once they've maxed out on
government loans, Raum says.

In December, a federal appeals court in Richmond ruled against a single
mother of a 7-year-old child who earned $10,771 in 2003, the year she filed
for bankruptcy. The woman, who was self-employed, had no health insurance
and drove a car with 250,000 miles on it, according to court documents.

In overturning a lower court's ruling in her favor, the appeals court said
the woman failed to show that she couldn't find a higher-paying job. It also
faulted her for not consolidating her loans, which would have cut her
payments.

Also contributing to a rise in debt: a sharp drop in direct aid. Congress
hasn't increased the Pell Grant, the most common direct aid for low-income
students, since 2003. The maximum Pell Grant: $4,050 a year.

"The Pell Grant isn't even keeping up with inflation, let alone college
costs," says Luke Swarthout of the Public Interest Research Group. Students
have to borrow more to make up the gap between direct aid and the amount
their families can afford to contribute, he says.

As a result, low-income students are carrying a disproportionate amount of
student debt, says Shireman of the Project on Student Debt. Shireman
analyzed loans held by Pell Grant recipients because those students are from
low-income families. More than 88% of Pell Grant recipients who graduated
with a bachelor's degree in 2004 had student loans, vs. 59% of students who
didn't have Pell Grants, according to an analysis of Education Department
data.

The average amount borrowed by Pell Grant recipients was 12% higher than the
amount borrowed by other students. And one-fourth of the low-income students
had mre than $27,000 in loans.

Caught in a bind

Students from middle-income families, meanwhile, say they're, well, caught
in the middle. Their families earn too much to qualify for direct aid -- but
too lttle to pay the full tab for college. That leaves them no choice but to
borrow.

Tom Dillon says his family's income made him ineligible for direct financial
aid. But because he has three younger sisters, including two who'll be in
college the same time he is, his parents can't afford to pay his college
bills. "We're stuck," he says.

Loan payments are typically deferred until after graduation. So many
students don't think much about their debts, or the interest rates they'll
pay, while they're in school, Shireman says. "It doesn't hit home until they
graduate, or worse, until they fail to graduate for some reason and then
they're faced with these loan payments."

Nicole Lamarche, 27, an ordained minister for the Wellesley Congregational
Church-United Church of Christ in Wellesley, Mass., considers herself
fortunate. She consolidated $33,000 in loans last year, extending the
payment period and locking in a low rate.

So her monthly payments are $200, vs. $350 if she hadn't consolidated. But
even with the lower payments, she doesn't think she'll be able to buy a home
for years. And she can't find money in her budget to save for retirement.

"I've been told that these are the important years for compound interest --
put in money now," she says. "But these are the years you don't have any
money."

Reykdal says all his friends have student loans and predicts that the higher
rates will force many future graduates to spend years paying off their
debts. "Their student loans will double by the time they pay them off, just
on interest alone," he says. "It makes me really worry about the future."