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National CrossTalk Summer 2002
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Debating Student Debt
Are college students living beyond their means?

By Kathy Witkowsky
Missoula, Montana

Christina Adams is an accounting major at the University of Montana, where she has earned a 4.0 grade point average. She's proud of her excellent grades, and excited that, come May, she'll become the first person in her immediate family to graduate from college. Those grades, though, have cost her, and she knows they will continue to exact a price in the future-though she has absolutely no idea how much of one.

Afraid that a job would interfere with her academic performance, Adams, 23, has relied heavily on loans to finance three years of her education at UM, where annual in-state tuition and fees for incoming freshmen runs $4,033, and where a scholarship allows Adams, who does not have residency status, to pay 150 percent of in-state charges rather than out-of-state tuition. (Her parents picked up the tab for her first year of college, at Arizona State University.)

But until recently, when a reporter inquired about her situation, Adams had never crunched the numbers.

"I'm not managing my money very well right now," Adams acknowledged with a nervous laugh. "It's just easier for me not to know the totals."

For good reason. It turns out that Adams owes nearly $41,000: $13,527 in federally guaranteed student loans; $22,400 in private loans; and about $5,000 on her credit card. "It's a lot more than I expected," she said, clearly shocked when she heard the tally. Still, she said, she's convinced she did the right thing by taking out loans. "I know eventually they're going to come back and haunt me," Adams said. "But I just think I'll deal with it when that day comes."

That's a common refrain on campuses these days, where rising tuition costs, the relatively easy availability of loans, and a society that increasingly relies on credit have resulted in students borrowing more than ever before. In the 2000-01 academic year, a record $74 billion was available in student financial aid, according to the College Board. But 58 percent of that aid came in the form of loans rather than grants, compared to just over 41 percent in 1980-81. At the University of Montana, the numbers are even more dramatic: In 2000-01, loans comprised 64.1 percent of the $60 million given out in aid, according to UM financial aid director Mick Hanson. Just nine years earlier, loans only made up 46.4 percent of aid, he said.

Ironically, students like Adams seem to find reassurance in the numbers. "Everyone else is going to have debt, so why not take out loans and live comfortably?" she figured, echoing many of her schoolmates. Almost no one would suggest that education is a poor investment. But some education experts are concerned about the trend toward greater borrowing, and say it underscores a tremendous need to promote financial literacy and better choices by both policymakers and students themselves.

"There is no evidence that the typical student or a majority of students are overborrowing," said Sandra Baum, professor of economics at Skidmore College and co-author of the National Student Loan Survey, sponsored by the lender Nellie Mae. Nonetheless, Baum said, "I think we need to be concerned because students frequently don't understand what they're getting into."

A 1996 survey of 443 graduating seniors at Iowa State University, for example, found that nearly 29 percent didn't know the extent of their debt, yet nearly 45 percent had "little concern" about paying it off. Some students overestimated the amount of their loan payments, while others underestimated them.

The results didn't surprise Tahira K. Hira, professor of personal finance at Iowa State, who conducted the survey.

"We as adults make it very easy for [students] to borrow money," said Hira. As a result, she said, many students borrow more than they really need for their college education. "I think the consequences are widespread and long-term," said Hira. "The simple way to put it is that they will have debts to pay for a long time."

"Some of these people are going to be paying their own loans while their kids are in college," said Patrick Callan, president of the National Center for Public Policy and Higher Education, which publishes National CrossTalk. That has potential ramifications not only for those who have borrowed, but for the future of higher education, he said, since adults saddled with high debt might be less sympathetic to the next generation of college students, and less inclined to support educational institutions.

That could be the case for Nate Biehl. Married, with a four-year-old girl and an infant boy, Biehl, 26, estimates he'll owe "closer to $30,000 than $20,000" by the time he hopes to graduate from the University of Montana's School of Journalism in May 2004 and go into broadcasting.

Not that he's complaining. "I figure that's the price of an education," said Biehl, who studied film and music at Montana State University in Bozeman and lute-making at Red Wind Technical College in Minnesota before enrolling at UM, where he finally has gotten serious about both school and money. Still, he regrets his earlier behavior.

"I've been pretty cavalier about borrowing money in the past because I didn't understand the weight of it," admitted Biehl. His father, who works for the National Guard, and his mother, a middle school music teacher, handled most of the financial arrangements for his earlier college experiences; he just signed on the dotted line. "I really wish that at a certain point I'd sat down and thought about what I was doing," he said.

Instead, said Biehl, "I totally wasted that money."

Since enrolling at UM in January 2002, Biehl has been making ends meet through loans, grants, the GI bill (he's in his third year of active duty in the Army National Guard), food stamps, a small payout from a car accident, earnings from his monthly weekend in the National Guard and from a part-time job as a newscaster for the local public radio affiliate. His wife is a stay-at-home mom. It is not an easy road, but Biehl is convinced that it will pay off-literally. "I'd rather owe money and be able to pay it than work in carpentry for the rest of my life and struggle to pay the bills," he said.

That, of course, is the whole idea behind student loans-to help students invest in their future. And for the most part, the system works. According to the U.S. Department of Education's National Center for Education Statistics, in 1999-2000, more than 60 percent of all bachelor's degree recipients graduated with some federal student loan debt; the median amount they borrowed was $15,375 at public institutions and $17,250 at private colleges and universities. "That sounds like a lot of money," said economist Baum. "But lots of kids go out and borrow money to buy a car, and no one is panicked about that.

"All evidence so far suggests that [debt burden] does not have a measurable impact on post-graduation lifestyle," continued Baum. "I think that, relative to all the other obligations out there, it's still not that big."

Even though indebtedness is increasing, the student federal loan default rate in the fiscal year 2000 was only 5.9 percent, down from 22.4 percent in 1990.

Still, according to Baum (who is currently analyzing results of the latest survey), debt levels are increasing quite rapidly-so it behooves society to get a handle on them. "Whenever you borrow, you should get a statement that says very clearly, 'You are borrowing this amount of money, and when this loan comes due, this is how much you will have to repay every month.'"

Generally speaking, that is not what happens. Students who want federal financial aid are required to go through entrance counseling, a brief primer on the rules and responsibilities of borrowing, and sign a master promissory note, good for multiple years. At the beginning of each calendar year, students must fill out a new Free Application for Federal Student Aid (FAFSA), but usually it is not until they go through exit counseling just prior to graduation that they have to face their loan totals and estimated monthly payments.

Increasingly, there is no personal contact at all; the counseling and forms are handled through the mail or over the Internet.

The University of Montana, for instance, once required students to attend an entrance-counseling session. But these days, nearly all UM students do their entrance counseling online.

But no matter how it's done, many students say the information goes in one ear and out the other. "The problem with entrance counseling," noted Jacqueline King, director of the American Council on Education's Center for Policy Analysis, "is that the student is not paying close attention. It's like the lecture on alcohol before you've had your first beer."

Christina Adams could not even remember whether she completed her entrance counseling over the Internet or by phone, let alone recall any of the questions or answers.

Securing private loans totaling $22,408 also was remarkably simple once her parents co-signed for them, she said. "I was kind of surprised that [the bank] would let you choose the amount and then they didn't say, 'Oh, that's too much.' They just said, 'Okay. Here.'"

Adams said she has never discussed financial planning with her parents, who are postal workers in Cody, Wyoming. Nor does she recall anyone ever discouraging her from borrowing.

That is fairly typical, said Iowa State University professor Hira, who blames parents and society in general for failing to educate young people about financial management. Expecting students to navigate the complex world of loans, credit cards and debt without any prior training is akin to letting people drive without first taking driver's education, she said.

"We focus a lot on teaching people how to earn," noted Hira. "But we don't teach them how to manage those earnings."

Like adults, she said, students have a tendency to spend carelessly. "If a kid is walking out of college with $40,000 worth of debt, I would ask myself if that $40,000 is really purely college-related expense." According to her 1996 survey, the answer often is no. More than half of the students surveyed said that college loans helped them pursue a "playful lifestyle." In another, as-yet unpublished survey, 42 percent of students said they bought without need; 44 percent said they shopped to celebrate; and 49.5 percent said they bought things they would not use.

Those students likely are using credit cards to finance some of their purchases. According to the National Center for Education Statistics, in 1999-2000, about 29 percent of students took out loans, while 70 percent had at least one credit card. In and of themselves, credit cards are not a problem, said ACE's Jacqueline King. But, she warned, "A credit card morphs into a student loan when you carry a balance."

Like 45 percent of undergraduate cardholders, UM senior Adams is doing just that. Until last winter, she had always been careful to pay off her card. But in December, her car broke down. Cost of repairs: $1,500. Then her second-semester loans didn't come through in time to pay January rent, so she took out a cash advance. There were also grocery and gas bills. And there were a couple of trips-a winter-break escape to Florida and a spring-break visit with an old friend in Boston, where she charged $300 worth of clothes. Adams' current balance is about $5,000.

"There is no such thing as living like a poor student anymore," said Hira, whose latest survey at a major midwestern university found that, on average, a student who has $2,000 worth of student loans is carrying an additional $4,000 of debt-from credit cards, car or personal loans, and the like. "It's very easy to extrapolate that they are living beyond their means when they are piling on the debt."

University of Montana financial aid director Mick Hanson said he sees a similar pattern at his institution.

"Some of these students are really struggling," acknowledged Hanson. But others, he said, are far too careless with their funding-like the three students who, separately, dropped by his office one day in mid September, looking for a short-term loan to tide them over because they had already spent the aid money that was supposed to last them the entire semester. Or the young second-semester senior, already $43,000 in debt, who had such bad credit that Hanson had to tell her the university was rescinding its offer of a $1,500 Federal Perkins loan that would have helped her complete her education.

Cases like those have prompted Hanson to begin developing a computer program that will notify him when students appear to be on track to borrow more than a specific amount-say, $25,000-by the time they graduate. Then they'll have to meet personally with Hanson before any additional financial aid money is released. "I want to help students get a degree very badly," said Hanson. "I just don't want them to graduate with so much debt that they have to reduce their lifestyle to less than it was during college."

Hanson is not alone in his concerns. Many universities and colleges across the country-including Stanford, the University of Iowa and Ohio State-now offer personal financial management courses. The University of Montana doesn't offer such a course, but Hanson wishes it did.

"The reality is that we do have to worry about this because it affects students' performance," said ACE's Jacqueline King, author of "Crucial Choices: How Students' Financial Decisions Affect Their Academic Success," which was published in June.

But the best financial choices aren't always obvious.

King's study, for instance, suggests that overborrowing is not the only potential pitfall that students face. "There are two bad things you can do: one is to borrow too much-to not pay attention, to not economize," said King. "But it's also not a good idea to not borrow if what that means is that you're going to have to work 25 or 30 hours a week."

Work, said King, is the most common financing strategy that students use. In a given year, about a third of all undergraduates borrow to finance their education. Meanwhile, 80 percent of all undergraduates work.

"And those students work a lot of hours-more than they probably should, more than would be in their academic best interests," said King. "It takes them longer to graduate, which costs them more in the long run."

And that's what concerns Thomas J. Kane, professor of policy studies and economics at the University of California, Los Angeles. "I'm sure there are some cases where people borrow too much," Kane said. "But I think it's an even bigger problem that there are people not borrowing enough and working too much while in school."

But that's not the way Linh Le thinks. What she knows is that "loans are a big no-no." So Le, 21, chose to take a year off from college to work full-time at Wal-Mart, where she earns $7 per hour, instead of borrowing to continue her education at UM, where she would have been a junior. "It was too risky to do loans-the fact that I might not be able to pay them back," Le said.

For most of her freshman and sophomore years, Le lived at home, and paid for her education with a combination of grants, scholarships, a $1,400 loan from her parents, and a 16-hour-per-week job. But for personal reasons, she moved out of her parents' home in February, and between living expenses ($225 per month in rent, plus phone, electricity, and food), orthodontist's bills and car insurance, Le has been feeling the pinch. Yet she refuses to ask her parents, both immigrants from Southeast Asia, for any financial help. "They worked hard enough as it is just when they came to the United States," she said. However, Le has assured them that she will return to school and complete her degree.

But by stopping out, Le not only has postponed the higher wage she could earn with a college degree, she has also put herself at risk of not completing her education, said ACE's Jacqueline King. Students' situations may vary, so there are no hard and fast rules about staying in school, said King, but "there's definitely something to be said for momentum."

That is Sandy Schell-Bergman's philosophy. The 21-year-old UM junior is so budget-conscious that she burst into tears when she received her school bill in August. For the second year in a row, UM tuition had increased 13 percent. Add in fees plus the additional tuition she has to pay as an upper-division student due to UM's two-tiered billing system, and all told, Schell-Bergman will be paying nearly 20 percent more this year than last.

As if that weren't bad enough, her grant support decreased more than 25 percent, from $1,810 to $1,325 per semester, because both she and her parents earned more money last year than the previous year. (Even though she lives on her own, and her parents do not contribute to her education, Schell-Bergman is considered a dependent because she is under 24, unmarried and an undergraduate, so her parents' income is factored into her financial aid package.)

"I actually considered, 'What would happen if I quit right now?'" Schell-Bergman said. She quickly realized that wasn't a good option. "I've already spent two years in college and it didn't make any sense to quit after going through half the program. And I don't know what I'd do without a degree."

But she did have to figure out how to come up with the money to continue her education. Until this year, she had managed to scrape by on grants and on what she earned working 15 hours per week (full-time during summers) at a variety of $5.50-$6 per hour jobs: as a cleaning woman at her church; as a salesperson at Sears; as an assistant at a plant nursery; as a desk clerk and sometime cocktail waitress at a bowling alley.

But the combination of increased tuition, decreased grants and a sprained ankle that kept her out of work part of the summer left her no choice this year but to borrow for the first time: $5,500 in a subsidized Federal Stafford Loan. The prospect of paying back that money is upsetting, said Schell-Bergman, a dance major who fantasizes about choreographing music videos for a living but in reality does not expect to earn much money after graduation. But she feels that she has invested too much of her time and energy to give up her education now.

"I don't think I would go back if I quit," said Schell-Bergman. "I just want to get it over with."

Schell-Bergman's decision to combine working and borrowing means she probably will graduate. King's study found that students who financed their college education by working part-time (up to 14 hours per week) and taking out loans were least likely to drop out-surprisingly, even less likely than students who didn't work at all. The study suggests that's because students who work part-time-particularly if they're working on campus-"are more connected to the institution, manage their time more effectively, and are more focused on their academic work than students who don't work at all."

That will serve as a bit of good news to Christina Adams, who has taken a work-study position, and also is applying for a part-time job so she can cover this year's tuition increases without having to take out any more loans.

Still, it might have been helpful to Adams to figure out how much borrowing is too much. The standard accepted formula is that payments shouldn't exceed eight percent of income. But that is a little too rigid, said economist Baum. "There's really not one number," she said. "If you're making 20 grand and paying eight percent, then the loan payment will be really hard. If you're making 60 grand, then you can certainly pay more than eight percent." Students would be wise to consider their income prospects, she said. "If you know you want to be a nursery school teacher, then you really shouldn't borrow much money. If you're going to be a doctor, then it makes much more sense to borrow significant amounts."

Using that logic, Adams may still be fine. She hopes to work for a big city accounting firm, where she expects to earn between $40,000 and $50,000 annually, so her estimated monthly payments of $462 (based on a ten-year repayment plan and using current interest rates) might not be too much of a financial stretch.

But not all students will be so lucky. Some will have a tough time digging themselves out of debt. Others may be so discouraged by the high cost of education that they never get through college. And experts say that it is time to address the situation before it gets out of control.

"Given the facts regarding state budgets, it's hard to imagine the story changing in terms of tuition (increases) slowing down," UCLA's Kane said. "And in response to that, I'd like maybe to see an expansion in the federal loan limits, to reduce some of the private borrowing. And at the same time we should be trying to figure out ways to reduce the repayment burdens on the people who have trouble in the labor market right after they leave school."

One way to do that, suggested Kane, is to give tax credits to people whose student loan payments exceed a certain percentage of their income.

Other potential approaches came from Dallas Martin, president of the National Association of Student Financial Aid Administrators. He would like to see the government consider extending the standard ten-year repayments. And he suggested that perhaps employers could be encouraged to offer student loan repayments as part of their benefits packages.

Perhaps most importantly, said the National Center for Public Policy and Higher Education's Patrick Callan, policymakers, like students, need to consider the long-term consequences of their actions, instead of just backing into their decisions. "The only way you can explain how we finance higher education in this country now is by the same principle as water flows downhill," Callan said. "Everyone takes the easy way out."

Kathy Witkowsky is a freelance reporter in Missoula, Montana, and a frequent contributor to National Public Radio.

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