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Aimee Yuyi Chen/MEDILL

Amit Pareenja, in an empty office in a Chicago bank, has to work extra hours to pay off his $120,000 student loan. But he says he's thankful to have a permanent job because many others don't.

Outstanding student loan debt tops $1 trillion; interest rate doubles

by Aimee Yuyi Chen
April 26, 2012


Students who borrow to pursue higher education now face the possibility that their interest rate will soon jump, adding further to the staggering debt that many new graduates must confront as they struggle to find jobs.

They already owe a cool $1 trillion, according to one government agency.

The government’s Direct Subsidized Student Loan, which is most common and carries the lowest interest rate, will double back to 6.8 percent in July if Congress declines to extend the current rate.

House Republicans say the government can no longer afford $5.9 billion a year to keep the interest rate low. The Ryan budget, recently approved by the House, would allow the interest rate to double.

The total outstanding student loan debt reached $870 billion last year, according to the Federal Reserve Bank of New York. However, the new Consumer Financial Protection Bureau estimates that the debt topped $1 trillion, more than the amount in credit card loans or auto loans last year.

Given the average student loan debt of $23,300 per person last year, according to the bank, students who apply for financial aid after July 1 will be paying $1,584 instead of $792 a year in interest alone.

“The President’s budget request for next year includes a proposal that, if approved by Congress, would maintain the current 3.4 percent rate on new undergraduate subsidized loans made for the 2012 to 2013 school year,” the U.S. Department of Education said on its website.

Even without the doubled interest rate on federal loans, millions of recent graduates already struggle with their student loan debts.

Amit Pareenja, who graduated in 2009 with a business management degree from Purdue University in Indiana, has a bank job in downtown Chicago but also has more than $120,000 in student loan debt.

With a permanent job, he is able to make monthly payments on his federal and private student loans.

Larry, who prefers to keep his last name private, is one of the many others who are not as lucky as Pareenja when it comes to student loan debt.

Going back to school in his mid-40s with the hope of getting a higher-paying job, he was unable to find a permanent job for years, failing to service $53,000 in student loan debt until a loan collector contacted him.

“I’m frustrated. If I want to buy new clothes, I can’t even do that really,” he said. “I can pay my bills, I can pay my rent and buy food, but that’s about it. The rest goes into this collection agency.”

The Federal Reserve Bank of New York estimates that about 37 million people, roughly 15 percent of Americans, have outstanding student loan debt.

The Consumer Financial Protection Bureau says the total debt will continue to climb as more students take out loans and people who have finished their degrees, which means they must start repaying, fall behind on payments.

Larry said that after graduating from Virginia Commonwealth University, he picked up any kind of job that could help him pay his everyday living expenses. But after making a commitment to the collection agency to start repaying, he still could not reduce his $53,000 loan below $50,000 due to all the interest and fees imposed by his lenders.

“It’s like I’m digging and shoveled and getting nowhere. It made my life hard because I don’t know how to get out of this. I try not to think about it actually because I get depressed if I did,” he said. “I’m not ready to go on the street and eat out of a trashcan. No.”

Under a 2005 law, private student loan debt is no longer dischargeable in bankruptcy, meaning ex-students will be obligated as long as they live, or until they repay completely.

Kevin Worthley, a certified financial planner in Rhode Island, said private student loans usually have much higher interest than federal loans.

“Federal loans are within reasonable interests, but private loans that a lot of people have are 11 percent or even higher,” he said. “The issue is, students find it hard to get ahead of it. With that much interest, especially if you’re unemployed, you can’t get out from under the rock.”

According to the Federal Reserve Bank of New York, average student loan debt reached $23,300 per person in 2011. It was up 25 percent in the last decade. And the rapidly increasing debt has direct implications on taxpayers, since 80 percent of these loans are government-issued.

“The government supplied lots of money for education,but as the economy goes bad, that money dries up. Students are kind of squeezed in the middle,” said Maura Kastberg, executive director of RSC, Your College Prep Experts, an online college preparation institution.

“It’s like a snowball; once it gets rolling it’s hard to control,” she added.
The Federal Reserve Bank of New York estimated that about two-third of student loan debt is held by people under 30.

With the younger demographic carrying debts, Worthley argued, the rising debt will become a potential threat to the economy, for those people are the main population buying starter homes, purchases that could potentially get the housing market underway.

“If these people can’t buy this stuff, it’s going to be a drag on the economy,” Worthley said. “A trillion dollars worth of debt is just a big anchor on the economy because it’s affecting the whole demographic, not just now, but decades from now.”

As the high school class of 2012 is about to enter college, experts suggest students make prudent choices, including taking as much from federal loans as possible and choosing schools that promise financial aid.

“They want to be in the top 25 percent in the incoming freshmen class because that 25 percent is most likely to get merit-based aid,” Kastberg explained. “Students need to be better consumers of their education.”

Kastberg also urged students to avoid for-profit colleges, as only 35 percent of college graduates from for-profit schools are paying their student loan debts regularly, she said.

Having worked with students and parents for years, Worthley agreed with Kastberg’s suggestion of taking finances into account when applying to college. Choosing a major wisely could also make a difference, he said.

“Just like in the housing industry, people bought too much housing than they could afford. Students are buying too expensive of an education than they can afford,” he said.

“You just can’t blindly sign promises,” he added. “It might affect their college choice or career choice, but it’s better than graduating with all these debts and starting so far behind the eight ball.”

Pareenja, the 25-year-old Purdue graduate, said a careful financial plan keeps him on track in paying his $120,000 loan debt. He was unemployed for three months after college, he said, but with a careful budget, he's managed to pay off $35,000 since 2009.

“Student loans cause me to stay home in a longer period of time than I wanted to,” he said. “It really came down to budgeting like how much you’re willing to take out for these four years. You need to have an idea of how much you’re going to make coming out of the job market. If not, you’ll start sinking lower and lower.”