It was supposed to be the culmination of the American Dream; every kid could get a college education, no matter how poor.
Instead, the student loan program has become a nightmare.
As it stands, former students are on the hook for a staggering $905 billion debt, some $325 billion less than Americans owe to credit card companies. According to the Wall Street Journal, student loan debt rose eight percent in the past year alone. So while Americans are making a conscious effort to pare down credit card debt – it is down 21.6 percent since 2008 – student loan debt is spiraling out of control.
The program, critics say, is insidious, with the government and colleges making sweetheart deals that benefit banks and other lenders as well as collection agencies. Most college age students didn't realize they were in essence no more than helpless prey.
Take the case of one local woman. Josephine (not her real name) signed on to attend Alfred College in 1983. Four years later, she graduated and found a job at New York University. She dutifully paid back her loan in small installments, and eventually went back to college to get her masters degree. "The loan was put on hold because I was a student," she recalled. After earning a masters in Computer Graphics, Josephine went to work for IDD, a financial publishing firm, and resumed paying off her loans, which were still relatively low and manageable – provided she kept working and making payments.
Her story from there is typical to what happened to many professionals. IDD was sold to the Wall Street Journal, and when money became tight dozens of mid-level management positions were eliminated. Josephine went to work for the Gartner Group, relocating to Connecticut, but the bottom fell out there after the 9-11 attacks.
"I couldn't even get a resume answered," she recalled. "Meanwhile interest was accruing at 8.25 percent a year." She applied for forbearance, which freezes the loan but not the interest. She moved back home with her parents in Brooklyn and when they passed on she gravitated out to the Hamptons to be near family and took a job in a grocery store.
"I don't earn enough to make ends meet. I kept getting letters saying I didn't owe anything." She took her car off the road because she couldn't afford it, and had to walk more than a mile to work each day.
Then, the kick in the chest – a letter from a collection agency. With principal, interest, fees, and penalties, she now owes a staggering $198,422.43.
Her health is failing, and at age 60 she was looking forward to collecting Social Security – until the collection agent informed her under federal law Social Security payments could be seized and put toward her debt. Nor could she go bankrupt. There was no way out.
"I don't know how I defaulted. I never got anything in the mail," Josephine said, though she suspects when she moved to the Hamptons addresses got crossed. "I had no idea what was going on."
The helplessness of the situation is one many Americans are dealing with. Josephine pointed out she has been through three recessions and has worked in two industries that suffered significant job losses. "But the student loans keep growing no matter what."
Apparently, we haven't learned from our mistakes. According to the Journal a rising number of student borrowers are behind in their payments; almost 10 percent of student loans are more than 90 days in arrears.
Reform has been slow in coming, but the government is slowly addressing the inadequacies of a system that fed the banks billions by allowing them to pile on interest for servicing federally approved loans. Ultimately, the government – and taxpayers — is on the hook for most student loans if they default.
The Obama administration is pushing a plan that will cap payments at 10 percent of a borrower's discretionary income, according to Josh Mitchell of the Journal.
According to the Department of Education some federally guaranteed loans are assigned to a Default Resolution Group for collection.
There is a website, the National Student Loan Data System --that will help former students identify what types of loans they have Colleges can also furnish information. Note that information about any private student loan will not be included in NSLDS.
In Josephine's case, her account has been turned over to Financial Management Systems, which immediately tacked on over $38,000 in collections fees, contingent on collection. As it turns out though, FMS is the only was out for Josephine – though if she becomes medically disabled there is a possible way to have the loan forgiven. She must agree to pay $125 a month immediately. In essence, the timetable will go on forever — she will never be able to pay the loan off.
A study by the Pew Research Center indicates there are many more victims shaped in Josephine's mold. Forty percent of households headed by a breadwinner under 35 had accrued student debt. The average balance is on the upswing, a 14 percent increase from 2007 to 2010. The default rate for loans that became due in 2009 is 9.1 percent.
Student loan interest rates doubled on July 1 because of Congressional inaction. And although there is an indication a reform deal is likely, it is by no means a bargain for borrowers. According to the New York Times, undergraduates would pay the 10-year Treasury note rate, 2.49 percent, plus 2.05 percent, with a cap of 8.25 percent, to protect them from inflation. Debt piles up fast when interest is accrued at that level.
"It makes me terrified, and it makes me angry" Josephine said, her voice rising. "You have no idea what is going to happen when you sign on for these loans."