Melvin B. Miller
Editor & Publisher

The debt burden

Now that the exuberance of commencement ceremonies has passed, many newly minted college graduates will have to confront their first adult challenge — how to repay their tuition debt. For many, that issue comes up even before hunting for a job. Unfortunately, employment decisions are often determined by the size of the salary rather than the quality of the employment opportunity. The paycheck has to be enough to finance living expenses as well as the burden of debt repayment.

The volume of student loans has more than tripled in the past five years and has grown to $17.3 billion in the 2005-06 school year. By now, such extensive reliance on loans to finance college costs should have provoked remedial action as a matter of public policy. However, the problem was ignored until it was discovered that some college officials were generating personal revenue by steering students to high-interest lenders.

Federal loans for education have a maximum interest rate of 6.8 percent. However, loans from banks and other financial institutions can establish whatever rate they believe is competitive. The rates of some lenders can go as high as 20 percent. Banks and other lenders view the private student loan market as a very profitable source of business. That is why they are willing to be so aggressive in their efforts to corner the market at various universities.

The interest rate they charge at prestigious universities might be less than elsewhere because of the likelihood that graduates will land better jobs upon graduation. Then debt service for these graduates will be less burdensome.

Regardless of the college, repayment of school loans is relatively safe. Liability for repayment cannot easily be discharged in bankruptcy. Also, the federal government subsidizes repayment of some student loans.

Federal grants and loans are the least expensive way to finance education. Pell grants were established in 1965 to provide funding for undergraduate postsecondary education. The grants are need-based, and have served as the foundation for student aid.

Twenty years ago, a Pell grant would cover 60 percent of a student’s cost of attending a public four-year institution. In 2005-06, the maximum Pell grant covered only one-third of those expenses.

The maximum grant has been $4,050, but is due to rise to $4,600 in 2008 and increase to $5,400 by 2012. The number of students who received Pell grants rose from 3.6 million in 1995-96 to 5.4 million in 2005-06, according to the College Board. While the maximum grant is $4,050, the average grant awarded in ’05-’06 was only $2,354.

The primary problem is that the cost of education has risen steeply, and public and private colleges and universities have been forced to raise their tuition fees. A study by Citibank found that college tuitions and fees have been increasing an average of 8 percent per year. At that rate, the cost of an education will double every nine years.

A postsecondary education is especially desirable because of the employment opportunities that are available to those with a baccalaureate degree. Ambitious students from low-income families assume a major risk, however, when they decide to finance their education with high-interest loans.

According to the congressional testimony of Secretary of Education Richard Riley in 2000, nearly half of all low-income students will have dropped out of their four-year programs by the end of the second year.

Dropouts still have to repay their school loans, and they will usually have a lower salary than graduates. Society must find a better way to finance the cost of college education.

“We can start living better after I pay off my student loans.”