For kids heading off to college, and their parents, here’s something to worry about:
Of former students with loans today, one out of four can’t pay.
About a quarter are in “forbearance” — meaning payments are suspended because of financial hardship — or in outright default, according to figures derived from a new study by the federal Consumer Financial Protection Bureau.
A bank with so many bad loans would go broke quick. But the above estimates are for the federally guaranteed loan program, and Uncle Sam has deep pockets.
The sky-high trouble rate implies some scary things for students today. One is that higher education is now less of a guarantee of economic success.
The cost of college is so high — and the borrowing so great — that many students start their working lives hobbled by debt. The average Missouri graduate with student loans graduates with a $23,000 monkey on his back — and lots owe more, according to 2011 figures from the nonprofit Project on Student Debt. That’s a heavy load in a weak job market.
The combination has consequences, for young people’s ability to start families, buy houses and move into the middle class.
For instance, it used to be that young people with student debt were more likely to own houses by the time they are 30 than those without such debt. That made sense; the better-educated had higher incomes, which more than made up for the debt payments.
That ended in 2011, according to a study by the Federal Reserve Bank of New York. Young people with student debt are now slightly less likely to own homes.
The same holds for car loans. More graduates seem to be riding their old jalopies from college right into their 30s.
Higher education is still worth borrowing for — as long as the amount is reasonable. A bachelor’s degree boosts your pay by 84 percent over a lifetime, compared to a high school diploma, according to Georgetown University’s Center on Education and the Workforce.
The trick is to borrow as little as you can; and to match your debt load to the expected salary in your chosen career.
For instance, the typical starting salary for a teacher is $27,000 per year in Missouri, according to CareerBuilder.com. For a mechanical engineer, it’s about $65,000 in St. Louis.
You can get an idea of pay and hiring prospects from the Bureau of Labor Statistics Occupational Outlook Handbook online.
So, how much should you borrow? The Project on Student Debt, in a 2006 study, suggests that a student making $30,000 a year might manage $22,000 in student debt.
That’s the maximum. It doesn’t mean living decently while making payments. It means better than hand-to-mouth. But you don’t go to college so you can just squeak by. Future teachers should choose cheaper schools.
By contrast, a $50,000-a-year grad might support $51,000 in debt with some straining.
The good news is that a third of college students graduate with no student debt at all, according to the Project on Student Debt. Some are lucky duckies with well-off parents. But others work part time during school, live at home, collect scholarships and pick schools that are less outrageously overpriced than most. Those kids play it smart.
Playing it smart can be tough for an 18-year-old. “When young people start their education, they’re so full of anticipation and feeling invincible,” says Vicki Jacobson, chief of the Center for Excellence in Financial Counseling at the University of Missouri-St. Louis.
And getting a federal student loan is easy: no credit checks, no income requirement.
The temptation is to borrow too much for a school too expensive for the family budget. They think, “If I have a college degree, everything will work out fine,” says Jacobson.
It usually does — if they don’t become a slave to debt.
Before you borrow, take a look into your soul. Do you have the staying power to actually finish your degree, or get the trade school diploma you’re after?
The payoff in higher ed goes to those who graduate. If you borrow and drop out, you’ll be worse off than if you never started.
Next, take a look at the student loan default records for schools you’re considering. That’s measure of how successful their students become.
The high default rates cited above are for all student loans, no matter how old. The U.S. Department of Education publishes stats on loans in default only three years after a student leaves school. The average default after three years is 13.4 percent.
But some schools — especially for-profit schools that ballyhoo themselves on daytime TV — have horrendous default rates. For instance, 31 percent of students at for-profit Everest College in Missouri are broke three years after leaving. It’s 27 percent at Sanford-Brown College and 26 percent at Vatterott College.
By contrast, it’s 12 percent at St. Louis Community College and 7.5 percent at the University of Missouri-St. Louis.
The U.S. Department of Education provides an fine guide to college-picking in its website College Scorecard, www.collegecost.ed.gov/scorecard. It will tell you graduation rates, default rates and the average debt taken on by students after receiving financial aid. You’ll notice that schools with low graduation rates have high loan default rates. These schools are rip-offs.
Don’t even think of getting a private student loan until you’ve exhausted all you can borrow under federal student loans, generally called Stafford and Perkins loans.
Federal loans are cheaper, and they’re much kinder to borrowers who have trouble paying. Payments can be reduced to match your income. There is forbearance for people who lose jobs. You’ll get little such mercy with private student loans.
EDITOR'S NOTE: An earlier version of this story misspelled the name of Sanford-Brown College.
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