How private lenders are keeping the poor and middle class in their place

Grant Reynolds, a recent SAIC graduate and the holder of $70,000 in educational debt, thinks the idea of paying off his student loans is so abstract that he can’t imagine actually doing it at any point. “Basically,” he says, “I’ve come to terms with the notion that my loan payments are just another bill I’ll be paying every month for the rest of my life.”

Reynolds is not alone in his feelings of servitude; 63 percent of SAIC students take out loans. As higher education becomes the domain of the wealthy once again, more students are finding that federal, state and institutional awards alone aren’t enough to finance their education.

An average graduate of a four-year college leaves their undergraduate career burdened by almost $20,000 in student loans, and among those graduating from four-year private schools, it is not uncommon to owe $40,000 or more. The average SAIC student graduates with over $26,000 in student debt, well above the Illinois average of $17,089.

So are federal, state, and institutional funding becoming more scarce, or is the price of education soaring? On average, tuition for the School of the Art Institute of Chicago jumps twice the amount of current inflation every year, but also, by some estimations, tuition accounts for only 25 percent of what a student really needs to pay for. The other 75 percent can be attributed to college-required health insurance, school supplies, books, housing and the cost of living, all new financial burdens for families seeking to improve the lives of students through education. In response, the House of Representatives recently passed a bill that would reduce federal loan interest paid by college students by about $30 a month, but this nicety does not affect the private loans.

While most students instinctively prefer federally guaranteed loans, financial aid offices often advertise private loans as “preferred lenders” for students who cannot meet the school’s financial demands with what federal loans, grants, and scholarships provide. Private student loans are loans provided by commercial financial institutions like Chase Bank (whose logo you can find on the Financial Aid office’s “Student Budget Worksheet,” and on posters in their office), and Sallie Mae (also touted on the school’s financial aid website, but it is not listed as a preferred lender).

Since private lenders exist outside of the federal government, they don’t offer federally subsidized interest rates, or options for postponing payments. These loans impose higher interest rates on borrowed money and typically require a cosigner or two-year credit history (not helpful for students bearing the burden of paying for their education alone). While the availability of federal loans has only increased at a rate of 86% over the past ten years, they are being fast out-paced by corporations like Sallie Mae and Chase, whose lending volume has increased a whopping 1042% in volume.

Sallie Mae, which manages $126.9 billion in debt for more than 9 million borrowers, earned the trust of the needy by being known as a government sponsored enterprise (GSE) in the 1970s, but quietly completed privatization in 2004 after its charter was terminated by the federal government. Many borrowers weren’t aware of the change until a “60 Minutes” investigation questioned the ethics of Sallie Mae’s business practices. Though Sallie Mae found itself deep in scandal after the “60 Minutes” episode aired, they still managed to profit: since 1995, the company’s stock price has gone up almost 2,000 percent and Albert Lord, CEO and Chairman, who made $225 million dollars in five years, is building himself a private golf course.

Sallie Mae and friends’ lobbying group made sure that lenders could also serve as collection agencies in 1997, by coaxing Congress to amend the Higher Education Act (Lord and his wife personally contributed $250,000 to senators and congressmen in support of education legislation in just the last election cycle), making student debt the most lucrative and easy money to collect. The amendments allow for enormous penalties and fees to be attached to defaulted student loan debt, take away bankruptcy protection for student borrowers, and make paying off loans early impossible by imposing stiff penalties. The amendments also provide for collection and punitive measures to be taken against student borrowers, including wage garnishment, tax garnishment, withholding of professional certifications, termination from employment, and social security garnishment.

In their efforts to rule the student lending industry, Sallie Mae has taken on a new strategy for total domination, attempting to buy state lending entities. In 2004, Sallie Mae attempted to purchase the Pennsylvania Higher Education Assistance Agency, the student-loan agency commonly known as PHEAA, for one million dollars, though the agency’s employees and supporters temporarily thwarted the attempts at what some are calling a “hostile takeover.” Sallie Mae’s tactics are especially threatening for students, in light of Governor Rod Blagojovich’s recent proposals to sell the assets of the states’ student-loan agencies in order to pay for pet projects, a proposal some say has Sallie Mae’s finger prints all over it. Though Sallie Mae denies any involvement, they were quick to admit they would certainly be first in line to bid on the contract.

According to “The Future of Private Loans,” a report published by the Institute for Higher Education Policy, 64 percent of total private loan borrowers are independent students earning less than $30,000 a year. Of dependent students, the majority are from middle or upper-middle class families.

“It’s strange that this thing which is supposed to open up a whole new world of opportunities previously inaccessible to the uneducated individual, instead shackles that same person in debt, hindering his or her advancement,” says Reynolds. The picture becomes clear: those of modest or lower income will be strapped with the financial burden of paying back not only what they have borrowed, but also initiation fees and interest on interest, if students put their loans into what is known as “total deferment,” a popular but highly dubious private loan “benefit” that encourages students to buy now but pay later. The appeal of total deferment in the private loan context is obvious: borrowers don’t make loan payments while enrolled in school, and lenders charge interest on interest while the loan is being deferred.

The effects of burying yourself in a tomb of debt are not limited to financial and mental repercussions. Russell Gottwaldt, another recent graduate saddled with $40,000 in private loans, has found that the debt he incurred is reinforcing his slot in America’s class system. “I recently turned down an ideal internship—something I’ve always wanted to do—because it was unpaid,” he said, something the children of the upper class often do with the help of their parents’ money. “I accepted a menial full-time job instead because I have to pay the rent. But this isn’t a problem specific to art school grads—this is a problem that every middle class graduate faces after they leave any college. The American education system has always favored the upper class.”

Now that private corporate lenders don’t have to worry about getting their money back from those who, in years past, would be considered a credit risk (they’ll just take it out of your paycheck, or your social security checks when you retire if you don’t pay now), lending to those in the lowest income brackets has become a GOOD investment, if not one that matures a little slowly. The poorest students going after undergraduate degrees are statistically less likely to find themselves employed post-graduation with high-paying jobs, and therefore less likely to be able to afford the payments on their loans. This gives private lenders the opportunity to tack on self-determined, unregulated fees, and garnish wages. Those who continue onto more advanced degrees, though more likely to earn more than someone with a Bachelor’s Degree post-graduation, are most likely to continue borrowing from private lenders, adding to their mountain of debt.

Patrick James, director of the Financial Aid office at SAIC, understands how difficult financing an education can be. “I wish we could ask three questions and have enough information to award aid, but unfortunately it doesn’t work that way. We are bound by federal and state regulations which collectively make the process more complicated than I would like.”

As financing an education gets more complicated, so does assessing the opportunity cost of taking on such an endeavor.

“It’s sort of depressing,” Reynolds admits, “but whenever I start to regret having taken [the loans] out in the first place I try to ask myself if the education that the loans paid for was worth what I’m paying now. To answer that I have to look at who I am today and the art that I’m making now versus who I was and what I was making seven years ago,” things one would have a pretty hard time quantifying. Reynolds asks, “Could I be who I am and still be making the same work now if I hadn’t gone to school? That always seems to put me in my place again, although it doesn’t make paying off the loans suck any less.”
Cold Realities

One of the cold realities of higher education is that a gap (in some cases a chasm) often exists between how much is needed and how much the government is willing to hand over.

F Newsmagazine recently asked the Director of Financial Aid, Patrick James, what advice he has for the increasingly indebted SAIC student body.

Here’s the scoop, straight from the Director’s mouth:

• Before borrowing, students should utilize all possible employment opportunities available on and off campus
• Students and families should borrow through the federal loan programs first and only through the private loans as a last resort
• Borrow conservatively
• When borrowing through private loans, often, the better the credit of the co-signer, the better the interest rate offered
• Before borrowing additional funds, review your total debt and what your monthly payment will be
• Review the repayment terms of the loan before deciding upon a loan program