Congress took action last week to extend temporary interest rate caps on federally subsidized student loans for undergraduate students.
The bill passed and signed by the president caps the rate on newly initiated Stafford loans at 3.4 percent through July 2013, and was welcome news to millions of student borrowers.
However, the debate over the bill serves to highlight the inimical effects of ballooning indebtedness on young college grads, as well as the economic side effects of the abundant supply of student loan capital. For many young graduates, the tuition payments continue for years in the school of hard knocks.
According to the Institute for College Access and Success, two thirds of 2010 grads walked across the stage with a loan balance averaging $25,000. For some proud alumni of expensive private schools, the tab may run to $50,000 or more. Add in graduate work and maybe medical school and you could easily be looking at $150,000.
As the availability of credit for college funding has become more prolific, many graduates are learning about the crushing load of debt the hard way.
While most other forms of consumer credit have declined noticeably since the financial crisis, student debt has continued to expand exponentially.
College loans have officially eclipsed credit card debt in the United States and currently exceed $1 trillion. And while much of the load is attributable to federally guaranteed programs, a growing share of the outstanding indebtedness consists of private loans issued by banks and finance companies.
It is woefully evident that many students (and their parents) are not cognizant of the lasting burden this debt imposes after graduation.
The Consumer Financial Protection Bureau has just released redacted text of some 2,000 complaints it logged from former students regarding loans for college. Among the complaints, two consistent themes emerge: burdensome debt long after leaving school, often due to a lack of knowledge and planning at the time of enrollment, and indulgent expenditures on lifestyle items during college.
Graduation day is not the time to begin considering the consequences of leveraging up in college. It is crucial for students (and their parents) to run the numbers before packing up the minivan. Be sure to get a credible estimate of the total costs of debt as well as the projected monthly payments after graduation. The websites Finaid.org and ProjectOnStudentDebt.org are excellent starting places.
Ask yourself whether the cost of an exclusive private school is justified within your particular field of study. Unless you can expect significantly higher annual income owing to the pedigree of your sheepskin, consider the cost advantage of a state school or community college.
Most importantly, maintain an attitude of frugality during your studies. Bear in mind that every dollar you don't spend on campus is an investment in your future. Mark Kantrowitz, founder of Finaid.org, puts it this way: "Live like a student while you are in school so you don't have to live like a student after you graduate."
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Christopher A. Hopkins CFA is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at dflessner@timesfreepress.com.
