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| The Basics | Uncle Sam cracks the whip on students
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The stakes on student loans just got higher: Not only have rates soared, but the debt can haunt you all the way to the grave.
By Liz Pulliam Weston
If you're a student or parent and felt a little out of breath over the holidays, you weren't imagining things. Lawmakers and Supreme Court justices were busy putting the squeeze on you.
Right before Christmas, Congress decided to slash $12.7 billion over the next five years from the federal student-loan program and boost interest rates on the most popular loans. (The changes are likely to become law in February.) A few weeks earlier, the U.S. Supreme Court gave the government even more power to go after delinquent student loans -- even if the borrower is elderly or disabled.
These two developments have ominous implications for the millions of families who need to borrow money to pay for a college education.
"It's difficult enough as it is," said Ann Ngo, a University of Southern California student who struggles to make ends meet with a part-time job and $45,000 so far in student loans. "Why did the government have to make it worse for us?"
So far, three things are clear:
- If you haven't already consolidated your student loans, now's the time. What's likely to be your last chance to lock in super-low rates will expire July 1, 2006.
- You should consider consolidation even if you're still in school. The Department of Education has made it clear that you don't have to wait.
- You need to limit your student-loan debt. If your total borrowing exceeds the salary you expect to make in your first year out of school, you may have already borrowed too much.
Time to pay the piper
Congress had been signaling for some time that the days of really cheap student loans were numbered. Allowing borrowers to lock in rates as low as 3% for 10, 20 or even 30 years through consolidation programs was simply costing too much, lawmakers decided. The government had to pay subsidies to student lenders for many of those consolidated loans and missed out on higher interest rates for loans it generated itself.
"The government was subsidizing long-term loans at short-term rates," said Martha Holler, Sallie Mae spokeswoman.
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Rates on Stafford loans -- which make up 84% of all federal loans, according to lender Sallie Mae -- would have increased anyway on July 1, since the variable rates are based on 91-day Treasury bill yields that have been climbing. But Congress decided to fix the rate for all new Stafford loans at 6.8%. The new fixed rate will prevent future borrowers from benefiting if rates drop.
The current variable rate is 4.7% for students still in school and 5.3% for graduates. (In 2004, rates hit a low of 2.8% for in-school students and 3.4% for graduates.) The new rate means the typical $20,000 student-loan debt load will cost as much as $2,500 more over 10 years after the rate change takes effect.
Rates for PLUS loans, which are typically taken out by parents, were boosted even further, from a current variable rate of 6.1% to a fixed 8.5%. The PLUS program will be expanded, though, to allow graduate and professional students to borrow money.
That could be a real boon for those students, who often face higher variable rates from private lenders. But the benefit to them doesn't offset the increased cost to parents and the cuts in the rest of the student-loan program.
"I would say it's one step forward, four steps back," said Mark Kantrowitz, publisher of FinAid.
A lifelong commitment
Besides being more expensive, student loans have also become much more difficult to shed, so much so that lenders probably should slap on a warning label: "This debt can follow you to your grave."
Unlike most other unsecured debt, student loans are all but impossible to erase in bankruptcy court. There's also no statute of limitations on how long borrowers can be sued over their debt, and the Department of Education can dock wages, seize refunds and take other steps to recoup what is owed.
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