Spotlight on the Economy: Student Loans

ST. MARY'S COUNTY - 10/30/2008

By Pete Hurrey

Many college graduates now entering the workforce will soon be faced with the dilemma of having to repay student loans. Consider one such graduate, wishing to remain anonymous:

“I have three student loans; two Stafford loans and one Perkins,” said the graduate. “Collectively they are near $17 thousand. With the interest I will have to pay, the loans will end up being about $24 thousand total.”

The graduate admits that the loan payment of nearly $400 per month will be taxing at the entry-level salary currently being earned. However, what troubles the graduate the most is that fact that the interest rates required by the loan payment schedule is prohibitive. “The first four years of the loan repayment will be at four percent,” said the graduate. “Then the interest rate will be raised each year throughout the life of the loan payment schedule ending up somewhere around eight to 10 percent.”

The graduate was aware that the loans, when applied for, were variable interest rate loans. However, with the Fed slashing loan rates to their lowest point in many years, the graduate expected the loan rates to be more reflective of the Fed’s rate.

Consider the fact that many students now graduating or who have recently graduated are facing a daunting task. The workforce is shrinking with the deteriorating economy and jobs are at a premium. Many students are forced to take employment positions that do not reflect their level of education or skills in order to make ends meet.

As the economy continues its upheaval, the situation for students burdened with staggering loans can only cause more student loan defaults in the long term.

The U.S. Department of Education’s Federal Student Aid program handles many student loans and lists its loan portfolio as follows:
• Federal Family Education Loans (FFEL), which include Federal Stafford, Federal Consolidation and Federal PLUS loans.
• Direct Loans, which includes Federal Stafford Consolidation and PLUS loans that are offered through the William D. Ford Direct Loan Program.
• Federal Perkins Loans
• Federal Pell Grants, Federal Supplemental Educational Opportunity Grants (FSEOG), Academic Competitiveness Grants and National SMART Grants.

In most cases, these loans are administered through banks and by the schools being attended by borrowing students. In the case of the example used in this story, there is a further complication in that two of the graduate’s loans are held by Wachovia Bank – a bank now on the brink of default and poised for failure.

“I think they are about to be bought out,” said the graduate. “I don’t know what to do about it. I only know I have to start paying someone back soon.” The graduate then lamented that once the repayment of the loans begins rent and student loans will exceed the new worker's monthly income.