More Grads Struggling to Repay Loans
The day of reckoning is looming for Adrienne Frank, a magazine writer who graduated from college this summer with $25,000 in student loans.
In December, Frank has to start making payments on the loans, and she has to find a way to make those payments while whittling down a $5,000 credit card balance and still meeting the day-to-day demands of paying rent and keeping up with her car payments. Although Frank doesn’t know exactly what her loan payment will be, she estimates that it will amount to making a second car payment each month.
“My husband is freaking out,” said Frank, 25, a Tempe, Ariz., resident whose spouse is still in school. “He’s trying to put together a budget to figure out how to handle all these payments.”
Such uncertainty about being able to meet financial obligations is a growing problem among recent college graduates, experts say. About one-third of all recent graduates are unprepared to make their first student loan payment, according to an August survey commissioned by Collegiate Funding Services in Washington. A year ago, fewer than one-fifth said they were unprepared to make that first payment, the company found.
The reasons are twofold, said Chief Executive Barry Morrow: Students are more indebted than ever, and they are walking into one of the worst job markets in a decade.
Soft Job Market a Factor
“Graduates are finding that employment, if available, is not what they thought it was going to be,” Morrow said. “Meanwhile, they have to pay rent, insurance and car payments while they’re heavily in debt. We are seeing a real increase in the number of people calling us saying that they are having trouble paying their loans back.”
The unemployment rate for college graduates younger than 35 has doubled in the last three years, said Jared Bernstein, senior economist at the Economic Policy Institute in Washington.
“College graduates have been relatively immune from economic downturns historically,” Bernstein said. “This time, they have been hit disproportionately hard.”
The rise in unemployment among college grads has been steeper than the rise in unemployment among the population as a whole. Whereas 1.7% of college grads were unemployed in 2000, 3.1% are unemployed today, Bernstein said. The nation’s overall unemployment rate is 6.1% versus 4.1% three years ago.
What those statistics don’t show is that the young gradu- ates who do get jobs often are earning significantly less than they had expected, said Michael C. O’Brien, chief executive of FinancialAid.com in San Diego.
“The job climate,” he said, “is just not what it used to be.”
Meanwhile, the combination of rising tuition costs and a decline in grant-based aid has left students more indebted than ever.
Average student debt has risen 58% in the last decade, according to the College Board, a New York-based college testing and information firm. The average student was carrying a consolidated education-related debt load of $28,701 in the 2001-02 school year, compared with $24,375 the year before, according to the College Board’s annual Trends in Student Aid report.
To make matters worse, most students -- 83%, according to the College Board’s latest survey -- also have revolving credit card debts, Morrow said.
The only bright note: Student loan rates are at historic lows. In July, rates on federally guaranteed student loans fell to 3.42% for loans already in repayment and to 2.82% for loans in deferment periods. (Borrowers are able to defer paying their loans until six months after graduation.)
Low Rates Offer Hope
Because of those low rates, graduates struggling under heavy college debt loads may want to consider a couple of strategies for making their payments more manageable.
For instance, graduates who opt to consolidate their loans can lock in those low rates for the life of the loan, Morrow said.
Those who are heavily indebted and strapped for cash also can stretch out the repayment period, a move that can dramatically cut monthly payments. The repayment period on a typical student loan is 10 years. However, consolidation loans can sometimes stretch repayment over 30 years, depending on the student’s total indebtedness.
That could allow the borrower to use more discretionary income to pay off higher-priced debt, such as auto loans or credit card loans, or to save for retirement, O’Brien said.
Consider the effect on a hypothetical graduate who has $50,000 in student debt. On a traditional 10-year repayment plan, he would pay nearly $500 a month on the loan. If he stretched his repayment over 20 years with a consolidation loan, his required payments would drop to a bit less than $300 a month.
Assuming the graduate can afford $500 monthly, choosing the stretched-out repayment plan could allow him to save the remaining $200 in his company’s 401(k) plan or in an individual retirement account.
Because he would pay his student loans more slowly under this plan, he also would pay more interest on that debt. Stretching out the repayment would cost him about $10,000 in additional interest charges over the 20-year life of the loan.
But assuming he is able to make a 7% return on the $200 he has invested each month -- not unreasonable based on historical stock market returns -- he would have $104,185 saved at the end of the period. That would put him about $90,000 ahead.
Stretching out student loan repayment also can make sense for those who simply want more available cash to pay against higher-cost debts, such as credit cards or auto loans, experts say.
“Proactively managing debt,” Morrow said, “is crucial in reducing lasting negative effects on the careers and finances of recent college graduates.”
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Times staff writer Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns visit The Times’ Web site at www.latimes.com/perfin.
