The near doubling in the cost of a college degree the past decade has produced an explosion in high-priced student loans that could haunt the U.S. economy for years.
While scholarship, grant money and government-backed student loans, whose interest rates are capped, have taken up some of the slack, many families and individual students have turned to private loans, which carry fees and interest rates that are often variable and up to 20 percent.
Many in the next generation of workers will be so debt-burdened they will have to delay home purchases, limit vacations, even eat out less to pay loans off on time.
Kristin Cole, 30, who graduated from Michigan State's law school and lives in Grand Rapids, owes $150,000 in private and government-backed student loans. Her monthly payment of $660, which consumes a quarter of her take-home pay, is scheduled to jump to $800 in a year or so, confronting her with stark financial choices.
"I could never buy a house. I can't travel; I can't do anything," she said in an interview. "I feel like a prisoner."
A legal aid worker, Cole said she may need to get a job at a law firm, "doing something that I'm not real dedicated to, just for the sake of being able to live."
Parents are still the primary source of funds for many students, but the dynamics were radically altered in recent years as tuition costs soared and sources of readily available and more costly private financing made higher education seemingly available to anyone willing to sign a loan application.
Students with no credit history and no relatives to co-sign loans (or co-signing parents with tarnished credit) were willing to bet that high-priced loans were a trade-off for a shot at the American dream. But high-paying jobs are proving elusive for many graduates.
"This is literally a new form of indenture ... something that every American parent should be scared of," says Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers.
More than $17 billion in private student loans were issued last year, up from $4 billion a year in 2001. Outstanding student borrowing jumped from $38 billion in 1995 to $85 billion last year, according to experts and lawmakers.
Rocketing tuition fees made borrowing that much more appealing. Consumer prices on average rose less than 29 percent the past 10 years while tuition, fees, and room and board at four-year public colleges and universities soared 79 percent to $12,796 a year and 65 percent to $30,367 a year at private institutions, according to the College Board.
Scholarship and grant money have increased, yet for almost 15 years, the maximum available per person in government-guaranteed student loans, which by law can't charge rates above 6.8 percent, has remained at $23,000 total for four years. That's less than half the average four-year tuition, room and board of $51,000 at public colleges and $121,000 at private institutions.
Sallie Mae, formally known as SLM Corp., has been on the winning side of the loan bonanza. Its portfolio of 10 million customers includes $25 billion in private and $128 billion in government-backed education loans. However, private-equity investors who had offered $25 billion to buy the company backed out last week, citing credit market weakness and a new law cutting billions of dollars in subsidies to student lenders.
Citigroup, Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Wachovia Corp. and Regions Financial Corp., are also big players in the private student loan business. And there has been an explosion in specialized student loan lenders, such as EduCap, Nelnet Inc., NextStudent Inc., Student Loan Corp., College Loan Corp., CIT Group Inc. and Education Finance Partners Inc.
The question is whether everyone who borrowed will be able to repay. Experts don't track default rates on private student loans, but many predict sharp increases in years to come.
Paul-Henry Zottola, a 35-year-old periodontist in Rocky Hill, Conn., faces paying $1,600 a month on his student loan on top of a $2,300 mortgage payment and $1,500 on the loan he took out to start his practice.
His credit record remains solid but he owes more than $300,000 in student loans as he and his wife, Heather, an elementary school administrator, raise two young children.
"It would be very easy to feel crushed by it," Zottola said. "All my income for the next 10 years is spoken for."
Meanwhile, complaints about marketing of private loans, such as ads promising to approve loans worth $50,000 in just minutes, are on the rise. The complaints have made their way to lawmakers, who see a need to regulate the highly profitable and diverse group of companies and the loans they make to college students.
In August, the Senate Banking Committee approved a bill that would mandate clearer disclosure of rates and terms on private student loans. The bill also would require a 30-day comparison shopping period after loan approval, during which time the offer terms could not be altered.
New York Attorney General Andrew Cuomo says many graduates who borrowed owe as much if not more than most homeowners owe on mortgages. Unlike mortgages with clear consumer disclosure requirements, even from nonbank lenders, private lending is "the Wild West of the student loan industry," he said.
Ticking time bomb?
Critics say what happened in the mortgage market could happen in the student loan market. Cuomo, who conducted a nationwide investigation, says the parallels between the two markets are "provocative.
Demand for bundled student loans sold to institutional investors worldwide fueled lending to students. The market for private student loan-backed securities leapt 76 percent last year to $16.6 billion from $9.4 billion in 2005, according to Moody's Investors Service.
The student loan-backed securities market has yet to suffer noticeable effects of a global credit squeeze that was triggered this summer by a mortgage meltdown of borrowers with risky credit.
"Once the economy starts to slow, you're going to see a large increase of these people in bankruptcy court," said Robert Manning, a professor at Rochester Institute of Technology who has written about college students and credit cards.
A 2005 change to bankruptcy law puts private student loans on par with child support and alimony payments: Lenders can garnish wages if someone doesn't pay.
Cuomo's probe revealed what he calls an "appalling pattern of favoritism" for student lenders that provided kickbacks, revenue-sharing plans and trips to college administrators in exchange for recommended lender status. Other critics allege widespread corrupt arrangements propelled a student loan boom.
Lenders deny such charges, arguing that industry growth resulted from surging education costs and that higher interest rates are justified for unsecured loans to borrowers with blemished or insufficient credit records.
"Lenders take 100 percent of the repayment risk on flexible private-education loans made to people with limited credit histories, on which they will not get repaid for several years," Barry Goulding, a Sallie Mae official, told Congress last spring.
New regulations could dry up access to education financing, he and other industry executives argue. Some experts are skeptical, predicting waves of student loan delinquencies and defaults on what is outstanding.
"Should private student loans suffer the same sort of failure as (subprime) mortgages, as students graduate or drop out and find themselves unable to pay, we will do serious damage not only to the lives of many students but also to the economic and social fabric of our country that depends on college graduates for its strength," says Luke Swarthout at the U.S. Public Interest Research Group.