Student loan straitjackets
College debt, credit cards hard to get out from under
By Mark Schwanhausser
Knight Ridder Newspapers
SAN JOSE, Calif. -- Students are graduating with bigger loan bills than ever, turning what should be a foundation for higher lifetime earnings into a financial straitjacket that could take years -- or even decades -- to escape.
A new study says seniors at public four-year universities owe an average of almost $13,000 in student loans -- a figure that runs even higher for those who earn advanced degrees. Those figures aren't the full picture, however, because students also are graduating with thousands of dollars in credit-card debt with sharply higher interest rates.
The burden of student loans is especially onerous for low-income students and those who attend beauty colleges, truck-driving schools and other vocational programs. It's worst for students who drop out with hefty student loans but can't cash in on the higher incomes generally associated with a college degree.
Some experts worry that debt could deepen further during the recession as workers stream back to the classroom to learn new skills. That influx is coming as California and 28 other states are debating whether to cut higher-education funding. Typically, schools pass along funding cuts by ratcheting up tuition -- which leaves students with little choice but to borrow even more.
As a rule of thumb, debtors tend to struggle once their student loan payments equal 8 percent of their gross income. Students have strapped on so much debt that at least one of every six students who earns a bachelor's degree this year will owe at leat 10 percent of their gross income, estimates Jerry S. Davis, vice president of research for the Lumina Foundation of Education in Indianapolis.
"They're headed for Default City," warned Davis, who tells students that staying below that 8 percent benchmark means they need to earn roughly $1,700 annually for every $1,000 they owe. "It's very difficult to handle that much of a repayment."
Karla Santamaria, 31, can only wish she had it so easy. Three years ago, she dropped out halfway through medical school at Wake Forest University owing about $60,000 in student loans. Today, her loans gobble 20 percent of her paycheck from nonprofit El Concilio of San Mateo County (Calif.), where she oversees bilingual education programs on chronic diseases such as diabetes.
"Interest accrues as I sleep and breathe," said Santamaria, whose family "lost everything" when they fled from the Salvadoran war when she was 10. Her parents could afford to help pay only for her first year at the University of California.
Santamaria figures she could have repaid her student loans in about 10 years if she had secured her medical degree. By following her heart into the nonprofit sector, however, she fears she might still be repaying her student loans when she's nearly 50.