Student loans could strain economy

The near doubling in the cost of a college degree in the past decade has produced an explosion in high-priced student loans that could haunt the U.S. economy for years.

Although scholarships, grant money and government-backed student loans (with capped interest rates) have taken up some slack, many families and students have turned to private loans, which carry fees and interest rates that often are variable and can exceed 20 percent.

Many in the next generation of workers will be so debt-burdened, they will have to delay buying homes, limit vacations and eat out less to pay off loans on time.

Kristin Cole, 30, who graduated from Michigan State University'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. "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 still are the primary source of money for many students, but the dynamics have changed radically in recent years as tuition costs have soared and sources of more costly private financing have made higher education seem 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.

"This is literally a new form of indenture ... something that every American parent should be scared of," said 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 more appealing. Consumer prices, on average, rose less than 29 percent in 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, but for almost 15 years, the maximum available per person in government-guaranteed student loans, which by law can't charge rates higher than 6.8 percent, has remained at $23,000 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.

The student loan law signed by President Bush last week will reduce the interest rates on government-guaranteed loans to 3.4 percent by 2011, but will keep the $23,000 cap.

Sallie Mae, formally known as SLM Corp., has been on the winning side of the loan bonanza. Its portfolio of 10 million clients includes $25 billion in private and $128 billion in government-backed education loans. But 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.

The question is whether everyone who is borrowing will be able to repay. Experts don't track default rates on private student loans, but many predict sharp increases in years to come.