Facts About Student Loans

Sep 14, 2007

The $85 billion-per-year student loan industry is widely considered to be a necessary evil for students looking to finance their increasingly expensive college education. Unfortunately, many students are under-informed when it comes to loans and borrowing for school. Read below for some important facts about student loans and how the industry might be changing.

View 32 Popular Schools »

Student Loan Facts

The majority of college students now need to borrow money to pay for schooling. With nearly 18 million college students in the U.S., the burden of loans is growing to astronomical proportions - the country's total student loan debt is currently more than $460 billion dollars, and rising by $2,000 per second. If you're a student or about to become one, it might be wise to learn a little about student loans and what they can mean for you. Here are some facts about student loans to keep you informed:

1. More Students Are Taking out Bigger Loans

Between 1993 and 2004 the proportion of graduating college students with student loan debt grew from under 50% to nearly two-thirds. In 2004 alone, more than $61 billion was dispersed to students in the form of loans. This increase in borrowing isn't just a product of Americans' willingness to spend other people's money, either; the price of college is going through the roof.

Between 2000 and 2005 - only five short years - the price of tuition at public colleges rose by more than 57 percent.
Private colleges aren't any better. Annual costs at Harvard are now nearly $46,000 - as much as the national median household income.
In the last 10 years, between 1 and 1.6 million students did not go on to college because of financial constraints. In the coming decade, this will increase to between 1.4 and 2.4 million.
Overall, college has become twice as expensive in the last generation.

2. Private Loans Are Becoming More Popular

Private loans are the fastest-growing source of student financial aid, with $14 billion in loans in 2004 coming from private sources - an increase of 600% over ten years before. Much of the reason for this is that rising college costs have not been matched by increases in federal aid. The maximum total amount of aid available through the popular federal Stafford loan program, for example, has stayed at $23,000. Private loans also have steeper interest rates than their federal counterparts, which means that students' overall debt burdens are higher after graduation. In addition, many charge that there is greater danger of corruption with private loans.

3. American Students Are Faced with Unrealistic Expectations for Repayment

Let's say you have a student loan debt of about $20,000 and you're on a 10-year repayment plan. If you make just $10,000 a year, the federal government expects you to spend nearly 30 percent of your income on student loan payments. Think about it: $10,000 is less than $840 per month. If your rent is $300 (leaving out the fact that you'd have to live in the middle of nowhere to get rent that low), you'll only have $288 per month for everything else after you pay the 30%. Hope you like Ramen noodles. In contrast, countries like the UK and Australia don't require payment on student loans until borrowers are making a much more comfortable $30,000 per year -- and even then, the UK only requires a 1.1% payment, while Australia asks for 4.5%.

4. College Students Don't Know What They're Getting Into

Ah, the optimism of youth - according to a 2002 poll by U.S. PIRG, a Washington-based research group, most American college students expect to make $39,000 per year directly after graduation. But the real number is somewhat less thrilling: between $27,000 and $29,000. Add to this the 41 percent of students who graduate with more than $3,000 in credit card debt, and a picture begins to emerge of American college students who are unrealistic about debt and their future financial prospects.

5. The Government Is Getting Involved

The federal government has realized that something is wrong and is now trying to do something about it. The College Cost Reduction and Access Act, passed by both the House and Senate in early September of 2007, is a broad-ranging set of laws meant to change the way student loans are handled and repaid. Interest rates will be lowered, reaching 3.4% in 2011, and borrowers won't have to begin repayments until they are making about $15,000. But some people question the effectiveness of the bill, noting that the interest rates will quickly climb back up after 2012. And, of course, the act still does nothing to address the underlying cause of all this student debt -- the outrageous cost of higher education.

Sources:

American Student Assistance, www.amsa.com

Project on Student Debt, www.projectonstudentdebt.org

Mobilize.org, www.mobilize.org

Student Debt Alert, www.studentdebtalert.org

Washington Post, www.washingtonpost.com

U.S. PIRG, www.uspirg.org

CBS News, www.cbsnews.com

U.S. Department of Education, www.ed.gov

Harvard University, www.harvard.edu

Show me popular schools