Debt problem is everyone’s

Most student loans financed by taxpayers

Published: January 04, 2011
By Edie Lau

This is the second of two parts. Read part 1.

Heavy educational borrowing is a problem for the graduates who must labor for the better part of their careers paying off school loans. It's a problem, too, for the profession, which is shaped by the collective debt. But the burden is not the veterinary community's alone.

Ultimately, the issue could become a problem for taxpayers as a whole.

Historically, the U.S. government has backed the majority of student loans through a federally guaranteed student loan program. The "guarantee" in the name applies to the private lenders, who are compensated by the government for 95 to 97 percent of their investment should a borrower default.

Last year, under the Student Aid and Fiscal Responsibility Act, which was attached to the health-care overhaul passed by Congress, the U.S. Department of Education assumed control of all new federally backed student loans. The goal is to streamline the lending process and save money — an estimated $40 billion to $62 billion over the next decade that would have been paid in subsidies and fees to the banks and other private financial institutions previously involved.

In addition, the government now will reap all interest payments on such loans. At the same time, it assumes all risk.

Under the Direct Loan Program, graduate students such as those in veterinary school may borrow up to $138,500 from the U.S. Treasury at 6.8 percent interest. They may tap federal Direct PLUS Loans for the balance of what they need to attend school (as determined by their school) at 7.9 percent interest.

PLUS used to stand for Parent Loan for Undergraduate Students, but its availability was expanded to graduate and professional students in 2006.

While educational loans traditionally have been viewed as worthy, important and solid investments for society, students loans aren't exactly no-risk propositions.

"It's amazing when you consider that a 22-year-old with no job, no collateral and no credit history can borrow $100,000 from taxpayers just by signing a note," observed Timothy Fitzgibbon, vice president of Debt Management Services for the National Council of Higher Education Loan Programs, which represents organizations involved in administering and servicing student loans, including private lenders, guaranty agencies and collection agencies.

And while credit counseling increasingly is part of a school's financial-aid process, the priority of financial aid programs is helping students access the funds they need to get through school.

"You don't want to exclude certain students from certain careers because they don't have the financial resources to afford it. So it's a tricky line to negotiate," said Haley Chitty, a spokesman for the National Association of Student Financial Aid Administrators. "You want to provide access to higher education to everyone."

Moreover, it would be against a school's own interest to deny students the resources they require to attend that school, Fitzgibbon noted. "Is it reasonable to expect a school to tell a student who wants to enroll: 'We're too expensive'?" he asked rhetorically.

Fitzgibbon added that veterinary students have good company when it comes to shouldering school debt. "You could interchange ‘veterinarian' with almost any profession you can think of and you'd be accurate in saying the cost of attendance is outpacing the starting salary," he said.

Default rates on student loans have not been a big problem in recent years, although they've risen from a 20-year low of 4.5 percent in 2003 to 7 percent in 2008, according to U.S. Department of Education figures.

But taxpayers may be on the hook in ways other than swallowing the costs of default. The Income-Based Repayment program, for example, which began in July 2009, allows borrowers to limit their federal educational loan payments to no more than 15 percent of their income. Details on how income and payments are calculated are posted online.

Following an extended period of consistent payment, participants' remaining balances are forgiven. For borrowers who work in public service, balances may be forgiven after 10 years; for everyone else, balances are forgiven after 25 years.

The program may be a blessing for graduates with high debt and not-so-high salaries. "The flip side of that is, it's a taxpayer cost," Fitzgibbon said. "(Making) loans easier to forgive — does that really make college more affordable for students, or just more expensive for taxpayers?"

Most federal loans are considered an entitlement for which student risk and creditworthiness are not factors for approval, according to the U.S. Department of Education. Credit risk is considered for PLUS loans, but a student who doesn't pass a credit check may still receive a loan if someone who can pass the credit check co-signs on the loan, according to department spokeswoman Sara Gast.

Gast noted that under the old system in which private lenders provided federally-backed loans, private lenders generally could decide not to make a loan based on a borrower's creditworthiness.

"If a borrower was turned down by one lender, schools generally worked with the borrower to find an alternative private lender or, ultimately, the Department (of Education) would make the loan," she said.

As to whether the department has concerns about the growing burden of higher-education debt, Gast said, "The Department and its (private sector) associates have an aggressive financial literacy program to help students make good individual borrowing decisions. Among other programs, borrowers are required to participate in entrance counseling before they get their first loan and exit counseling as they leave school."

At Sallie Mae Inc., one of the largest private companies in educational financing, a spokeswoman declined to discuss in detail the company's views of and responses to students' increasing debt load.

"While our underwriting is proprietary, I can tell you that it is designed to help our customers be successful and to maintain the highest likelihood of successful repayment, and it includes looking at the applicant's and co-signer's income and debt, among other factors," said Patricia Nash Cristel, managing director of Corporate Communications.

Part 1: Veterinary student debt continues to climb

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