Trapped for Life: The Sad, Familiar Story. He Borrowed for College, Pays 18%, and Is $50,000 in Debt -- With a Low Salary.
This is from the San Francisco Chronicle (Oct. 25, 2006).
Ethan Winsby considers himself in financial ruin at age 27 -- but not because he lost at gambling or risked everything on a startup that went bust.
Like a growing number of young adults, he had to take out private loans to attend college.
He graduated from the California Culinary Academy in San Francisco in 2005, but he said his subsequent low-paying job as a cook has made it nearly impossible for him to repay the $35,000 he borrowed.
As the 18 percent interest rate compounded, his debt has soared to $50,000. The monthly payments, if he made them, would be two-thirds of his $1,200 monthly after-tax salary.
With no prospects of paying his loans off quickly, Winsby sees his debt spiraling out of control.
"At this rate, I'm going to be in default," he said. "Default means you have no options. It's the main source of stress in my life. It shouldn't be. I was trying to make a career for myself. I wish I hadn't even gone to school."
As the cost of college skyrockets and the federal government limits how much it will loan students, young adults increasingly are taking out private loans to finance their education.
The amount loaned to students nearly tripled between 2001 and 2006, from $6.1 billion to $17.3 billion, according to an annual student aid survey released Tuesday by the College Board.
"I am shocked and worried about the amount of debt these companies are encouraging students to take out," said Robert Shireman, executive director of the Project on Student Debt.
The trend is especially dangerous, he said, because such loans almost always carry a variable interest rate and lack the protections offered by federal loans, "so if interest rates go up, your private student loan can look like a credit card pretty quickly."
Recent changes in federal law make it nearly impossible to discharge any kind of student loan debt through bankruptcy. Instead, a borrower faces the possibility of a ruined credit rating or being forced into an unaffordable payment plan. . . .
Students and families are finding it increasingly hard to pay for college. In the past five years, the cost of attending a public university has risen 35 percent after adjusting for inflation, according to the College Board. Meanwhile, federal loan amounts have stagnated. . . .
Students often get into trouble because they don't fully understand the terms and agreements of what they're getting into, said Alan Collinge, who founded Student Loan Justice in Washington 18 months ago to collect stories of wronged students and to advocate for change. He did this after unemployment caused him to default on a $38,000 loan to attend the University of Southern California. That loan has grown to $105,000 with compounding interest, penalties and fees.
"College students are an extremely vulnerable segment of the population," Collinge said. "They will sign virtually anything you put in front of them."
Ethan Winsby feels like he signed away his freedom. Every night, he searches the Internet for a way out of the financial mess and wonders what will happen when Sallie Mae no longer allows him to put off the payments. In reviewing his situation, Sallie Mae spokesman Tom Joyce called Winsby an "unusual case" and said few of the company's borrowers have such high variable interest rates. He added that less than 2 percent of Sallie Mae's private loan borrowers default.
But higher-education experts counter that default rates are deceptive. Companies use techniques such as allowing borrowers to defer payments to avoid defaulting -- but loan recipients still owe many times what they originally borrowed.
They say too many people are like Winsby, struggling with loans they might never be able to repay.
"What sense does it make to dig the hole deeper and create an underclass who because of their student loan default will never get out of debt?" asked Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. "We're marginalizing a significant portion of our population."
None of this is necessary. A person can earn a bachelor's degree at home and pay for it by working at McDonald's part-time. But few people understand this.