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After college, many struggle with debts

November 22, 2009 12:36 am

Jessica Patrick entered one of the worst labor markets in decades when she graduated from the University of Mary Washington in December.

Patrick, whose bachelor's degree is in studio art, applied for just about every retail job she could think of, but until recently nothing panned out.

Patrick, 23, paid for college on her own. To do so, she took out private student loans from Sallie Mae and ACS that now total almost $40,000 including the interest that has accrued. Six months after graduating, she had to start paying back the loans.

She's been able to make the $300-a-month payment, which will go up in a few years, but it hasn't been easy. The Massaponax High School graduate lives with her mother and stepfather in Stafford County, doesn't have health insurance and puts just about all her dwindling savings into the monthly loan payment.

"I don't spend on anything else," Patrick said.

She's far from alone. And unlike many Americans, Patrick is making her student loan payments despite the brutal labor market.

The percentage of people who are at least 90 days late on their student loan payments is significantly higher than the percentage of people behind on their mortgage payments, though the latter has received far more media attention.

The student loan delinquency rate ranges from 5.8 percent to 14.5 percent for localities in the Fredericksburg area, according to data from the Federal Reserve Bank of New York. In each area locality, that rate is higher than the seriously delinquent mortgage rate, often two, three or even four times higher.

That higher delinquency rate is partly due to the fact that student loans are unsecured credit given to people with little income and no credit history, said Patricia Nash Christel, a spokeswoman for Sallie Mae, which is the country's largest student loan lender.

Christel said Sallie Mae helped 1.4 million customers resolve their past-due status in the 2008-09 academic year. The company offers online resources to help people estimate the cost of college and the income needed to repay various levels of debt. It offers financial counseling to students while they're still in school.

Despite these efforts, many people get out of college having given little thought to how they'll repay the loans, according to a survey of 1,604 college students and their families that Sallie Mae conducted this spring called "How America Pays for College."

The survey found that 58 percent of American families paid for college last year without borrowing anything. Fifty-eight percent of families who borrowed did not take the student's expected starting salary into consideration. About a quarter of the students surveyed didn't know what their future monthly payment would be, and the rest were often wildly off the mark.

By the time graduates figure out what they'll be paying, it can be too late, especially in a weak labor market. Though the vast majority of people are making their loan payments on time, the delinquency and default rates are going up, and countless more are stretching themselves thin to stay up to date.

The U.S. Department of Education announced this fall that 6.7 percent of borrowers who started paying their student loans between Oct. 1, 2006, and Sept. 30, 2007, were already in default by Sept. 30, 2008. That was up from 5.2 percent the year before and 4.6 percent the year before that.

Go to studentloanjustice .org and you'll find tales of people who have dug themselves into deep debt. A woman listed as the contact for Virginia is now $225,000 in debt from principal and interest on a $92,000 loan she took out for law school in the early 1990s.

The single mother's problems started when she lost her job and defaulted on the payments in 1998. Her poor credit disqualified her for many of the lucrative jobs that might have enabled a loan repayment.

This 52-year-old woman is willing to identify herself only as "Pam" because for years she's "lived off the grid." That means no credit cards, no apartments rented in her name and no telling her employer about the situation. She now makes $17,000 a year working at a school in Florida and recently qualified for a new U.S. Department of Education program called Income Based Repayment that caps payments on federal-backed loans (private loans don't qualify) to 15 percent of the borrower's income.

That program brings Pam's payment, which would be $1,200, down to $104 a month. But meanwhile, her loan balance keeps growing.

"There's no way to get out of this situation," she said. "It gets worse every month."

Unlike with other forms of debt, student loans are not dischargeable in bankruptcy unless a judge finds that the loan presents an "undue hardship" to the borrower. That's a tough thing to prove, said Spotsylvania County bankruptcy attorney Charles Cowsert.

"It's a very rigorous standard," he said.

Linda Murphy, a 66-year-old Ruther Glen woman, found that out the hard way. She filed for bankruptcy in February 2005 after racking up $180,000 in debt mostly from hospital bills resulting from heart bypass surgery.

The medical debt was discharged, but the loan balance that Murphy owed from borrowing $4,000 for bartender school in 1988 stayed on her record. Every month, $197 is deducted from her Social Security and disability payments to cover the student loan debt.

Advocates for student loan reform point to the bankruptcy law as the key element that needs to change, as it prevents people from starting over.

Christel, the Sallie Mae spokeswoman, said the company supports bankruptcy reform that would allow student loans to be dischargeable for those who have made a good-faith effort to repay the loans over a five- to seven-year period and still face financial difficulty. But she said ideally the company wants to work with borrowers far before it gets to that point.

Back in Fredericksburg, Patrick took one big step toward staying current on her student loans this past week. She was elated to find a job with the Virginia Department of Alcoholic Beverage Control. She'll be working at one of the area retail stores two or three days a week. Longer-term, she's thinking of getting certified to teach art.

Regardless, she knows the student loans will be with her for years to come.

"I just know I'll be paying forever," she said.

Bill Freehling: 540/374-5405
Email: bfreehling@freelancestar.com