Cinthya Vieyra, a first-generation college student from Redwood City, never imagined going anywhere for higher education except a local community college. But she got into Notre Dame de Namur in Belmont and worked two jobs and took out federal loans to cover the $45,000-per-year cost of tuition, room and board. Focused solely on getting an education, she didn't worry about how much it would cost her later on, she said.
Rand DeCastro, a 36-year-old web designer from Guam who works at a startup in Palo Alto, is working to pay off the $148,000 he accumulated during a two-year art program at The Art Institute of Seattle. He now pays about $700 per month in loans, which does not include his currently deferred federal loans. He and his partner have gone back to school multiple times, partially to defer on their loans and to take a break from the never-ending debt.
This is the state of the nation's loan system today.
With student debt exceeding national credit-card debt — crossing the $1 trillion point last year — and college becoming costlier each year, students and their families are borrowing more and more to finance their futures.
People at every stage of their education — just starting college or in the midst of their undergraduate or graduate tenures — along with recent graduates, parents and retired adults are saddled with debt. They're neck-deep in what many call a broken system, which has devolved from a well-intentioned federal commitment into a $1 trillion problem.
The evolution of student loans
The birth of student loans can be traced back to 1840, when the first program was established at Harvard University.
But student loans started taking off nationwide during the second half of the 20th century. The 1958 National Defense Education Act — sparked in part by the Soviet launch of the first-ever satellite, Sputnik, and an ensuing concern that America was falling behind as a technology, math and science superpower — provided funding for educational programs, graduate fellowships, vocational-technical training and loans for college students interested in careers in science, math and foreign languages.
The Higher Education Act of 1965 marked a milestone in student-loan history, providing Pell Grants for lower-income students. It also increased the amount of federal money given to universities so they could boost their financial-aid offerings, created scholarships and allowed for loans with lower interest rates.
The act's Guaranteed Student Loan Program — which would later become the Stafford Loan Program — granted loans whose repayment students could defer while enrolled in school full time. These came in both subsidized and unsubsidized form: subsidized meaning the government paid the interest while the borrower was in school, and unsubsidized meaning the borrower was responsible for all interest accrued.
Later came the Free Application for Financial Student Aid (FAFSA) — which all students must complete before applying for federal and state loans — and loan-based repayment plans.
Banks and nonprofit lenders entered the student-loan business in 1965, when the government began guaranteeing student loans under the Federal Family Education Loan Program. This opened the door for financial institutions such as Sallie Mae and Wells Fargo.
State financial-aid programs, such as Cal Grants — money funded by the state of California that does not have to be paid back — also became part of the mix, as well as private scholarships.
With set limits, well-tailored requirements and repayment options in place, federal and state loan programs began as well-intentioned programs designed to make sure people from all walks of life could pursue higher education.
Kathy Rose, a retired schoolteacher who lives in Menlo Park, said that when she attended San Jose State University in the 1970s, paying for college was that simple.
"It used to be government loans, and they weren't in it to make a profit," she said. "They were there to help you get through college."
Rose borrowed $900 to finance her undergraduate education, half of which was paid off by the government because after graduating, she became a teacher in a low-income school district. With monthly payments of about $40, she said, she paid off her debt in about a year.
"It was a piece of cake. We never even thought about it."
Today the picture is quite different.
A bad time for a student loan
As a full-time student in an intense art program, Rand DeCastro worked at most part-time while getting an education. His partner, Scott Schafer, who was working as an adviser at the University of Washington at the time, supported both of them, but DeCastro still had to take out loans to cover tuition as well as some living expenses.
"For a while we were relying on only his salary when I was full time in school," DeCastro said. "So we know what it's like to be poor, to be on food stamps, to be going to food banks to get food and getting stipends to go to the grocery store. It's really humbling and kind of embarrassing to be able-bodied people who are working and still can't make ends meet, to have to go to a food bank and get frozen peas and trying to figure out what we can do just to eat for the week. It's tough. It's really tough."
Schafer, now an assistant director of fellowships at Stanford University, has his own set of student loans. He graduated with a degree in sociology from the University of California at Los Angeles in 1996, owing about $30,000 in federal loans. He went on to graduate school to study psychology, taking out more loans to do so.
"Initially, I was grateful for the loans," Schafer said. "But, as the aggregate amounts piled up, I felt weary and dreadful each time I took one out. But, it felt like I needed to do it just to get the master's and increase my earning potential. So, the loans would lead to a degree that would enable me to make more money, in theory."
This theory disintegrated for many students after the recession hit in 2008, making it harder and harder to find well-paying jobs to begin paying back their debt.
"It's interesting," Schafer said. "The system is structured to encourage people to go to school and amass debt, but then there's not a lot of job prospects for people who are graduating. It's not setting people up for success."
Schafer's path through the job market and higher education was shaped by the economy, as he went back and forth between going to graduate school and finding jobs.
This cycle was driven by the ever-challenging pursuit of "what do I want to do," but for many feeling desperate about their student loans, returning to school has also become a means to escape debt.
"I've gone to school so many times partially to just be able not to pay my loans," DeCastro said. "It's sort of this vicious cycle where you're kind of bouncing checks in a way. You start a program, get the loan, pay off some of other bills and then that goes away, start a new program or start school again, get more loans to try to pay off previous loans or previous debt and it just keeps racking up and up and up.
"It's sort of milking the system, but when you're so far deep into it, there's really not much you can do except milk the system."
DeCastro graduated in 2010 and entered an unforgiving job market, especially for a luxury industry such as interior design. He got a job in sales at a furniture store but realized any hope of going beyond that was slim. He decided to go back to school for a web-design degree, choosing one of the few fields that was booming at the time.
And his web degree did pay off; he almost immediately got his current job, moved to Silicon Valley and began chipping away at his loans.
By the end of this year, DeCastro estimates he'll be paying $1,000 every month.
"That's $1,000 that I could be using to save up to buy a house or go on a trip or put away for a nest egg or something," said DeCastro, who is paying about 18 percent interest on his private loans.
"I'm not saying I deserve a free handout, but there's this tipping point where you're like, 'OK, get an education, go to school, be all you can be and get an education and you'll succeed,' and that's what we tell people to do, so we do all we can to make that happen."
The rising cost of a college education
College is more expensive than ever today, across the board. Between the 2000-01 and 2010-11 academic years, prices for undergraduate tuition, room and board at public institutions rose 42 percent, and prices at private not-for-profit institutions rose 31 percent, after adjustment for inflation, according to the federal National Center for Educational Statistics.
For the 2010-11 year, undergraduate tuition, room and board were estimated to be $13,600 at public institutions, $36,300 at private not-for-profit institutions, and $23,500 at private for-profit institutions.
"From my perspective, I think it's atrocious, quite frankly," said Shannon LeCompte, college success director at College Track, a nonprofit in East Palo Alto that helps students from poorer communities prepare for college and supports them while they are in school.
LeCompte said when she graduated from Santa Clara University in 2001, the annual ticket price (tuition, room and board) totaled $24,000. For the 2012-13 academic year, undergraduate tuition and fees plus room and board checked in at $52,848.
When considering what drives the rising cost of tuition in the United States, inflation — the natural increase in cost of living over time — does have to be taken into account.
But there is much more at play.
One reason college has become more expensive is that many schools, mostly private four-year universities and public research institutions, are spending more in order to be more competitive. They're spending on hiring and trying to keep the best professors, conducting research, expanding extracurricular programs, improving student services, and constructing new buildings and sports arenas — and students end up footing some of the bill.
A second reason, which plays out at the nation's public colleges and universities, is state budget cuts. As states slash higher-education funding, as California has in recent years, colleges raise tuition to make up for the difference. The burden thus shifts from the government to students and their families.
Furthermore, demand for college has only grown, which, as in any supply-and-demand model, has led to increased prices.
The problem of the rising costs of a college education has landed in the federal spotlight. President Barack Obama in August went on a two-day bus tour to bring attention to the issue of college affordability. During the tour, he proposed a government rating system that would judge schools based on their affordability using numbers such as the percentage of students receiving Pell Grants, average debt accrued by graduates, graduation rates, average tuition and incomes of graduated students.
"Higher education cannot be a luxury," Obama told a crowd of students at the University of Buffalo in New York. "Every American family should be able to get it."
The rating system, which would go into effect in time for the 2015 school year, is billed as a means to help students and their families decide whether a certain school is worth the financial investment, help the government decide where to allocate financial aid and incentivize schools to reduce costs.
The system instantly sparked criticism and concern, however. Critics labeled it yet another subjective school-rating system that, as one college professor wrote in a New York Times letter to the editor, "fails to come to grips with the roots of the problem."
Though college has become more costly, students continue to believe that the education is worth the investment.
Eighty-six percent of students and 85 percent of parents strongly agree that college is an investment in the future (the highest numbers since 2010), according to Sallie Mae's annual survey, "How America Pays for College." A college degree still guarantees better financial security and economic mobility than a high school diploma or an incomplete college education.
Mounting debt and confusion
A record number of students are going into debt in order to finance their futures.
Fifty-seven percent of U.S. undergraduates used federal aid to pay for college in the 2011-12 academic year, up from 47 percent in 2007-08, according to a report released by the Education Department in August.
More government spending on financial aid is part of that equation. In 2005, new loans through the Federal Direct Loan Program totaled $55.8 billion; in 2009, $96.5 billion.
So there's more money in the system, and with the median household income still struggling to attain pre-recession levels, greater numbers of people are seeking aid.
"Unfortunately costs have risen at rates astronomically higher than standard family income," College Track's LeCompte said.
Lack of financial planning could be a contributor to the loan boom, said Karen Cooper, the financial-aid director at Stanford University.
"I haven't seen research to back this up, but I think another issue is that parents just haven't saved for college expenses," Cooper said. "Every year I see parents who are totally surprised by the realities of college costs, and they've done no planning so are left with loans as the best alternative."
The quest for a graduate education has also led students to take out private-bank loans once they max out their unsubsidized and other federal loans, LeCompte added.
Regardless of the reasons for mounting debt, it's safe to say that a large number of those taking out student loans don't know what they're getting into.
Cinthya Vieyra attended the private, four-year Notre Dame de Namur. When she took out her loans — subsidized and unsubsidized Stafford loans and a Perkins loan — she said she didn't look into different options for interest rates or when she would need to start payments.
"The information went in one ear and out the other. Being 18 at the time ... 'Why is it so difficult?'" she said she felt like asking. "Just give me the paperwork. I'll sign it (and) worry about it later."
Vieyra graduated in May with $36,352 in debt.
She said many undergraduates do not grasp the full scope of loans when they initially take them out: how much they're borrowing, who they're borrowing from, what different types of loans are, how they're going to pay their debt off.
Vieyra now has a full-time job at Beyond12, a national nonprofit that helps underserved students be successful in college. She lives at home with her mother to save on rent.
"When I look at it, I try to think of it as a good investment," she said of her debt.
What scares her, she said, is how much this number has grown, due to interest. She said she considered returning to school part-time in order to defer on her loans or discharging her debt by going into public service (under one government program, some full-time public service workers qualify for loan forgiveness). Instead, she chose a five-to-10 year repayment plan and is actively budgeting for her future.
"I'm trying to be mindful of rent and miscellaneous and my priority, which is paying off my debt," she said.
Confusion is common when it comes to loans, starting with the difference between loans and grants or scholarships, Le Compte said.
According to Nerd Wallet, a personal finance and credit-card comparison website, 60 percent of student-loan borrowers don't understand the difference between private and federal loans. Private bank loans have higher limits but also higher interest rates that could hurt in the long run.
"I didn't know the difference (between different types of loans)," Patricia Zeider said. "I didn't know anything until the end" of college. That's when she was required to do exit counseling.
Exit counseling is a graduation requirement at many colleges. It's also a federal-loan safeguard: Students must do entrance counseling before taking out a loan so they understand what they're getting into and exit counseling afterward, so they can figure out repayment options and plan for their future. Even then, the information can be difficult to absorb.
Zeider said her exit counseling was an online program that reminded her of clicking through traffic school.
Was it helpful?
"No. I don't think I realized what it was really like until I had to start paying it," she said.
Betting on their futures
Some students who take out loans to fund their education say it makes sense to do so, even if they don't fully grasp the particulars.
Sean and Antwon Chatmon — twin brothers from East Palo Alto in their senior years at Whittier College in southern California — plan on getting master's degrees before returning to East Palo Alto to open a combination massage therapy and family/marriage therapy practice. They expect their earnings will more than pay back their student loans.
"I'm not too worried about it," Sean said. "I feel everything will work out. I'll get a career that I can start paying back with."
Each borrowed about $20,000 a year from Wells Fargo to finance his undergraduate education. Sean said the one downside is that he feels bad that it's bringing down their parents' credit as loan cosigners.
"They were like: 'You know, it's going to be expensive. But at least you'll be getting out in four years,'" Sean said his parents told them. "If we went to a state school it would have been more impacted, and we probably wouldn't be graduating this year.
"And they'd rather us get out in time and then either go on with education or get a career where we can start paying them back. As far as that, I'm not really too worried about it. I think I have like $90,000 in debt. I added it up earlier this summer."
Both brothers plan to attend Palo Alto University for their master's degrees, which will cost around $20,000 per year. They're on their own paying for that, their parents have told them.
Antwon is not worried either. He mentioned that he saw a piece on the Suze Orman Show (Orman is a self-proclaimed personal-finance guru) about a 10-year government loan-forgiveness program through public service.
He said he and his brother will look into getting their loans forgiven that way, but if not, the plan is to "definitely continue education, try to get a pretty high-paying job that I love where I can help people and also pay back my loans."
This mentality is common for students pursuing careers in fields such as medicine or engineering. The debt is worth it when there's a guarantee that there will be a for-sure return on the investment, they say.
"I like to use the engineering masters student as an example," Stanford's Cooper said. "They're going to have good jobs when they're done so they can afford to take on this debt. And that's what they want to do anyway; that's why they're here."
Xio Pinto, a Palo Alto native currently at Albany Medical College, is confident she'll be able to pay off an eventual estimated $200,000 debt because she'll be able to secure a high-paying job.
"I was talking with some of my friends about finances, and at a certain point someone just said, 'Well, what's another $5,000 in loans anyway?'" she wrote in an email. "It was rather shocking to realize that they were right. For my profession, you have to know that you're going to go into a load of debt and trust that you're going to pay it off eventually."
Pinto's parents — who she said also struggled with loans, her father taking 35 years to pay off his medical-school debt — pay for her living expenses and some of her tuition, but the rest she has financed with federal subsidized loans.
Regardless of the eventual return on her and her parents' investment, borrowing money still weighs heavily on Pinto.
"It's kind of like, 'Well, I'm up (a) creek, but I think I'm going to find a paddle. ... In, like, three years I'm going to have a paddle to start to get out of this mess,'" she said. "And until then you just kind of have to go with it."
What's the fix?
As the problem has grown, solutions in various sectors, from government to entrepreneurial, have emerged.
Numerous start-ups are trying to address the debt problem in innovative ways, such as San Francisco-based ReadyForZero, which is an online space where users can manage all of their debt. Free of charge, the company pulls together all of a user's financial information — credit card debt, student loans, income, etc. — and creates a financial plan based on his or her ability to pay. For a premium of $7 a month, users can use ReadyForZero to schedule and make payments on their loans.
ReadyForZero's "fastest growing segment" is student-loan debt — $250 million out of about $1 billion total, said co-founder Rod Ebrahimi. He said that's because there is a "need for people to just figure it out" but also because ReadyForZero's target audience is people in their 20s and 30s, an age where one's debt is likely to be from student loans.
The idea for ReadyForZero was inspired by Ebrahimi's girlfriend, who one day asked him and his tech friends: "Where do I go to manage all my debt?"
"And we had no answer," Ebrahimi said. So they created the website, which tracks a user's payment progress, total debt, next steps to take, credit score and more.
"I know it seems very small, but just seeing (her debt) visually going down" helped, he said. "And we provide that. She was in the six-figure range in total, so just seeing that number didn't motivate her to pay it down. (She) just felt like, 'I can't do it.' ReadyForZero made it a little more tangible: 'This payment will save you this much in this much time'; 'make an extra payment'; or 'set up a recurring payment.'"
In addition to working on debt management, educational entrepreneurs are tackling the costs of higher education. There's already been a surge in less-costly methods of learning, especially online education. MOOCs, or massive open online courses, are popping up everywhere, from Harvard to San Jose State University. Foregoing the need for bricks and mortar, MOOCs are battling higher education's chronic issues of affordability and accessibility by harnessing market forces.
On the government front, in addition to Obama's college-ranking system, politicians are targeting the loan problem with legislation. State Assemblyman Bob Wieckowski, who represents Fremont and areas south of San Jose, introduced a "Student Bill of Rights" in February. The legislative package includes four bills designed to more effectively address the student-debt burden.
AB 391 would require the California Department of Education to add curriculum for grades seven through 12 to help students better understand economics and personal finances — including paying for postsecondary education. The bill was heard in the Senate Appropriations Committee in April and is still in committee process.
AB 534, dubbed the "Know Before You Owe" Act, would ensure that all students taking out loans, whether they are federal or private, receive the same counseling. It would require entrance and exit counseling for students who take out private loans.
AB 233 would prevent wage garnishment for federal student loans, which is when an employer is required by court order to withhold a person's earnings in order to force a debt payment. It also encourages lenders to work with students to find manageable repayment plans. The bill was read in the Senate Judiciary Committee in June and is slated for a third reading.
AJR 11, a joint resolution known as the "Financial Fresh Start Resolution of 2013," urges Obama and the Congress to make federal reforms that would allow private student-loan debt to be discharged via bankruptcy. The bill was filed with the California Secretary of State on Sept. 9.
Change could also come in the form of revisions to the 1965 Higher Education Act, which is set to expire at the end of this year. Last reauthorized in 2008 after five years of temporary extensions, Congress will be forced to rewrite the act, but that is likely to be far off, Cooper said.
"If I had to guess, I would say it's probably going to come piecemeal. I can't imagine this Congress being able to do it all at once."
But people have begun calling for change, she said, proposing simplifying loans programs by collapsing them into fewer programs, offering fewer subsidized loan options, placing more emphasis on making the repayment side of things easier.
Schafer and DeCastro have written many letters to elected officials — Obama, U.S. Senators Dianne Feinstein and Barbara Boxer — urging them to consider various alternatives for student-loan reform, such as consolidation.
Loan consolidation centralizes all of a borrower's loans into one bill, can lower his or her monthly payments by allowing for extended repayment periods (up to 30 years, during which interest still accrues) and might allow for switching from a variable to fixed interest rate.
Schafer was able to consolidate all of his federal loans, but DeCastro, with federal and private loans coming in with different interest rates, cannot consolidate his debt.
"I'm happy to pay back my loans, but the interest is just killing me," DeCastro said. "My private loans are at 18 or 19 percent interest. So it would be nice to be able to consolidate my public loans or federal loans into one and have just one payment go out every month. I have every intention of paying back my loans, but there needs to be some way to make that happen."
They've received stockpile responses, letters saying, "I'm very much into helping students out, which is why I'm all for lowering federal loan interest rates."
But that's not enough, DeCastro and Schafer said.
"There are a lot of people who take out private loans in addition to federal loans," Schafer said. "What they need to do is open up ... the federal programs to consolidate private loans. They also need to re-examine loan-forgiveness issues for people who are approaching retirement age and that kind of thing."
He added that at the rate he's going, he'll definitely be retired and still paying off his total student-loan debt, which, with compounding interest, has grown from a principal of $128,000 to $150,000.
"I'm 42 now, and I can't afford to make the full time (payments). ... If I did the full-time regular payment plan, it would probably be 10 to 20 years, but the payments would probably be around $1,300 a month, which is not — unless I have a huge change in my income — that's not realistic.
"I guess we could move back in with our parents," he said, laughing sarcastically. "It's a challenge."
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