Wednesday, May 14, 2008

Student Loan Debt

Student loans are not as cheap as they used to be. These days Federal Stafford Loans are set at a fixed 6.8% interest rate and if you need more money than the $20,500 a year limit, Graduate PLUS loans are available at 8.5%. Seven and 8.5%... are you kidding me? This is so ridiculous - they used to be 3%! Student loans should be 3% since they cannot be discharged in the event of a bankruptcy and lenders have the option to garnish your wages. Where's their risk? Seven percent is a great return for a lender, almost on par with the stock market!

The government has firmly declared that education is not a priority in this country. In 2006, Dubya signed a bill into law that cut $12.7 billion out of education funding, which caused the federal student loan interest rates to soar. There was chatter that the Democrats were going to fix the student loan problem when they took control, and there have been some House votes, but today the status quo remains. Hillary Clinton has pledged to make some changes as President, but now it looks like she won't win the nomination.

The leaders in our government must want our country to lose its edge in innovation because bright people will either put off going to school (maybe forever) or will go somewhere else. Technical majors have been declining for years, so the government has been trying to boost math, science and engineering majors. We are still importing our scientists and technical minds. The government's plan is to throw money at organizations, like the National Science Foundation. Uhh Duhhh, if college tuition and student loans keep getting more expensive then there are going to be less graduates overall. And those that do bend over and take it for these ridiculous interest rates will have more incentive to pursue higher paying careers, instead of teaching positions like the government wants.

This hits very close to home for me because I need to borrow $75,000 for graduate school (only the cost of tuition - I've decided to deplete savings for housing and food). You know how much and how long it takes to pay off loans set at 7%? I'm actively trying to make a decision on whether or not I should go because I recognize this as the great burden that it is. Could you imagine 18% student loans?

To put things in perspective, a $75,000 loan @ 7% (which might be higher due to annual loan limits), taken over 3 semesters and deferred for 1.5 years means that by graduation the loan balance will be $80,311. A 10 year re-payment schedule comes out to $932.48 a month, or $111,897 total ($36,898 in interest).

Raise that interest rate to 8% for the same loan terms, and the payments become $983.72, or $118,047 total with $43,047 in interest.

Lower the interest rate to 5% with the same loan terms and the balance at graduation is $78,781, and the payments become $835.60, or $100,272 total with $25,272 in interest.

Surely you'd hope someone about to take out a loan of this magnitude would be getting a high paying career, right? But you have to remember that a lot of these high paying careers are concentrated in large metropolitan areas with high costs of living and high taxes, like California and New York.

Lets see what $932 a month would be before taxes accounting for a 25% average federal tax rate, 7.5% payroll tax and California income tax of 9.3%. It comes out to be $1,482 a month or $17,784 a year. So your $80,000 salary just got lopped to $62,216 before taxes. And that's for ten years folks. Or put another way, after taxes in California, an $80,000 yields $4,182 a month (Yeah, I know, it is pathetic) so your effective take home drops to $3,250 a month. Then lop off $2,000 a month for a 1 bedroom apartment, and wallah!, you're back to being a poor student again!

One last comment:
Student Loan Origination fees. What a crock. Just another way to screw the consumer.

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