Stafford Loan Justice

Another story on student loans: The 1% owing $150,000+

Here’s another story on student loans, this time from The Atlantic. From the article:

Meet Kelli Space. She went to Northeastern University to get a degree in sociology. And she graduated in $200,000 of student loan debt. In the economy’s newest trillion-dollar crisis, she is the 1 percent.

Kelli is not the face of America’s student debt problem. Among the 37 million people in this country with student loans to pay off, the median balance is $12,800. A whole 72 percent of borrowers have less than $25,000 left in debt, according to data from the Federal Reserve Bank of New York.

No, students like Kelli are the rarities, the white rhinos. Only about 5 percent of borrowers owe more than $75,000. The question is: How do they get there?

The article goes on to quote a study of “experiences of high-debt borrowers by analyzing survey data from about 6,500 undergraduate and graduate student loan borrowers, fully 25 percent of which have outstanding loan balances at or exceeding $100,000” by a group called NERA Economic Consulting. Neither The Atlantic article or the NERA report mention capitalization of interest (although NERA does use the phrase “interest that accrues over time”, p. 12). Recall that capitalization is accrued interest on one’s loans in addition to interest rate of the loan. To attend graduate school, for example, grad students usually carry (this is changing) subsidized (fed gov pays interest) and unsubsidized loans, where interest is not subsidized while in school and is subject to capitalization.

Of late, what most, if not all, articles and reports on student loans ignore: 1. That Kelli, like most borrowers, receive a set amount (scroll down to the chart “Annual and Aggregate Loan Limits”) of loans that only go so far, and in some cases, don’t cover the total costs of education, 2. What loans equal after one graduates does not represent the true costs of  one’s education, but charges such as interest and capitalization of interest, and and 3. Kelli, again like most borrowers, probably couldn’t afford to pay her unsubsidized loans while in school, so capitalization – accrued interest – silently, grossly inflated the loan during the deferment/forbearance period. In other words, if Kelli was in deferment/forbearance during her academic studies, the loans evolved to $200,000 through the interest rate and capitalization of interest during the time she was in school.

I ran a few parameters for Kelli given in The Atlantic in the FinAid calculator to illustrate my concern with interest and capitalization (emphasis added):

Initial Loan Balance: $200,000.00
Loan Interest Rate: 6.80%
Loan Term: 10 years
Minimum Payment: $100.00
Deferment (Months): 12
Capitalization Frequency: Quarterly

From FinAid:

After the deferment period of 12 months, the new loan balance is $213,950.75, including $13,950.75 in accrued interest.

Without the interest capitalization there would have been 120 payments of $2,301.61 , for a total payment of $276,193.20 (including a total of $76,193.20 in interest) plus an additional $13,600.00 in interest paid during the deferment period.

With the interest capitalization there are 120 payments of $2,462.15 , for a total payment of $295,458.00 (including a total of $81,507.25 in interest plus $13,950.75 in interest accrued during the deferment period).

The numbers speak for themselves.


Written by S.

May 7, 2012 at 2:36 am