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Students May Pay Much More for Loans

July 20, 1995

College students may soon learn a bitter civics lesson about the federal budget: Balancing it could cost them a lot.

For students who receive government-subsidized loans, the price of a college education could rise as much as 36 percent starting in the fall of 1996. That’s because Congress’s plan to balance the budget, passed late last month, cuts $10.1 billion from the student-loan program.

``The only way you can save that much money is to tax students somehow,″ says Marshall Smith, undersecretary of education.

Congressional committees will decide exactly how to pare the education budget this summer, but lawmakers currently plan to make students absorb all the cutbacks. While there’s likely to be another political fight over whether the banks that make the loans should be asked to share the financial burden, students and educators have started to prepare for a new era of financial austerity.

Already, some students are contemplating dropping out of school, choosing more lucrative professions or reducing their course loads so they’ll have time to earn more money for tuition, education groups say. Meanwhile, some universities are trying to persuade donors to increase their contributions and are studying ways to create their own loan programs.

The president of the University of San Diego is among those trying to raise more money. The university ``doesn’t want to become a rich kids’ school,″ says Judith Lewis Logue, director of financial aid. ``Our students are already borrowing all they can.″

The nation’s 1.8 million poor and middle-income graduate students would be hit the hardest under the current congressional plan. They would lose the federal subsidies, paid to banks, that now allow them to avoid paying interest on their loans while in school. Undergraduates who get such subsidies would continue to receive them.

But all 5.6 million graduate and undergraduate students who participate in federal student-loan programs would be required to pay the government an extra percentage point on their loan-origination fees. They would also lose the six-month grace period after graduation during which they don’t have to start repaying their loans.

For students who enter college in the fall of 1996 and borrow the maximum $88,000 for undergraduate and graduate education under the standard 10-year payback plan, college debt would come to $167,723 under the new plan, compared with $128,400 under the current system, the Education Department calculates. Monthly payments would jump $382 to $1,452 from $1,070.

Those who choose to complete only a bachelor’s degree would feel less of a wallop. Students who take out the maximum $23,000 undergraduate loan over 10 years would pay $339 a month under the new plan, compared with $275 under the current system, a 23 percent increase.

For graduate students, ``eliminating the interest exemption is absolutely the worst thing you could do,″ says Kevin Boyer, executive director of the National Association of Graduate-Professional Students. ``People who need the most are hurt the most.″

With $86,000 in debt and only $5 in his pocket, Anthony Rosati, a graduate student in chemistry at Georgetown University in Washington, D.C., says the proposed changes may be enough to make him quit school. ``If I get my doctorate and go to teach, I’ll never be able to pay off this debt,″ he says. He’s considering dropping out now to take a more lucrative job as a computer consultant. ``If I give up my dream entirely to be a teacher and pay back this money, I can live with that.″

But some students are infuriated that they should bear all the financial burden of the education budget cuts. Indeed, those fighting the loan changes are busily drafting proposals that could force banks to help defray the costs.

The proposals include changing the amount of profit banks and guarantee agencies make on defaulted loans. When a student defaults on a guaranteed loan now, the government pays the bank 98 percent of the uncollected money, and a guarantee agency then tries to collect the funds from the student for the federal government. If the guarantee agency succeeds, it gets to keep 27 percent of the money it collects.

Some lobbyists believe the government could save money by paying banks less than 98 percent of the defaulted money or reducing the guarantee agencies’ profit below 27 percent. It costs guarantee agencies only 12 percent to collect a defaulted loan, the Education Department says.

The loan changes come at a time when the cost of going to college is skyrocketing. Tuition has jumped 48 percent in the past five years, and borrowing for college has increased greatly, too, according to the American Council on Education. In just two years, between 1992 and 1994, the council says, money lent in the guaranteed student loan program rose 57 percent, to $23.1 billion from $14.7 billion. That means that of the $183 billion borrowed during the 29-year history of the program, 22 percent was borrowed in the past two years.

It’s unclear to what extent higher loan costs would cause students to drop out of school. But one study shows that for students with family incomes of less than $30,000 a year, every $100 increase in their tuition and fees causes a 2.2 percent decline in enrollment, says Fred Galloway, a policy analyst with the American Council on Education.