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Borrowing the Future

June 21, 2005

This year's college graduates hardly need alumni letters to trigger undergrad memories. The monthly loan-payment checks that they'll be writing for years to come are ample reminder of the glory days when money was arriving for their tuition, not flying out of their bank accounts. The monthly bite is about to grow, with only days left before higher interest rates kick in on most student loans.

Close to two-thirds of today's graduating seniors leave school owing the federal government an average of $20,000, according to FinAid.org, a respected financial aid information website. Perhaps one in 10 owe more than $35,000. These figures don't include what their parents may also owe.

Since 1992, sharply rising tuitions coupled with forgiving interest rates and deferments on federal loans have given students reason to flock to loans. In 2002, students borrowed nearly 140% more than they did in 1992, the year Congress both expanded loan options and raised limits on borrowed amounts. Even students from middle- and high-income families have increasingly turned to federal loans, which have eclipsed grants as the primary form of financial aid.

In January, the government tightened the eligibility formula for Pell Grants, the nation's bread-and-butter aid program for poor students. More than 1.5 million students had their awards reduced, and 80,000 lost their grants altogether. Translation: more loans.

On top of that, as of July 1, the interest rate on the government's largest loan program -- the variable-rate Stafford student loan -- will jump nearly two percentage points from its current rate, an all-time low of 3.37%.

This year's graduates still have a narrow window of escape. Consolidating several Stafford loans by June 30 would lock in the loans' lower rate while extending the repayment period beyond 10 years, significantly reducing the monthly total owed. Lower monthly payments improve graduates' credit scores -- lenders are more likely finance a condo or a car for ex-students who owe smaller percentages of their salary.

The flood of "buy now, pay later" borrowing over the last decade has made getting an education easier and reduced the need to work grueling hours while studying. Or in some cases, increased the available partying time. But either way, loans narrow students' post-graduation choices (a satisfying job with a small nonprofit won't cover the bills) and carry risk. Unemployment levels can go from impressive lows to depressing highs in the time it takes to get (or fail to get) a degree.

One increasingly popular depressurizer is community colleges. Spending two years there on basic courses before transferring to the big leagues is not just cheap, but liberating.

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