It was a conversation with his father that brought the recession home for Scott Leiserson.
“My dad is a very futuristic person in his planning, and he thought for a while he would be writing a check for my college,” Leiserson said. “Eventually, the financial crisis hit. And he owns a manufacturing business … He lost half his business in one quarter of time, and another half in the second quarter, making it a three-quarter loss.”
The financial crisis of 2007-08 and the subsequent recession caused Leiserson to take out Federal Direct Unsubsidized Loans through UC Santa Cruz’s Financial Aid and Scholarship Office. Leiserson has been a student at UCSC for two years now, and he currently owes $71,820.
“It’s scary,” he said. “When all this happened my dad said, ‘We just can’t pay for your college right now, you’re taking all the loans.’ I’ve been getting these statements each quarter … and this number is a lot.”
At a projected $1 trillion nationwide, student loan debt is not going away any time soon. For many the burden is staggering: Student debt is increasing at an estimated rate of $2,853.88 per second, according to The Project on Student Debt, a non-profit group that is part of the Institute for College Access & Success. After adjusting for inflation, the College Board reports that students are borrowing twice what they did a decade ago.
In late October, President Obama introduced changes in student loan legislation, and recently there has been a surge of stories calling the loans situation a “bubble,” akin to the financial crisis of 2007-08. While pundits and politicians alike are taking notice and speaking out about the loan situation, many students remain concerned about whether there are any solutions in sight.
Jason Green finished his degree at UC Santa Cruz in January of 2011. He explained how crushing the debt of student loans can become.
“I got my degree in biology and I’m $80,000 in debt right now,” he said. “With my degree, if I could get a decent job it wouldn’t be so bad, but the job market is so fucked right now too that I’m just so screwed.”
He said since his family was neither impoverished nor incredibly wealthy, he was put in a difficult situation.
“Combined, my parents make about $120,000, so we couldn’t get any financial aid,” he said. “But it wasn’t enough to pay for college either, so I had to take out loans and try to get scholarships and grants. After my first year I lost my grandparents, and I didn’t have the GPA anymore to get scholarships and grants, so I had to start taking out loans.”
Graduates today face the highest unemployment rate in recent history. In 2009, recent graduate unemployment rate was at 8.7 percent, 1.2 percent beneath the national average. In 2010, the recent graduate rate grew to 9.1 percent, while the national average fell to 9.4 percent. Defaults are up as well: The number of students defaulting on their loans is growing fast, with a 2010 default rate at 8.8 percent, in comparison with 7 percent in 2009.
Dan Rola works the front desk of UCSC’s Financial Aid and Scholarship Office. He said it can be very difficult for students to take on the burden of paying for their education without familial support, the same support weakened by the recession.
“With the credit crunch a lot of families are experiencing, we’re finding students are having trouble getting parent loans. When their parents are denied parent loans, they can reapply with cosigners to still get the federal loans,” he said. “But in a lot of cases parents don’t have that option. So the student is left to find private loans elsewhere. Often they’re left trying to foot the bill, whether it’s a portion of their tuition or housing.”
Graduate Jason Green said at first he was fortunate, as he was able to receive federal loans. However, due to extenuating circumstances, funding his education through private loans was his only option.
“After my grandparents passed and my grades fell, I couldn’t get them anymore,” he said. “I started using Wells Fargo and I used them to get through school.”
Green is among a small minority at UCSC who are left with little choice other than private loans. Only 2.1 percent of UCSC students used private loans during the 2009-10 academic year, according to data from the Financial Aid and Scholarship Office. The rest are federal, with the average student debt upon graduation pegged at $17,546.
As these statistics follow only students who began and finished their undergraduate education at UCSC, the numbers leave out the roughly 2,700 transfer, re-entry and re-admittance UCSC students that make up a significant portion of the campus.
The “Bubble,” and Rethinking Capitalism
In its simplest definition, a speculative bubble is when buyers purchase an asset consistently over a period of time. They envision it rising in value, and as more people purchase the asset, its price rises. Eventually buyers outnumber sellers, and finding nobody to sell to, panic ensues among investors and prices plummet — the bubble “pops.”
In 2007-08, a bubble in mortgage-backed securities brought the United States into a recession. After low-interest rates introduced by the Federal Reserve, investors looked toward housing to invest in high-profit Credit Default Obligations (CDOs). CDOs often held subprime mortgages, loan arrangements for borrowers with a poor credit history and typically with high interest rates. Just like home mortgages, student loans are securitized, and are packaged and sold by investment banks in CDOs.
Like housing, often student loans are made without research into one’s credit or income and are by definition subprime. However, unlike home mortgages, it is nearly impossible for a student to declare bankruptcy and default on his or her debt, much less walk away like many homeowners did.
The Bruce Initiative on Rethinking Capitalism, a project within UCSC’s social sciences, endeavors to look at finance and capitalism through new perspectives, after the events of the 2007-08 financial crisis brought the United States economy to a halt. Professor Robert Meister helped form the program, and said the UC’s ability to continually raise tuition despite future job markets will further increase student debt.
“One needs to understand that in this society, people don’t think of debt as a tax they pay to the financial industry, because they think they’ve already gotten something — their tuition,” he said. “The whole industry exists because well over 90 percent of students cannot finance 100 percent of their costs, and can live on credit besides. Because they can simply add their credit card payments to their student debt … If you view the university as a public institution and you view tuition as a tax, this is the only public agency that can raise taxes and increase the number of payers at the same time.”
Tuition and fees for public four-year institutions across the country have risen 8.3 percent higher since last year, according to a report by College Board. The University of California has increased student fees to record levels, about 18 percent over the course of last year and 30 percent the year before that.
Meister has been a prominent dissident against UC fee hikes. He wrote a series of articles entitled “They Pledged Your Tuition,” in which he described how the UC’s power over tuition was used as collateral for construction bonds. As a leading member of the Rethinking Capitalism Project, he made a suggestion: Instead of the UC regents constantly raising tuition, the University of California could provide a free education for anyone who agreed to a 3 percent income tax for a preset number of years.
Working Toward the End of Debt
Nicole Gamache is a former re-entry graduate who transferred from Golden West College in Huntington Beach to UC Berkeley.
“In two years, I acquired $26,000 of student loan debt,” she said, over the phone because she does not have much time between a full-time job and raising her 12-year-old son. “I actually kind of consider myself to be lucky, because I did find a job. It took nine months after I graduated to find one.”
Gamache graduated with a degree in anthropology in 2010 and now lives in Albany, near UC Berkeley, so her son can remain in the same school district. She wants to continue studying anthropology, but can’t, because of her debt to the UC regents — in this case in the form of a hold placed on her account because she couldn’t pay her bills.
“What’s frustrating is I have my B.A., but I can’t get my transcripts and go to grad school because of the amount of money I owe,” she said. “There’s a limit to how much you can take out in a year, so I ended up owing, in addition to the student loans, almost $9,000 to the UC itself.”
Since 2010, Gamache has paid $400 altogether. After her six-month grace period she was able to defer her payments because she was unemployed. Now that she’s working, she’s receiving bills she can’t pay for. While she was able to lower her payments from $300 a month to $50, between housing, food and the expense of raising a child, she says she still can’t pay.
Professor Meister of the Rethinking Capitalism Project said students’ defaulting can be profitable for the loan industry.
“There’s a sense they are more profitable if they perform worse, because they aren’t riskier if they perform worse, they’re just more profitable,” he said. “On the other side, you might have a student with $28,000 in debt … such a student will on average face penalties and collection fees that are added onto your principal — $30,000 collection fees right off the bat. And your default doesn’t put you in a position as a credit card default might, to lower your principal and negotiate. It’s the case that people will often pay, through the miracle of compound interest, something like $130,000 or $140,000 in total.”
The Obama Administration’s Response
President Obama’s plans, introduced Oct. 26, include debt consolidation and a lowering of the income percentage that determines payments. Debt consolidation, a new system proposed by the president, would allow students to combine all of their student loans into one monthly payment. This would also help students by providing a lower interest rate if rates had changed. Before, students could have as many as five or six different bills each month. The plans also lower the monthly payments from 15 percent of one’s income to 10 percent, and will forgive any remaining debt after 20 years instead of 25.
UCSC graduate Green said lowering payments would not be valuable to him. He would rather pay his debt faster.
“I don’t want to pay for 20 years,” he said. “While I know that would help a lot of other people, I intend to try to go to grad school or med school in the next two years. That means I’m going to have to take out more money or find another way to take care of it … just pay off the old loan with the new loan.”
Meister questions the amount of help students could actually get from the new legislation.
“In order to qualify, you have to be up-to-date and have not missed a payment,” he said. “And how many people would be in a position where they couldn’t pay it off for 20 years and wouldn’t have missed a payment?”
Part of the problem of calling the current student loans situation a “bubble” is that bubbles are very difficult to predict until they have popped. Patrick Register, associate director of the Financial Aid and Scholarship Office, said he doesn’t see how it could be possible to predict the future of student loan debt.
“There have just been so many variables in the last five years … It’s complicated,” he said. “When I look at our averages, they are not climbing as rapidly as they could be in other states. Part of that is because we have a fairly significant low-income student population, and that student population qualifies for grants — federal, state and institutional. And if the grants come close to keeping up with the increases in tuition, we’re going to be OK.”
Green offered several pieces of advice from the outside, having seen the job market with his own eyes.
“Find experience on campus right now … One of my exes has a double major in anthropology and literature, and she’s working at Trader Joe’s right now,” he said. “Go do something you want to do, right now, because experience matters way, way more than your degree for some reason.”
As a recent graduate, Green just started making payments on his loan debt in October, after his six-month grace period. He has to pay $770 a month with money from work he finds on and off at a temp agency.
“Look early, look now [for work], look two weeks ago — it’s something you should be doing constantly,” he said. “For the last three weeks or so I’ve been employed, then they laid me off for three days, and then they found me a new day job. I’ve worked the last four days and now I’m unemployed again.”
Current UCSC student Leiserson was able to get a job doing property maintenance on a ranch near campus, and he says he’s very excited about it. However, he’s still apprehensive about paying off his loans.
“I’m not sure how long I’ll be working there, but it’s just nice to have another source of income other than the school,” he said. “Especially coming into Christmas time and Thanksgiving — it’s the longest time since the next financial aid.”
By the end of this year, he will owe $91,306.