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When college doesn't pay for itself 

Many former students working steadily at white-collar jobs still can't pay their loans. Should they have settled for a place at McDonald's instead?

click to enlarge Amy Peck "Property of Sallie Mae" T-shirt image
  • Brian Chilson
  • IN DEBT: Disgusted by how much she still owes Sallie Mae on her student loans, Amy Peck designed a "Property of Sallie Mae" T-shirt.

Amy Peck works a lot. Sometimes this makes her angry. Mostly it just makes her tired.

For 12 years, Peck has spearheaded outreach efforts as a salaried employee in Arkansas museums. For the past 14 years, she's been paying back the $13,465 she borrowed to obtain her bachelor's in fine arts degree from Atlanta College of Art.

Each month lender Sallie Mae deducts several hundred dollars from Peck's bank account for a payment that's roughly 30 percent interest. That means only 70 percent is actually applied against her remaining principal of $6,748. To keep up with these payments, she bolsters her $44,250 salary at the Old State House Museum with a part-time retail gig. For the past nine years, she's had to work two or three jobs, sometimes logging 70 hours a week.

Peck, 40, grew up in Louisiana. She attended college in Ohio before transferring the Georgia art college. But economically, Arkansas has suffered the most from her prolonged relationship with top college lender Sallie Mae. "If it weren't for these loans, maybe I'd buy a house. I certainly didn't expect to still be living in an apartment" this far out of college, she laments.

Peck has paid about $28,000 toward the loan of $13,465. She estimates that she has at least $10,000 to go. Her debt-load has stymied her life goals. "Working two jobs impacts my ability to meet people and date," she says. "I can't afford a house or children. I just turned 40, and I literally have no life."

Back in 1990, neither Peck nor her parents understood the policies governing student loans. Peck chose Atlanta College of Art because it seemed more studio-based than art programs at public universities. She and her parents thought they could handle the cost of a private education. "We didn't think we were borrowing extravagantly. We thought of $13,500 as a car note, paid off in five years," she recalls.

But it's not like a car note. Most students don't pay on their loans until after they've graduated, when, in most cases, interest has made the debt much higher than the original loan.

In his spring 2010 study of 199 University of Arkansas students, University of Arkansas human development professor Dr. William Bailey found that students tend to overestimate their financial aptitude. "Most students feel they can handle any sort of debt, but their responses to empirical questions indicate a high degree of financial illiteracy," he said. "There's a conflict between their confidence level and their actual knowledge. This makes sense developmentally because, without this confidence, people wouldn't do things like buy houses or have children."

But he's seen this confidence erode in recent years. "More and more, young adults are delaying these 'normal' behaviors. My junior and seniors are very concerned about the current job market and their future pay scales," he added.

The real cost of spending four to six years pursuing a degree in higher education is much steeper than tuition alone. "At the University of Arkansas, you pay about $80,000 for tuition, books and living," said Bailey. "Then you add opportunity costs to that. Instead of college, you could've worked at McDonalds for $10 an hour. That's another $80,000. So the actual costs are anywhere from $120,000 to $160,000."

According to Bailey, Arkansas's lack of high-paying jobs contributes to a high rate of student loan defaults — at 12.3 percent for public four-year colleges, it's the highest of any state. "Many graduates who stay in Arkansas can't find jobs," he said. "So they can't pay their loans, or they leave, find jobs and exercise their spending power elsewhere. They may have been educated at some cost to Arkansas, but they're buying houses and cars in other states."

His colleague, Kathy Deck, director of the UA's Center for Business and Economic Research, details the fallout from student debt: "It cramps your ability to take out auto loans, small business loans, a mortgage ... and since student debt can't be dismissed through bankruptcy, there are huge implications that follow you the rest of your life. If you delay something like buying a house, there are repercussions for subsidiary industries — everything from realtors to contractors to furniture retailers."

Chris Weevers, executive vice president at First Federal Bank of Harrison, the second-largest mortgage lender in Arkansas, said, "It would be like putting a whale through a needle" to get a long-term, fixed-rate, secondary market mortgage for a person making $30,000, with $20,000 in student debt. "They'd stand a better chance of getting it done locally, with a smaller bank that understands the situation. But the interest rate wouldn't be as low or fixed beyond maybe 36 to 60 months."

At the current interest rate of 6.8 percent, a $10,000 Unsubsidized Stafford Loan will accrue about $1.90 interest each day. When monthly payments don't cover accumulated interest, the interest is capitalized: the unpaid interest is added to the total loan amount, increasing the daily interest. Student loans accrue capitalized interest because, unlike a car loan or a mortgage, there is nothing for the lender to repossess.

"Debt is a self-reinforcing thing," said the UA's Deck. "That's why it's so important to put policies in place that will break the cycle."

Bailey and Deck are in favor of debt education programs. Deck also suggests that the cost of higher education "should fall on the state and on taxpayers rather than on the students directly."

Even working multiple jobs, Peck at one point needed to defer her loans for three months. A few years ago, her mother was in Little Rock undergoing cancer treatment. While acting as her mother's caregiver, Peck couldn't handle her bills. She deferred to avoid defaulting. She knew that, in addition to destroying her credit rating, a default would allow the government to garnish wages, social security and tax returns.

For the past few years, both national and state default rates have risen steadily. According to the U.S. Department of Education, the national default rate for loans applied to public institutions is 8.8 percent, up from 7 percent in 2008. Arkansas's public two-year institutions have a 16 percent default rate, which jumps to 20 percent for its historically black colleges. The latter may reflect the median household income of black Arkansans, which was $23,000 in 2006, as compared to the state average of $35,599. For-profit colleges with branches that cater to older Arkansas students have national default rates of 18 percent.

Ivan Reyes is in his second year at Pulaski Technical College, where he is double majoring in IT and culinary arts. With 11,199 students, Pulaski Tech is Arkansas's largest public two-year college. Reyes is 33 years old and a single father of three. When he graduates next year, he'll be roughly $36,000 in debt.

Most afternoons, Reyes camps in a booth in the Pulaski Tech cafe, nursing a giant soda and poring over binders and books. This is his self-imposed study hall, the cushion between his day shift as the cafe's stir-fry cook and his evening classes.

"They call us 'change-takers,' " he said, momentarily abandoning his binder to squint out the window at the waning winter sun. "It means you get the loan check, cash it and bounce," meaning skip out on classes.

Reyes never intended to be a change-taker. When he enrolled in the University of Arkansas at Little Rock as a freshman in 1999, he had the best intentions. Reyes is a first-generation American. He was born in Little Rock, but his parents are from Colombia. His father never understood why he wanted to go to college.

"My dad, he's old school Latino. Old school Latinos, man, that's why they love America. You come here and get a job off the bat, but if my dad didn't work 60 hours a week, he couldn't make any real money. He told me to go to McDonald's. But that's stupid, man. Why not find a job that pays double, while working regular 40 hours like everybody else?"

His entire life, Reyes watched his mother work 12-hour shifts, seven days a week, at Luby's Cafeteria, while his father pieced together part-time and fulltime jobs. That's why, despite landing at an alternative learning center rather than a traditional high school, he made sure to get his GED and enroll in college. His parents couldn't help with tuition, so Reyes took out loans.

"They set up tables, you just walked in and picked up an application, and then they told you what you were getting," he remembers. Reyes' loans were applied to his tuition, and the excess — books and living expenses — came to him in the form of a personal check.

"I was partying a lot. I decided to keep the party going," he said. "I didn't get my hand slapped, so I thought I could do it again."

Reyes managed to "party" for six consecutive semesters. "I didn't know it had a name till the second time. I thought it was just me. Then I heard some people talking about change-taking. I was just thinking, take the money and run," he explained.

Three years in, Reyes was on academic probation and eventually, UALR booted him out. At 23 he moved back to his mom's house and began working retail and paying his loans. But once he got his own place, he was forced to defer his payments.

"I started to let my loans go into default," Reyes says. "It was the grace of a really good friend who paid to get them back on track."

Federal and state lending agencies such as Sallie Mae and the Arkansas Student Loan Authority (ASLA) were established to administer Federal Family Education Loans (FFELP) in the 1970s, when rising education costs and enrollment made banks hesitant to underwrite student loans. But after the federal Healthcare and Education Reconciliation Act of 2010, the Department of Education began to administer loans directly. Congress figured that if the government could avoid middleman subsidiaries, it might avoid exorbitant interest rates.

ASLA is a quasi-governmental agency, a nonprofit responsible to the state legislature. According to director Tony Williams, it has never received state funding. ASLA's entire budget is funded through interest fees.

ASLA is in a period of transition. It currently holds $500 million in Arkansas student debt. Since it lost its ability to lend, ASLA has functioned solely as a financial aid educator. But in January 2012, it expects to begin servicing FFELP loans, which will allow it to collect government fees. Instead of functioning as both lender and collector, it will simply collect federal loan payments.

ASLA has the option of privatizing, as Sallie Mae did, but according to Williams that will only happen if Arkansas students can't find alternative funding. "We'd like to see if there's a need before we get into it. The lottery scholarship is still new. We're hoping that it will lower the need for student loans," he said.

Each college determines its own students' financial aid eligibility, including how much a student can borrow in private loans. Then the lending agency assesses the risk factors and determines the interest rate. In the case of federal loans, a standard interest rate is set by Congress and eligibility is factored from data collected on the FAFSA form.

Eighty-six percent of Pulaski Tech students receive financial aid to cover $2,840 in annual tuition. The school estimates that, with books and living expenses, current expenses are about $16,400 annually. According to data collected by the National Center for Education statistics, 56 percent of its students borrow funds to cope with this cost, and 14.7 percent of those students have loans in default.

At UALR, annual in-state tuition is $6,643, and just short of half — 43 percent — of current students receive loan aid. UALR's default rate, at 9.7 percent, is lower than the state average. Among Arkansas's public four-year universities, UA Pine Bluff and the UA Monticello have the highest default rates, at 21.1 percent and 20.1 percent, respectively. The University of Arkansas for Medical Sciences, UA Fayetteville and University of Central Arkansas have the lowest default rates, at 1.4, 4.7 and 8.6 percent.

But averages don't tell a complete story. Tiny, private Crowley's Ridge College in Paragould has a 29.6 percent default rate — the highest in the state. Out of 201 students, 26 are non-white, and only six are over 25 years old. At face value, the school could be a shrunken version of Hendrix College, another private institution full of mostly white, traditional students. But Hendrix has a default rate of 1.8 percent — the lowest in the state for a primarily undergraduate institution.

Colleges with high default rates share common characteristics. Representatives from Crowley's Ridge and Arkansas Baptist (default rate of 27.2 percent) estimate that at least half of their students have parents and grandparents who never attended college. Fewer than 10 percent of Hendrix students are first generation, and the school says about 10 percent of its freshman class graduated high school valedictorian. High-default colleges often have open admission, recruit from low-income regions and enroll at least half of incoming freshmen in remedial courses. Hendrix offers no remedial courses and has a 60 percent graduation rate. In contrast, high-default schools have about a 60 percent non-graduation rate.

A tale of two students

Demographically, Peck has much in common with Hendrix students. After graduating from a public school for the gifted, she attended two private art colleges. She graduated in four years with a high GPA. Her middle-class, educated parents helped with college costs, and she supplemented with loans and part time jobs. Within two years of graduation, Peck was hired in her field.

"I've worked steadily, I've been promoted, and I still can't afford to pay my loans," she says. "Shouldn't I be grandfathered into the loan forgiveness program?"

Public Service Loan Forgiveness (PSLF) forgives federal student debt for qualifying professionals who have served the public for a decade. Peck hit the 10-year mark in 2007. Ironically, time served before October 1, 2007, doesn't count toward PSLF.

But in some ways, Peck is lucky. She borrowed only $13,500. Fifty-seven percent of Arkansas graduates had an average debt of $20,000 in 2009 — roughly the same amount as Arkansas's per capita income that year. The federal government allows current students to borrow up to $46,000, which is twice the 2009 maximum. When he left UALR in 2001, Reyes was already about $21,000 in debt.

In 2007, Reyes received full custody of his then-10-year-old twins (he took custody of a third child a year later). He'd been working in retail six years. "That's when I decided it just wasn't me anymore," he says. "I was doing exactly what my father told me to do, and what I didn't want to do."

He took out more loans and enrolled in the Information Technologies program at Pulaski Tech. Some of his credits transferred, but many didn't.

"I lost a lot," Reyes says. "I was almost ready to be a junior, and I got smacked down to being a freshman."

Reyes chose IT because he'd been a computer science major at UALR. He came to the culinary program more haphazardly. In August 2010, when he enrolled in Pulaski Tech, he noticed that the executive and sous-chefs were constantly working the cafe cash register. He needed a job, and he had plenty of register experience. He pestered the executive chef to hire him.

"When you have these dudes on the register instead of in the kitchen, something's wrong," Reyes says. "Finally they were like, OK, just show up." Soon after, they had a vacancy on the stir-fry station.

"It's supposed to be the hardest station, nobody wants to touch it," Reyes says, tugging on the bill of his culinary school cap. "I was like, what's the big bad deal? I'll do it."

He loved the stir-fry station. In the summer of 2010, he enrolled in the culinary program. "To me, a good mind-clearer is doing a whole bunch of prep, you know, hours of cutting vegetables. I like being in front of people and seeing the look on their faces when the pan bursts into flames and they're like, 'something happened.' I put on a cooking show for them and they remember that. As a result of that, they remember me. It feels really good to be something."

Reyes works 40 hours a week and takes 12 hours of classes. He's a serious student this second time around, with a 3.64 GPA. He holds the position of parliamentarian in the student government association, and he plans to run for student body president in spring. He's excited about his education and his future, but he expects to be paying loans for the rest of his life. "It'll probably be $500, $600 each month," he says. "It's just another bill I'll always have, like rent."

His current loans (along with his cafe earnings) pay tuition, buy books and help support his family. He's already paid rent till February 2013. He plans to use his last series of loans to pay even more rent forward, so that when he graduates next spring, he'll have a safety net while looking for a job. He estimates that, as a chef, he could make as little as $18,000 starting off. As a network technician he could make up to $70,000.

"If I were to be an executive chef in my own place, I'd be happy. And if I had my own office in an IT place, I'd be happy with the paychecks and just doing what I like," he said. He wishes that he'd waited to go to college till he was mature enough to handle the responsibility attached to borrowing serious money.

"The last I remember, it's a free country and we have a right to choose whether or not we put ourselves in debt, but we need a serious educating. The first time, it was a walk past a table. This last time, it was a 30-minute program on a computer. I think they need something like a three-day seminar," he suggested. "Someone to really explain what it is you're doing, so you can know how bad a loan is before jumping on it."

He slammed his binder shut in punctuation. It was nearly time for the Certified Cisco Networking Assistant class that represents Ivan Reyes's first-generation American dream — that higher education that will pave the way to an easier, better life. It's Amy Peck's middle-class American expectation — that if she studies hard and works hard, she can live comfortably. But for many Arkansans, the post-graduate nightmare is just beginning.

Correction: Originally this story incorrectly stated that Peck's payments are 70 percent interest with 30 percent applied to her principle. It should have read that 30 percent of her payments go towards interest and 70 percent is applied to her principal.
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