One-two punch for Michigan students: more loans, high interest rates

AND AFTER COLLEGE?: All the money being borrowed by college students in Michigan -- $1.9 billion in one year alone -- poses a significant threat to future economic growth says Mitch Bean of Great Lakes Economic Consulting. (courtesy photo/used under Creative Commons license)

Michigan’s student debt problem is getting worse, with college kids borrowing almost $1.9 billion.

In just one year.

At the state’s public universities alone.

The tab is even bigger than it sounds. A Bridge Magazine analysis of loan data reveals that the majority of that borrowed money is at high interest rates, rather than via the much-publicized subsidized loan rates that Congress just allowed to double. And interest on these loans starts on day one, rather than being deferred to a student’s graduation or departure from school.

More than $1.1 billion in federal loans made to students at Michigan’s public universities in the 2011-12 school year were at rates higher than the rates for most home and car loans. Those rates ranged from 5 percent for Perkins loans (offered to low-income students), to PLUS loans available to parents of undergrads at 7.9 percent.

Adding to the long-term cost was the fact that interest on $1 billion of those loans started to accumulate the day students and parents signed the paperwork – rather than being deferred while the borrowing student is in school.

All of this growing debt – ballooning to $27,451 for the average Michigan college grad in 2011 – is a financial ball and chain for young professionals. But it’s also a long-term economic problem for Michigan.

College grads making “house payment”-sized student loan payments buy used cars instead of new, delay buying homes and sometimes delay starting families, said Mitch Bean*, of Great Lakes Economic Consulting and a former director of the Michigan House Fiscal Agency.

“Clearly it’s a drag on the economy when people get out of college and can’t go on with their lives,” Bean said.

Loan sums grow at rapid clip

The reasons student loans in Michigan have grown 57 percent in five years are pretty simple:

--Michigan funding of higher education – as a share of overall university revenue -- has gone down, while college costs have gone up. The result is Michigan families pay more to send their children to our state’s public universities than do families in other states. To cover higher tuition, students borrowed more.

--Schools are now more dependent on student loans than on state funding. The same school year in which students took out loans totaling almost $1.9 billion, the Legislature provided $1.26 billion for higher education.

The debt accumulated by graduates at Michigan public and private universities averaged $27,451 in 2011, the 11th highest debt in the nation and an almost 7 percent increase over the debt load of 2010 grads. Among the state’s public universities, the average debt ranged from $21,649 for grads of the University of Michigan-Dearborn to $35,476 at Ferris State. (Lawrence Tech grads bore the highest debt burden among Michigan’s private schools, with average student loans of more than $46,000.)

The average debt of grads of Oakland University and Lake Superior State jumped more than $3,600 in one year; Michigan Tech grad debt rose $3,200.

Two public schools – the University of Michigan at Ann Arbor and the University of Michigan-Flint – had slight decreases in student debt.

Interest-rate boost heightens scrutiny

The student debt explosion is back in the news because Congress recently allowed the interest rate on Stafford subsidized loans to double. But most Michigan college students are already paying that doubled rate, or even more.

According to data available at Michigan Higher Education Institutional Data Index, just 38 percent of federal loans to students attending the state’s public universities were Stafford subsidized loans, with an interest rate of 3.4 percent, with no interest until the student leaves college. Another 45 percent were Stafford unsubsidized loans, with an interest rate of 6.8 percent that begins accruing from day one. Another 15 percent were parent PLUS loans, with an interest rate of 7.9 percent, or about double what many Michigan residents can get on home loans.

MORE COVERAGE: What’s the average student debt of graduates of your college?

Even with higher debt and higher interest, a college degree is well worth the investment, said Mark Kantrowitz, founder of FinAid.org and a well-known adviser on college finances.

“Education boosts the local economy and creates jobs,” Kantrowitz said. “People with college degrees are healthier and they’re less likely to commit crimes. Someone with a bachelor’s degree pays twice as much in taxes as a person with a high school diploma,” so education helps support government services.

But there are thousands of Michigan residents paying off student loans without having earned a degree. A third of college borrowers never earn a degree, according to a study by the Urban Institute.

Others don’t even try to go to college because of the fear of debt, said Brandy Johnson, executive director of the Michigan College Access Network. “We know from our own survey data that affordability is the major barrier to access,” Johnson said. “This generation is debt-averse because of the economic crisis.

“Our message is, even at the high end (of college costs), when you do the long-term cost benefit analysis, it’s still worth it,” Johnson said. “You just need to be smart about the kind of debt you take out.”

Senior Writer Ron French joined Bridge in 2011 after having won more than 40 national and state journalism awards since he joined the Detroit News in 1995. French has a long track record of uncovering emerging issues and changing the public policy debate through his work. In 2006, he foretold the coming crisis in the auto industry in a special report detailing how worker health-care costs threatened to bankrupt General Motors.