Thousands of low-income adults borrow at high interest rates to go back to school to learn new skills. Many end up falling into a debt spiral.
John Liles of Cleveland, Ga., dreamed of becoming a sports coach. He had lost his $9-an-hour job as a machine operator in 2005 as a result of a lengthy bout with diabetes. His illness hadn't stopped him from coaching his children's sports teams, however, and he hoped to turn the hobby into a career. He needed an associate's degree, so he signed up to study online with American InterContinental University (AIU).
To obtain loans, the school guided him to SLM Corp., better known as Sallie Mae. Liles, now 47, says he explained to AIU that he couldn't afford interest of more than 9%, and the school encouraged him to move ahead with the loan application. Several months into his courses, he says he was shocked to discover in a form Sallie Mae sent him that one of his loans, for $6,000, was growing at 18.1%. It would require monthly payments of $110 for the next 15 years, totaling $19,924. "I can't afford it," he says.
Cases like Liles' are proliferating as the cost of education has far outpaced the availability of low-interest loans whose repayment the federal government guarantees. With enrollment rising in trade schools, more lower-income students are relying on high-interest private loans, such as the one Liles received. "For hundreds of thousands of citizens, the worst mistake they ever made was to go back to school," says Alan Collinge, founder of advocacy group Student Loan Justice.
Many borrowers describe the loan process as opaque, saying schools and lenders don't explain interest rates or postgraduation payments. Some borrowers say they were unaware that private loans are different from less expensive federally guaranteed loans. "When you hear Sallie Mae,' you think of somebody's favorite aunt baking them a pie," says borrower Molly Cosgrove of Portland, Ore. "You don't think of high-interest loans." Once a federally sponsored organization, Sallie Mae became a fully independent corporation in 2004. It offers both private and federally backed loans.
After losing her $20,000-a-year job at a call center, Cosgrove enrolled in Western Culinary Institute in Portland in 2004, planning to become a chef. She says the school lined up student loans for her with assurances that the terms would be reasonable and her diploma would attract appealing job offers. She asked few questions. Today, Cosgrove, 33, has her degree—and $43,000 in debt, most of it accruing interest at 18.5%. Unable to get a job as a chef for more than $8.50 an hour, she went back to answering phones for $13 an hour. She owes Sallie Mae $553 a month but doesn't have anything close to that to spare. "I can't see a way out of the mess I inadvertently created," she says.
Career Education Corp. (CECO ), which owns both AIU and Western Culinary Institute, says it is not responsible for, and often not aware of, loan terms, which are agreed to by the student and lender. It adds that its schools inform students that private loans carry higher interest rates.
Sallie Mae says the terms of its private student loans are made clear in writing to would-be borrowers before any money is disbursed. "These are college students. At some point you have to read what you're signing," says Barry Feierstein, Sallie Mae's senior vice-president for private credit loans.
The lender says it recently capped rates on new private loans and is exploring ways to relieve the high rates facing some recent graduates. "We want people to have a fighting chance," says Feierstein.
By Ben Elgin