To The Limit. My Debts, Part Two.
Where Were You in 1997? I was listening to a new Boyz II Men album, Evolution, and signing paperwork to take out my very first student loans—the first of many.
I’m back with Part Two of an ongoing series on my personal journey with student loans. In this edition, I’ll talk about my very first student loans from August 1997—loans that I would not fully pay off until twenty-two years later, in February 2019. It didn’t take me 22 years, though, to learn an important lesson: no one in the student loan industry will ever look out for the borrower. I saw this right away, right then in 1997: With student loans, trust no one! You’ve got to look out for yourself.
In this series on the newsletter here, I’m going to tell the story of my student loans. Let me preface this by saying, once again, as clearly as I can: I'm one of the lucky ones. This story is, in a lot of ways, a “best case scenario” for how student loans should work. For more on why I’m writing this, please check out Part One if you missed it. And before you do anything else, listen to this conversation between two of America’s leading scholars studying the student debt crisis: Tressie McMillan Cottom and Louise Seamster.
Nine Nickel Penny Penny (aka: ’97): The Very Beginning
The year was 1997, the year I graduated from high school. The unofficial slogan for the Class of ’97 at Southfield High School was “Nine Nickel Penny Penny.” Listen, if you were a teenager in the 90s, “Nine Nickel Penny Penny” can be understood as a “fresh” way to say “97.” I have a clear memory of this ridiculous slogan, in part because it sounded to me a little bit like “dime, nickel, they’ll get every penny.” And that, as it turns out, would be a fantastic slogan for the student loan industry.
Sometime in early 1997, with that slogan ringing in my ears, I corresponded with the financial aid office at Albion College. As I prepared to start college, I held a naïve belief that Albion and their financial partners in the government and at the banks would treat my account with care. After all, I was a great student, and they were excited to have me on campus. Right?
Choosing A College
In addition to having a good feeling about Albion, I initially chose to go to that small, private, liberal arts college because it was presented as the most affordable of my options for college. Even more affordable than the excellent “state schools” that most of my friends would attend.
My goal back then was to go to a “good school,” which in my mind meant a place where I would live away from home, in the dorms, and I would revel in classes exploring weighty topics like politics and philosophy (I hadn’t really yet heard of the term “sociology”). In addition to Albion, I had been accepted to the two biggest schools in Michigan: the University of Michigan (U of M) and Michigan State University (MSU). At first, I assumed that I would follow most of my high school friends, the vast majority of whom went straight to one of these two big schools after graduating.
As it turned out, though, Albion proved to be significantly more affordable for me, in terms of the dollar cost of attendance over four years. In other words, to compete with U of M and MSU, Albion put together a financial package for me that included generous “merit scholarships” (read: discounted tuition). Those discounts meant that the total cost of a college education for me, at Albion, would be much less than attending college at the Michigan flagships in Ann Arbor and East Lansing.
However, even with those scholarships/discounts, Albion was far more expensive than my family could afford. Unless, of course, I took out student loans.
Finances: The Deciding Factor
As an eighteen-year-old in 1997, I was no financial expert. If anything, I was the opposite of a financial whiz kid, because I had almost no education in how finances worked. And, my employed, generous parents kept me blissfully unaware of the challenges of family finances. While we didn’t have tremendous wealth, we never had to worry about losing our home or where our next meal would come from. We had enough of what we needed and a lot of what we wanted. But college tuition—that was beyond our capabilities. I needed to choose a college that we could afford.
Even I could see that Albion was a significantly better deal, financially. At U of M, or MSU, I would have needed to take on thousands of dollars more in loans compared to Albion. (Unfortunately, I can’t remember the exact dollar amounts for each school, but I remember that Albion would cost us thousands of dollars less per year—or as much as $10,000 less over four years.)
My loving but inexperienced parents were the only people who really helped me through the process of getting into college. Neither of them had graduated a four-year college with a bachelor’s degree. They did their best, and they indeed helped me get to a “good school.” As part of the decision-making process, I remember talking with my parents about how much we loved Albion (and we still do!), its small classes, intimate and well appointed campus, and its location just far enough away from Detroit to feel like I would be at a remove from home.
But the bottom line is that Albion was less expensive than Michigan or Michigan State for me. That, in my mind, was the deciding factor. Would I have done better, overall, in my life and career if I had chosen to go to Ann Arbor or East Lansing? I will never know, but I do know that those options seemed foreclosed to me in large part because I was worried about taking on too much in student debt.
The Moment of Truth
In reality, the cost of attending a four-year, residential “good school” was beyond what even my generous and fairly well-off parents could afford. The only reason I could even consider Albion or any other residential college was the easy availability of student loans.
The student debt program that I took advantage of was known as “Stafford,” after a US Senator who worked to create this system. These federally-backed loans were offered to me at a decent interest rate (variable, but at the time I graduated, my loans had interest rates ranging from 6.3% to 7.7%--which were considered good at the time, apparently).
To access the student debt system, I applied using a standardized form known even today by its acronym: FAFSA, or the Free Application for Federal Student Aid. This form took financial information from myself and my parents, and applied a formula to determine my eligibility for various types of financial aid for college—including loans. My family’s income and wealth were judged too high for certain types of grants, but low enough to qualify me for two types of “Stafford” loans.
In early 1997, Albion took all this information and prepared a “package,” which was communicated to me via a set of papers with a lot of numbers of them. For my initial start in college, as a high school senior, my recollection is that my parents and I didn’t even know what questions to ask. It was a bewildering and confusing process. All that we understood was that to get to Albion, I would have to take on student debt. This meant that I’d have to pay a monthly bill, for years after graduation, in the future. Whatever the numbers were, I didn’t notice them at this point. I just signed the forms that Albion gave me, and took out the loans.
In that moment that I signed the paperwork that Albion had prepared for me, I committed myself to taking on student debt. I’m still figuring out how to manage the implications of that commitment, today, nearly twenty-five years later. Right away, though, I started learning about the student debt system’s many variables and nuances. The first lesson was a big one: the magnifying effects of compound interest.
“Subsidized vs. Unsubsidized”
My family’s income was low enough to qualify for “subsidized” Stafford loans. This relatively attractive type of loan would not accrue interest while I was in school—the government would pay the interest to the financial institutions backing my loans until I finished my education.
However, in my case, only a part of the loans that Albion suggested (read: instructed) me to take on were the nicer, “subsidized” kind, though. Confused yet? This was my first “college-level” lesson in finance: the role of interest in student loans. Yes, I had to take an interest in interest. (Sorry, I promise never to do that again.)
To be clear, interest is what you pay the banks. It doesn’t go toward higher education. It goes to the financial industry. As you can imagine, banks have made tremendous profits from the student debt system. (But I’ll leave the analyses of the student debt industrial complex to the experts.)
The subsidy in my “subsidized” Stafford loans saved me thousands of dollars (maybe even more than $10,000—I’d literally have to run the numbers). This was a big deal, and I was savvy enough at eighteen to know that my “subsidized” loans were significantly better for me.
In fact, let’s get specific for a moment. In 1997, as I prepared to enroll at Albion, the federal government determined that I qualified for a maximum of $2,473 in subsidized Stafford loans, and Albion recommended that I take out the full amount to apply toward my tuition bill.
But that $2,473 didn’t quite cover my first bill for tuition and fees, after Albion’s generous scholarships/discounts. And here’s where I saw the ugly side of student debt, up close and personal.
Trust No One
Albion suggested that I take on an additional loan in 1997, beyond the nicer “subsidized” loan. Based on Albion’s calculation, they said that I should take an additional, unsubsidized loan to help me pay for tuition, room and board, and other fees. This unsubsidized loan would begin to accrue interest immediately, at a rate of 7.66%. (By 2021 low-interest standards, that’s insanely high. Even in 1997, that rate was cause for concern. Or it should have been.)
In any event, to show how little Albion actually cared about my financial health, they had me take out an unsubsidized Stafford Loan, on September 26, 1997, for… $152.
Yes, that’s $152 at 7.66% interest.
Not a typo. One-hundred-fifty-two United States dollars. ($152 in 1997 would be $247 in today’s 2021 dollars, by the way.) Which, as an unsubsidized loan, would have interest accruing and compounding starting on day one, growing my debt for years and years after I first took on the loan on September 26, 1997.
Spoiler alert: this $152 debt would have doubled in size at that interest rate of 7.6% over twenty years. (Yes: double of $152 is still not a huge number, but even with my cushy high income today I hesitate before spending $150 on something if I didn’t really need to.) For the record: I would have paid $145 in interest if the rate had stayed the same, for a total cost of $297 (or around $480 after adjusting for inflation), over a 20-year lifespan of that loan.
No one at Albion, as I recall, noticed that this $150 unsubsidized loan was a bad idea for me. Someone at Albion’s financial aid office could have asked me, “Listen Erik, can you and your family find $150 to avoid taking on this unsubsidized loan? If you can, you should avoid having to pay the interest here.” If someone had done that, they would have shown that they cared about me and my family’s financial health. No one did.
Keep in mind that Albion is one of the better players in the student debt industrial complex—they’re not-for-profit, and they have a vested interest in helping keep the burden of attendance lower for their students. Still, they failed me here. (It would have “only” cost me an extra $150 over twenty years, but multiply that for every student they treated the same as me, and sometimes with much larger numbers….)
Now, fortunately, in the summer of 1998 or 1999 (I honestly don’t remember), I somehow had the wherewithal to look closely at my student loan documents. I saw that one of my loans had already started to accrue interest, and that the outstanding balance was “only” about $150. I used some of my earnings from my paychecks (from working as a resident assistant at college and at the city pool as a lifeguard and pool coordinator) to completely pay off that tiny loan right then and there, before it had a chance to really start building up interest. Again, I consider myself fortunate that $150 was an amount that I could afford to pay back then, and that I had the time and space to figure out that I should pay it (instead of spending those dollars on what I really wanted at the time: a better car stereo with a CD changer. I needed a better way to switch between Cooleyhighharmony and Evolution while driving around Detroit in my hot 1991 Ford Escort!)
I took it upon myself, as a teenager, to quite literally call up the bank, and I figured out how to write a check to pay off this $152.00 loan while I was still in school at Albion. This is before the ability to pay via the internet, mind you, so I put in the work to find the address, and then put a check in the mail with the correct paperwork. I followed up on that payment a few weeks later, making sure it had gone to the correct loan. I didn’t want that $152 check to pay down the other loan, the subsidized $2,500 loan that I also took on in 1997, but I had no confidence that the bank would apply the payment correctly for me. In the end, the $152 unsubsidized loan was, indeed, correctly marked as “PAID IN FULL.” It still shows up on my permanent record today (although the payment that I made is so long ago that the date is recorded as “0000” in the system that I can access online).
In any event, by this point, I didn’t trust anyone in the student loan system to have my best interests at heart. I assumed that in the years ahead, I would have to deal with situations like this one, where I had to watch my back, and look out for my own financial best interests, because no one else would. I guessed that I would need to spend a lot of time (and a lot of money) if I was going to survive my years-long journey through the student debt system.
Yep. I was right. That’s exactly how it’s played out over the years.
Speaking of played out, I also thought that Boyz II Men would continue to release relevant, timeless music after 1997. And I was not right about that, unfortunately. Oh, well.
Coming Up Next Time
2001: A Student Debt Odyssey
Find out what happened after I graduated from college in 2001, and then moved overseas for two years. Do you have to pay your student loan bill if you don’t live in the US? (Spoiler alert: yes, you most definitely have to.)
Thanks for reading. Please let me know what you think about this series, and my newsletter more generally.