cyberworth

Recessionary economic conditions and a poor job market are working against college grads who have high balances on education loans.

At one time, college graduation was the first signpost along the road to financial security. But in this economic climate, many grads are instead finding themselves trapped on a path that leads straight towards insolvency.

On the heels of the subprime mortgage crisis, a new class of borrowers is in trouble: college graduates. SLM Corporation, also known as Sallie Mae, has reported that the September 2008 delinquency rate on private education loans rose to 9.4 percent from 8.5 percent in the prior year. (Sallie Mae, a private corporation, is the country's largest provider of federal and private education financing.)

Federal education loans are regulated and guaranteed by the government; like an FHA-insured mortgage, a federal student loan must conform to various government specifications. Among those specifications are caps on interest rates and an aggregate loan limit. If the student still needs more education financing after reaching the aggregate limit of $31,000 in federal loans, private student loans are the option.

Private student loans, unfortunately, don't offer the protections of their government-backed brethren. As a result, they can be expensive-some even carry volatile adjustable rates. The largest danger, though, is the lack of any cumulative borrowing cap. Students can quickly pile on tens of thousands of dollars in debt, blithely unaware of how those student loans will burden them later in life. And those grads can remain blissfully unaware of their mistake, up until post-graduation bills start arriving in the mailbox.

In a perfect world, college grads emerge from school and quickly secure a healthy salary in their chosen fields. Today's economy, however, is anything but perfect. As unemployment rises, new grads find themselves competing for jobs with older, more experienced, applicants. If the opportunities are thin enough, those grads may be forced to work in low-paying or part-time positions. While those kinds of jobs may put food on the table, they don't produce enough income to service $100,000 worth of education loans.

Just like the subprime borrower who's underwater on the mortgage, the indebted college grad doesn't have many options. He can try refinancing, or asking his lenders for deferment based on financial hardship. He also might try getting by with credit cards and personal loans, at least until his earnings improve. Or he may ask his parents for help-but given what's happened in the stock market, his folks may not have the wherewithal to contribute.  Bankruptcy isn't an option; in bankruptcy, student loans are non-dischargeable.

Here's what it comes down to: should the economy and job market deteriorate further, those delinquency rates will get higher.  That means too many college students will be heading down the wrong road after graduation.