Student Loan Debt, With Little to Show for It

Kevin Wanek was just one semester away from graduating from Western State College of Colorado in 2010 when he found himself in a bind. He no longer wanted to be an accountant, the field he’d studied in college, but owed more than $50,000 in student loan payments to Wells Fargo (WFC) and other private lenders. Reluctant to take on further debt and close to reaching his borrowing limit, he decided to drop out of school in 2010.

Says Wanek: “I started adding up what I owed, and it really hit me.”

As a college dropout, his career options were limited, but he found an entry-level job that at iTriage, a Denver-based mobile healthcare application company. In the last two years, he’s become a self-taught computer programmer and received a promotion. He now wants to go back to school to finish up his degree online, this time with a focus on technology and computer science. But with nearly all his disposable income going towards his $600 monthly student loan payments, Wanek, 24, worries he’ll never be able to save enough money to go back to school and complete his bachelor’s degree.

“It almost feels like the money is going into a black hole,” he said. “It is frustrating knowing that you’re paying for something which you don’t have a tangible return on.”

More people than ever are borrowing to pay for college as tuition climbs, and last month the government reported that U.S. student-loan debt had reached a record $1 trillion, surpassing even credit card debt. As student loan debt balloons, another disturbing trend has emerged. According to a report released this year by the Education Sector, an independent education policy think tank, the percentage of student loan borrowers who are dropping out of school is on the rise. Among those who borrowed, nearly 30 percent dropped out between 2003 and 2009, up from 23 percent eight years earlier, the latest figures from the Department of Education show. The problem is most prevalent at for-profit four-year institutions, but is also on the uptick at four-year public and private colleges and community colleges, said Mary Nguyen, who authored the report. Students who delay enrollment, attend college part-time, or work more than 35 hours a week their first year of school have a greater risk of dropping out with debt, she said.

“This is a pretty big problem because it is growing in every single institutional sector,” she said. “As long as college prices keep increasing the tension students face between trying to minimize debt but also maximize their chances of graduating will continue to grow.”

The consequences for this population of student loan borrowers can be severe. Borrowers who leave school have a harder time finding a job, and therefore are four times more likely to default on their loans than borrowers who graduate, the report showed. At the same time, those who drop out have higher unemployment rates and lower earnings than college graduates, the data showed. For example, in 2009, the median income for borrowers who dropped out of college was $25,000, $5,000 less than those who graduated, Nguyen said.

Today, there are 36 million Americans who spent some time in college but earned neither a two-year nor a four-year degree, said Anthony Carnevale, director of the Georgetown University Center on Education and the Workforce.  By not completing a degree, these people are curtailing their lifetime earning potential. For example, the median lifetime earnings of a bachelor’s degree holder is $2.3 million today, while a person who attended some college and has no degree will earn $1.5 million, according to the center’s findings.

“The worst case is if you go into a low-earning field, don’t graduate and accumulate debt,” Carnevale said. “The effects are very negative and very powerful because in the end what you got for the effort is the debt and no real increase in earning power.”

According to the College Board’s 2011 Trends in Student Aid report, 13 percent of people who last attended a four-year institution but did not complete their bachelor’s degree by 2009 have more than $28,000 in student loan debt.

For some, the debt burden can be far worse. Jim VanNest, 30, has been struggling with more than $100,000 in student loan debt since he dropped out of Boston’s Berklee College of Music in 2005, where he’d been studying voice and audio engineering for three years. Since then,  he’s worked as a customer service representative for a telecom company, a receptionist, a janitor and “hit a low point” when he got a job at Petco (PETC). VanNest, now working as a quality assurance analyst, recently decided to return to San Francisco State University to study economics.

“That feeling of not being technically eligible for so many positions bothered me so much that I decided that I was going to finish school,” he said.

For some who’ve dropped out of college, their student loan debt has forced them to become entrepreneurial, propelling them onto a career path they never envisioned while in college. Kari DePhillips was supposed to graduate from a private women’s liberal arts college near Pittsburgh in 2005 with a bachelor’s degree in international business, but had to take three semesters off to care for her mother, who was living in California and struggling with a terminal illness. She ended up losing her scholarship and in the process, racked up $130,000 in debt, even as she worked full-time at a local media company to help pay for school. She dropped out of college in 2007, with just one semester left to go.

With $1,500 monthly student loan payment to private lender Sallie Mae — whom she jokingly refers to as Aunt Sallie –  hanging over her head,, DePhillips decided the “only way for me to control my environment was to create my own company and run it,” she said. Two years ago, she launched the Content Factory, which specializes in online public relations and social media marketing. For DePhillips, a former freelance writer, it’s a risk that has paid off. The company is slated to bring in $500,000 in revenue this year, she said, which “is good because I owe Aunt Sallie quite a lot of money.”

BUSINESS WEEK

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