Increase Federal Student Loan Limits? Am I Crazy?

A  Wall Street Journal story yesterday looked at how one medical school graduate's $250,000 in school loans ballooned to $555,000. It's a good story (I love stories that look over other folks' money woes), but there's one point it could have made more strongly: hefty as her federally backed student loans were, it's the private unsubsidized and unregulated loans that really are the big problem.

The subject of the story, Dr. Michelle Bisutti, took out the maximum $152,000 in federal loans, and the balance on those has now gone up to $209,399. But here's the thing: do a little math here, and you realize that to get to the $555,000 total, the balance on her $98,000 or so in private loans, from Sallie Mae and Wells Fargo, has to now have gone up to--including preposterous "collection fees"--to about $345,000. So her private student loan balance has more than tripled because of interest and fees.That's a whole lot more scandalous than what happened with the federal loans--especially when you consider that (catch-22 here...) $30,000 of the increase in the federal loan balance is the result of fees added when, faced with the crushing total, she defaulted on the federally backed loans as well as the private ones.

I know that to a lot of people it may seem amazing that in this time of concern about student loans I would argue, as I did last week, for an increase in the maximums for federally subsidized loans. But this is a perfect illustration of why. Substantial as the $152,000 in federal loans that Dr. Bisutti seems, she would be in a vastly position now if she had been allowed to borrow even more and avoid those private loans. I pointed out in last week's story that part of the reason this system continues is that as much as lenders such as Sallie Mae like the federally subsidized loan structure, which gives them guaranteed profits, they don't want to raise the limits on those because they like high interest private loans even more. Unlike other private loans, these can't be discharged in bankruptcy, so the lenders can add interest in fees forever in the expectation that eventually they'll get paid back before the borrower dies. It's a raw deal for students, and a worse one for the public interest.