Student Debt Grows and Grows: Default Rate on Student Loans Up
More students are defaulting on their loans, the Chronicle of Higher Education reports. According to a U.S. Department of Education report released on Monday, the “cohort default rate” on student loans increased to 8.8 percent, up from 7 percent in the previous year. That is, 320,000 out of 3.6 million student-loan borrowers whose first repayment period landed between October 1, 2008 and September 30, 2009 defaulted before September 30, 2010.
The cohort default rate measures the proportion of students who defaulted within two years of entering the repayment period. In 2008, the cohort default rate at for-profit institutions was 11.6 percent; in 2009, it was 15 percent. At public institutions, the default rate increased from 6 percent to 7.2 percent; at private universities, it increased from 4 percent to 4.6 percent. Taken together, these figures indicate an overall faster rise in default rates.
For recent college graduates, the consequences of defaulting could stay with them for years. A default could severely impact their credit rating, making it far more difficult for them to buy a car or house, or even rent an apartment and get a job.
Why the Increase?
James R. Kvaal, deputy under secretary of education, noted two trends. With the unemployment rate at 9.1 percent and no new jobs added in August, the economic outlook for students remains gloomy. Kvaal specifically cited a “strong correlation between student-loan default rates and unemployment rates, as well as credit-delinquency rates.” Second, he pointed out that growth in for-profit colleges has pushed up the default rate overall:
In fact, more than half of the total increase in the number of defaulters from 2008 to 2009 arose from the for-profit sector. There were 81,000 more defaulters in 2009 than in 2008, and 49,000 of them, or about 60 percent, came from the for-profit side.
Debbie Cochrane, a program director at the Institute for College Access & Success, notes that, while it is hard to single out one reason that more students are defaulting on their loans, “allegations of deceptive or fraudulent recruiting practices in the sector, including misrepresenting college graduation rates to potential students to encourage them to enroll and take out loans.”
As Mark Kantrowitz, publisher of FinAid, a site with information on student aid, points out, for-profit colleges should not necessarily be singled out for the rise in the student default rate. For-profit colleges typically enroll more low-income students who are less likely to graduate; students who fail to graduate are three times as likely to default on their loans.
A Little Known Program Could Help Borrowers
As the New York Times says, a recent study by the Institute for Higher Education Policy has found that, for every student who defaults, two more fall behind in their payments. Only 37 percent of borrowers who started to pay back their loans in 2005 were able to do so on time, the study found. An income-based repayment program that began in 2009 could help many borrowers who are unemployed or earning little, but it is not widely used:
Under the program, borrowers who pay 15 percent of their discretionary income for 25 years — 10 years if they are in public service — can have the rest of their federal student loan debt forgiven; in 2014, that will go down to paying 10 percent of discretionary income for 20 years.
“In the age of income-based repayment, there is no reason for a student to default, since even a payment of zero dollars is acceptable payment, if you have zero discretionary income,” Ms. Cochrane said. “But as of April of this year, only about 350,000 borrowers have entered income-based payment, a small subset of the eligible population. Students need to understand the options, colleges need to share the information, and the department needs to make it as easy as possible for students to enroll.”
Community Colleges Receiving Less State and Federal Funding
Another report, “Trends in College Spending, 1999-2009,” by the Delta Coast Project, “paints a picture of higher education in the United States as an enterprise that is turning increasingly to tuition increases to fill financing gaps—a trend that fuels students’ and parents’ unease about the cost of higher education.” The report, says the Chronicle of Higher Education, finds that community colleges have been the hardest hit by a downturn in educational spending. With growing enrollments and less support from state and federal sectors, community colleges saw their funding for educational and related activities shrink by 3.4 percent from 2008 to 2009. Any “new money” that is coming into higher education is coming from tuition and student fees.
Mindful of the importance of a college degree, students who don’t have the funds on hand for tuition have no choice but to take out loans — and if there are no jobs for them after they finish college, they face the likelihood of joining the ranks of borrowers who default.
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