Student loan default at highest level in years

Tuesday, September 13th, 2011 By

A college cheerleader in uniform walks the court as she stares into space, apparently deep in thought.

College graduates are defaulting on student loans at higher rates. (Photo Credit: CC BY/Kevin Coles/Flickr)

Student loan debt has surpassed credit cards on the consumer debt scale, and experts predict the trend to continue. According to the latest U.S. Department of Education data, federal student loan default rose sharply in fiscal 2010. Overall, 8.8 percent of borrowers defaulted. The number increased to 15 percent within the first two years of repayment when only for-profit schools were taken into account.

Student loan default up whole percentage points

The increase in student loan default was significant on all levels, reports the New York Times. For-profit college default went up from 11.6 percent in 2009 to 15 percent last year. For the same years, respectively, default at public institutions went from 6 percent to 7.2 percent, and all U.S. colleges saw an uptick from 7 percent default to 8.8 percent. Overall, the student loan default rate is the highest it has been since 1997, when it was also 8.8 percent. That’s significantly lower than the 20 percent student loan default rate observed in 1990.

“Borrowers are struggling in this economy,” said James Kvaal, deputy undersecretary of education. “We see a strong relationship between student default rates and unemployment rates.”

When one student defaults, two more fall behind

A recent study by the Institute for Higher Education Policy says for every student loan default, there are at least two more students who fall behind in their student loan payments. Among college students who started repaying their student loans in 2005, only 37 percent have gone without missing a payment or making a late payment.

These figures have disturbed the Department of Education to such a degree that work is in progress to capture an even larger sample window – a three-year default rate – in order to more fully analyze the problem.

Colleges can lose federal aid eligibility

One side of the student loan default dilemma not frequently publicized is what happens to colleges with the most students who experience loan default. According to Kvaal, multiple universities – four of them for-profit – lost federal student aid eligibility. As for-profits depend upon tuition payments for as much as 80 percent of their total revenue, the difficulty is easy to see. Such colleges have curtailed many recruiting programs that were previously essential to their survival. The long-term affects of student loan default on such universities remains to be seen.

Tuition costs growing faster than family income and inflation

The recession and high unemployment among young workers have contributed to student loan default rates, yet borrowing continues at a record pace. Even though family incomes and inflation have failed to keep pace with the cost of going to college, many students feel as though they’re mired in a grim catch-22. Going into default is certainly not an attractive option, as a lifetime of credit-related problems can occur, but when jobs aren’t available, or graduate wages are lower than they once were, there appears to be no escape.

More student loan debt, lower graduate wages

Sources

New York Times

Student loan default (U.S.) Wiki

U.S. Department of Education

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