The Daily Need

Student loan defaults on the rise

Student loan defaults are on the rise, according to data released last week by the Department of Education.  In the fiscal year ending September 30, 2010, 8.8 percent of borrowers defaulted on their student loans within two years, up from 7 percent the year before. This marks the highest default rate for student loan borrowers in more than a decade, although The New York Times notes that the rate spiked to 20 percent in 1990.

The Department of Education’s report reveals that the trend is particularly troublesome for those graduating from for-profit colleges, where the default rate rose from 11.6 percent in 2008 to 15 percent in 2009. In contrast, the default rate was 7.2 percent for graduates from public colleges and 4.6 for not-for-profit colleges.   

Some of the problems underlying the spike in student loan defaults are obvious.  The troubles facing the U.S. economy have been particularly hard on recent college graduates, who face fierce competition for entry-level jobs and few options outside of low-skill and low-wage work that can depress their incomes for years. The rising default rates also add to growing concern over for-profit colleges, whose students comprise nearly half of all the defaults. Critics say that for-profit college recruiters target low-income and minority students that bring in money from federal financial aid, but face high debt and low job prospects upon graduating. New federal guidelines restrict federal aid to for-profit schools where less than 35 percent of former students are making their loan payments each month.

But another lesser-known problem with rising defaults is that many students simply aren’t aware of loan repayment options that exist. A repayment program started in 2009 caps monthly payments at 15 percent of borrowers’ incomes, giving low-wage earners a bit more breathing room in paying back their debt than standard monthly payments normally allow. Borrowers who make monthly payments over a period of 25 years can have the rest of their loans forgiven. Those making less than 150 percent of the poverty line – $22,314 for a family of four and $11,139 for an individual as of 2010 – would be able to make monthly payments of zero dollars. The program’s low enrollment rate suggests that schools and the Department of Education are not advising students about loan repayment options as effectively as they could, particularly to low-income students who need the most assistance. The Department, however, has stated that it is taking steps to expand their outreach efforts for the program.

 
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