Student Loan Defaults On the Rise

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Many students are unable to pay back their school loans, especially those attending for-profit institutions, according to the Education Department.

The department ‘s most recent default data , which looks at loans that entered repayment periods between Oct. 1, 2007 and Sept. 30, 2008 and defaulted before Sept. 30, 2009, shows that 7% of federal student loan borrowers defaulted within two years of beginning repayment, up from 6.7% the previous year. Put another way, just over 238,000 of the 3.4 million students couldn’t pay back the money they owed.

“This data confirms what we already know: that many students are struggling to pay back their student loans during very difficult economic times," U.S. Secretary of Education Arne Duncan said in a press release.

Duncan went on to point out, however, that the most defaults come from students attending universities or educational institutions run by private, profit-seeking organizations. These institutions range in size, from small trade schools to  larger chains, such as the well-known University of Phoenix.

The Education Department said that enrollment in these types of institutions increased during the last two years. Growth aside, in the last 2008-09 year, students at for-profit schools represented 26% of the borrower population and 43% of all defaulters. The median federal student loan debt carried by students earning associate degrees at for-profit institutions, according to the Education Department, was $14,000.

Comparatively speaking, the default rate at public nonprofit colleges was 6%, up only one-tenth of a percentage point from last year’s data. Rates at private nonprofits increased from 3.7% to 4%, year over year.

“While for-profit schools have profited and prospered thanks to federal dollars, some of their students have not,” Duncan said. “Far too many for-profit schools are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use.”

In an effort to preemptively prevent defaults, the Obama administration is proposing that stricter lending practices be put in place at for-profit institutions. Two proposals, published separately by the Education Department in June and July, aim to protect students from misleading and overly aggressive recruiting practices, while providing better information about the effectiveness of career college programs and ensure that only eligible students and programs receive aid.

Under current legislation, all schools with default rates of 25% or greater for three consecutive years will face a loss of eligibility in the federal student aid programs.

Until new laws are put into place, the Education Department advises borrowers who need assistance in repaying their student loans to visit their website www.federalstudentaid.ed.gov or contact the holders of their loans to discuss repayment options.

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