October 15, 2013
Student Loan Defaults Surge To Highest Level In Nearly 2 Decades
Recent college students are defaulting on federal loans at the highest rate in nearly two decades, reflecting "crisis" levels of student debt and a lackluster economy that leaves graduates with bleak employment prospects.
One in 10 recent borrowers defaulted on their federal student loans within the first two years, the highest default rate since 1995, according to annual figures made public Monday by the Department of Education.
A separate gauge, measuring defaults occurring within the first three years of required payments, showed that more than one in seven borrowers with federal student loans went into default, an event that can trigger invasive debt-collection methods that include fees, wage garnishments, and withheld IRS tax refunds.
“The growing number of students who have defaulted on their federal student loans is troubling,” Education Secretary Arne Duncan said. Duncan said the department will work to “ensure that student debt is affordable.”
As in previous years, for-profit colleges had higher default rates than any other sector of higher education. The industry, in the Education Department’s crosshairs since 2009, is braced for an onslaught of renewed scrutiny as federal lawmakers and policymakers attempt to rein in the amount of taxpayer-financed loans and grants going to schools with dubious track records.
The increasing default rate underscores the Obama administration’s shortcomings in enrolling distressed borrowers into government programs that cap monthly payments based on borrowers’ incomes. While the two-year default rate has doubled since 2005, millions of potentially eligible borrowers appear unaware of programs President Barack Obama has touted as a way to manage debt burdens and avert default.
Roughly the same number of borrowers defaulted on their federal student loans last year as were aided by the Obama administration’s three debt-relief measures, known as Income-Based Repayment, Income-Contingent Repayment and Pay As You Earn, according to Education Department data previously obtained by The Huffington Post.
Debbie Cochrane, research director at the Institute of College Access and Success, a student advocacy group, said that while the programs shouldn’t be expected to avert every default, many of the 600,000 borrowers who defaulted last year “should have been able to benefit from income-driven repayment plans, but likely didn’t know about them or how to enroll."
“There's just not enough borrowers who know about" the programs, said Rory O’Sullivan, policy director at Young Invincibles, an advocacy group representing people ages 18 to 34.
The government’s default rate masks the true state of distress among American households because of the way the federal government defines defaults, officials and experts have said. While most banks and other lenders define defaults as loans delinquent for at least 60 days, the Education Department waits 270 days -- nine months -- before declaring a delinquent borrower in default.
"This is really just the tip of the iceberg," Cochrane said. "It doesn’t measure people who are able to stay on top of their loan payments, but are struggling with unmanageable debt, and it doesn’t measure borrowers who are delinquent."
Recent data from the Federal Reserve Bank of New York suggest the number of delinquent borrowers is increasing. About $52 billion in student loans that had been current became delinquent in the first half of the year, the highest first-half total recorded since 2003.
With nearly 39 million borrowers carrying more than $1 trillion of federal student debt, government concerns have been mounting over the potential of a slowdown in future economic growth. Borrowers who devote bigger shares of their incomes to repaying student debt reduce purchases of big-ticket items, such as cars and homes, investments in potential new small businesses, and savings for retirement.
The average borrower with federal student loans now carries more than $26,000 in debt, a nearly 43 percent increase from 2007.
“We've got a crisis in terms of college affordability and student debt,” Obama said in an Aug. 22 speech at the State University of New York in Buffalo. “Our economy can’t afford the trillion dollars in outstanding student loan debt, much of which may not get repaid because students don't have the capacity to pay it.”
As college tuition continues to rise while state governments cut back on aid to public colleges and universities, the amount of student debt has shot up. But while policymakers for years have argued that college degrees remain a worthwhile investment, recent data suggest they’re not as valuable.
Median weekly wages for holders of bachelors degrees have fallen 4.8 percent over the last 10 years, according to inflation-adjusted data from the Bureau of Labor Statistics. Weekly paychecks for all college degree holders over the age of 25 are down 3 percent.
The White House has suggested measuring colleges -- and the value they provide to students -- by examining graduates’ wages and average debt levels. The idea is one of many the White House has embraced as it attempts to increase college affordability.
While defaults increased across higher education, the default rates at for-profit colleges remained conspicuously high compared with public and private non-profit schools.
This year's data showed that 13.6 percent of for-profit college borrowers defaulted on federal loans within two years, and 21.8 percent of students defaulted after three years -- a slight drop from 22.7 percent last year. That compares with default rates of 13 percent at public colleges and 8.2 percent at non-profit private institutions.
The for-profit sector, which includes small trade schools and publicly traded giants such as the University of Phoenix and ITT Technical Institute, has seen intense scrutiny from the federal government and members of Congress in recent years.
Many for-profit institutions receive more than 80 percent of revenue from federal loans and grant dollars. The for-profit sector educates only about 13 percent of students, yet takes in nearly a quarter of federal loan and grant dollars and contributes to about 47 percent of loan defaults.
The Department of Education is revisiting regulations that would cut off federal aid to certain career college programs -- both for-profit and non-profit -- that leave students shouldering massive debt burdens. The department issued rules two years ago known as "gainful employment" regulations that were intended to measure students' ability to repay loans after graduating or dropping out of vocational programs.
A for-profit college industry trade group sued the federal government, and a federal judge struck down many provisions of the law over the summer. The administration has revived its effort, convening a new rule-making panel this month.
Although three-year default rates at for-profit schools are down slightly from last year, and two-year rates are down from a high of 15 percent two years ago, advocates argued that the sector's high default rates compared with non-profit colleges suggests a deeper problem.
"The pattern has been consistent," said Cochrane, of the Institute for College Access and Success. "When you see anomalies like what you see in the for-profit sector, that's when you need to start looking under the hood."
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