Facing Student Debt and Defaults Realistically

By Heide B. Malhotra
Epoch Times Staff
Created: November 14, 2012 Last Updated: November 14, 2012
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Students protest the rising costs of student loans for higher education on Hollywood Boulevard in Los Angeles, Sept. 22. Citing bank bailouts, the protesters called for student loan debt cancelations. (David McNew/Getty Images)

Students protest the rising costs of student loans for higher education on Hollywood Boulevard in Los Angeles, Sept. 22. Citing bank bailouts, the protesters called for student loan debt cancelations. (David McNew/Getty Images)

Student loans, student defaults, and unemployment among recent college graduates have been intensely discussed because of the economic upheaval of the past few years.

A mid-2012 briefing paper by the Economic Policy Institute suggests that young people, including those with a college degree, face an unemployment rate that is double that of the older generation. This unemployment is not because they lack the skills for a given job, but because there are just not enough jobs in the market.

“Recent college graduates have entered an enormously difficult job market, which poses particular challenges for those who need to begin paying back student loans. The unemployment rate for young college graduates in 2011 remained high at 8.8 percent, a slight decrease from 2010, which saw the highest annual rate on record for this group (9.1%),” the Institute for College Access & Success states in an October 2012 report.

Student Loan Consequences

“Defaulting on a loan has several serious consequences including adding significantly to the cost of a loan and ruining the borrower’s credit score,” the Institute for College Access & Success states on its Project on Student Debt website.

In July, the National Consumer Law Center (NCLC) released a report titled “The Student Loan Default Trap.” This report draws attention to the consequences when defaulting on a student loan.

“The stakes are high because vulnerable students attempting to better their lives face severe consequences if they default on federal student loans. The government has nearly boundless powers to collect student loans, far beyond those of most unsecured creditors,” according to the NCLC report.

The stakes are high because vulnerable students attempting to better their lives face severe consequences if they default on federal student loans.
-National Consumer Law Center

The NCLC conducted a survey that suggests most student loans default because of failure to earn a degree, unemployment, or insufficient income. Of those that defaulted, 85 percent were on welfare, 80 percent were unemployed, and 53 percent didn’t graduate.

Close to one-fourth of those who defaulted had no idea they had defaulted, and more than two-thirds had not received counseling concerning default.

The survey interviewers discovered a reason for defaulting that had not been discussed in any prior research they had reviewed.

“The vast majority who did not believe they should have to pay back their loans expressed serious problems with the schools they attended,” the NCLC report disclosed.

U.S. Government to Blame for Student Defaults

An Oct. 1 article on the Sober Look website accused the U.S. government of playing a large part in the student default debacle. Through its student aid programs, the government provided almost limitless credit and at the same time kept the interest rate far below market prices.

The U.S. government “allowed schools to raise tuition without the demand constraint that would normally exist in a market,” the Sober Look article states.

Official Three-Year Student Loan Default Rates

As required by the Higher Education Opportunity Act of 2008, the U.S. Department of Education published a three-year default rate for the first time on Sept. 28.

“Congress included this provision [three-year versus two-year default rate] in the law because there are more borrowers who default beyond the two-year window,” the department explained in its announcement.

The September release includes both two-year and three-year calculations. The two-year numbers indicate the default rate increased by 0.3 percent, from 8.8 percent for fiscal year (FY) 2009 to 9.1 percent for FY 2010.

When applying the trial three-year window to the FY 2008 group of borrowers, the default rate was 13.8 percent, while the default rate for the FY 2009 cohort was 13.4 percent, 0.4 percent lower.

“The FY 2009 three-year rates announced today capture the cohort of borrowers whose loans entered repayment between Oct. 1, 2008, and Sept. 30, 2009, and who defaulted before Sept. 30, 2011. More than 3.6 million borrowers from over 5,900 schools entered repayment during this window of time, and approximately 489,000 of them defaulted,” according to the department’s release.

Two schools face losing eligibility in federal student aid programs due to “two-year default rates of 25 percent or more for three consecutive years,” according to the department’s release. Without successful appeals, their students may no longer be able to access federal student aid.

“However, any school with a three-year CDR [cohort default rate] of 30 percent or more must establish a default prevention task force and submit a default management plan to the Department. There were 218 schools that had three-year default rates over 30 percent and 37 schools had three-year default rates in excess of 40 percent,” the department release states.

In response to the student loan default release, an Oct. 4 announcement on the Business Wire website states: “Fitch Ratings has affirmed the senior and subordinate student loan notes issued by SMS Student Loan Trust 2000-A at ‘AAAsf’. The Rating Outlooks, which are tied to the sovereign rating of the U.S. government, remain Negative.”

Information Not Quite Transparent

“But what’s really telling about this data is how much it does not tell us, particularly when college costs continue to soar, student indebtedness has surpassed $1 trillion, and the total amount in default owed to the government exceeds $75 billion,” according to a post on the Quick & The Ed blog.

The publicly released data is missing a lot of information collected by the department, yet no one has requested the data under the Freedom of Information Act.

“The point is we don’t know what we don’t know. And without better data from the federal government on student borrowers, we will remain in the dark about how best to remedy excessive student debt,” the Quick & The Ed post advises.

Student Debt Problematic for U.S. Economy

“Student debt is another debt time bomb. The effects of an increasing number of people defaulting on their student debt will only cause more suffering to the already fragile U.S. economy,” an Oct. 2 Profit Confidential article warns.

The article suggests that at least 1 out of 10 students is defaulting on his or her student loan due to the inability to find jobs commensurate to academic achievement and skills. This results in lower pay, which is often just enough to survive from day to day, but not enough to pay down a student loan.

“Issues such as debt problems at the municipal level and the looming crisis in student debt will only cause the U.S. economy to decline further,” the Profit Confidential article forewarns.

Student Loan Debt Statistics

With data sourced from the Chronicle of Higher Education, the American Student Assistance (ASA) website states that close to 20 million Americans attend a higher education institution annually. More than half, 12 million, need a loan to pay for the cost of attending college.

ASA states that according to the Federal Reserve Bank of New York, of the 37 million student loans outstanding, about 5.4 million or around 14 percent of the loans are delinquent. Approximately $85 billion, out of $870 billion–$1 trillion in outstanding student loan debt, is past due.

“As of early 2012, borrowers in their 30s have a delinquency rate (more than 90 days past due) of about 6%, while borrowers in their 40s have a delinquency rate double that, at about 12 percent. Borrowers in their 50s have a delinquency rate of 9.4% and those over 60 have a delinquency rate of 9.5%,” according to information on the ASA website.


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