Student loan default rate rising

The Department of Education (DoE) said that default on student loans climbed to 7.0 percent in fiscal 2008, up from 6.7 percent in the prior fiscal year - yet another manifestation of the sluggish economy and bleak jobs market.

The default rates increased from 5.9 to 6.0 percent for public institutions, from 3.7 to 4.0 percent for private institutions, and from 11.0 to 11.6 percent for for-profit schools.

These default rates -- the most recent data available -- represent borrowers whose first loan repayments came due between Oct. 1, 2007 and Sept. 30, 2008, and who defaulted before Sept. 30, 2009. During this period, almost 3.4 million borrowers entered repayment, and more than 238,000 defaulted on their loans.

DoE explained that borrowers who default after their first two years of repayment are not measured as defaulters in the current data.

According to Mark Kantrowitz, director of FinAid.org, a financial advice website. student loan debt in the U.S. recently surpassed credit card debt. Indeed, the Wall Street Journal reported that Americans now have to bear about $830 billion in private and federal student loans, compared with about $827 billion in credit card debt.

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

Duncan also noted that the data reveals that students attending for-profit schools are the most likely to default.

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

DoE also stated that students at for-profit schools represented 26 percent of the borrower population and 43 percent of all defaulters. The median federal student loan debt carried by students earning associate degrees at for-profit institutions was $14,000.

The majority of students at community colleges do not borrow, DoE noted.

The default rate] is [at] a high level, but it's consistent with the overall weakness in the labor market, said Sean Snaith, an economist at the University of Central Florida.

We're only going to see these rates rise in 2009 and 2010 given the continuing problems with joblessness. The situation here is analogous to the subprime mortgage crisis in the housing market, except this time, it's because of a growth in defaults coming from the for-profit educational sector.

Meanwhile, the Obama administration has imposed certain new rules that will regulate the federal aid provided to the for profit schools.

The DoE has also proposed rule which would cut off federal student aid to educational institutions/programs whose graduates carry high student loan debt relative to their incomes.

An escalating rate of loan defaults would result in more younger Americans having their credit scores damaged, precluding their ability to obtain financing, mortgages or even employment in the future.