by Yewon Kang
May 13, 2010
The student loan default rate continues to rise along with the unemployment rate, according to the latest figures released this month by the Department of Education. That's left recent graduates to worry about how they will pay off thousands of dollars in student loan debt.
Preliminary data for the student loan default rate in 2008 was 7.2 percent, up from 6.7 percent in 2007 and 5.2 percent in 2006, putting it at the highest level since 1999. The "cohort" default rate, which is released annually by the department, refers to the proportion of federal loan borrowers who began repaying loans between October 2007 and September 2008 and defaulted by the end of September 2009.
The unemployment rate for people with bachelor’s degrees and higher over the age of 25 was 5 percent in February, more than double the rate in February, 2008, according to the Bureau of Labor Statistics.
Jenni Smith, who just graduated from Northpark University in Chicago with a degree in English and a teaching certificate, thought she wouldn’t have a problem finding a job. But that’s not the case as cash-strapped states slash education spending and lay off teachers. She is left with $75,000 of debt with no certainty of becoming a teacher anytime soon.
“Getting a job is unrealistic at this point. I’m essentially a free teacher now,” said Smith, who’s teaching part-time at a local school to fulfill the 100-hour requirement of fieldwork. “It’s been hard.”
It will be harder when Smith must start paying back her loans after the customary six-month grace period ends. She says she has no intention of defaulting on her loans, but for thousands of other college graduates who have either lost their jobs or never found one after getting their degrees, default seems like an answer.
The primary driving factors behind a rising default rate are high unemployment and changes in interest rates on many student loans, said Mark Kantrowitz, publisher of FinAid.org. Recent graduates will see "cross-currents" with their student loans' interest rates, Kantrowitz said. Overall, students who graduated last year have seen an average increase in interest rates, but they will start to see a decrease as government aid policies kick in.
To ease the burden of student loans, the Student Aid and Fiscal Responsibility Act was signed into law in March as part of healthcare reform. Under the law, private lenders will no longer receive government subsidies to issue federal loans. Instead, the government will provide the loans directly to student borrowers, which is expected to translate into more grants for students at lower interest rates.
"The high interest rates on private student loans have made them incredibly profitable for loan companies and saddled students with crushing debt," said Dick Durbin (D-Ill.) in a press release on the bill he introduced last month to allow private student loans to be forgiven if the borrower files for a bankruptcy. The legislation is under consideration by the House Judiciary Committee.
Another law will also take effect in July 2011 that will cut one key student loan rate to 3.4 percent from 6.8 percent currently. The College Cost Reduction and Access Act of 2007 applies only to undergraduate student borrowers under the Federal Family Education Loan and Direct Loan program.
However, the new laws are too late to help the current crop of college graduates who need to start paying back their loans. Also, critics say recent legislation has focused too much on the financing of student loans, rather than what they see as the underlying problem.
"The real problem is not lenders who are charging high rates to students, but why students have to take out loans to such a great extent in the first place and that's a function of tuition cost," said Sameer Gokhale, a senior analyst with Keefe, Bruyette & Woods.
Private loans take about 20 percent of the student loans and 80 percent are estimated to be federal or government-backed loans, according to TransUnion LLC, a consumer credit reporting agency.
Over the last two years, private student loan lenders like Sallie Mae experienced significant credit losses, driven by the subprime private student loan portfolios, Gokhale said. But he expects the company to see credit quality improve in the near future. "There's some light at the end of the tunnel as far as credit quality goes."
On the other hand, Fitch Inc. recently downgraded the asset-backed securities on private student loans for the first quarter of 2010. The downgrades reflected default rates that continue to rise higher than Fitch's initial expectations, according to its report on Jan. 29.
It took Vanessa Harikul four years to pay back $24,000 of her loans with Sallie Mae after she graduated in 2005. She started at an entry-level job at a telecommunication company in downtown L.A. With an income of $30,000 a year, Harikul barely made the minimum of $263 a month for her student loan payment.
“It was difficult, a big adjustment,” Harikul said. She drove an old car and cut back on credit cards. After paying rent and other bills, any extra money went to the student loan payment, she said.
High debt levels are more common among independent students like Harikul and Smith as opposed to dependent students who may be getting support from their parents or spouses, according to the College Board in its report examining 2007-08 bachelor's degree recipients who graduated with more than $30,500 in education debt.
The consequence of defaulting on student loans can be brutal, according to FinAid.org, a website informing students about education loans. The loans may be turned over to a collection agency, which can garnish students’ wages and hurt their credit records.
http://news.medill.northwestern.edu/chicago/news.aspx?id=164598
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