Default rate on student loans soar, says report

The sustained increases in the cost of higher education have prompted students to get financial relief from student loans. Borrowing to pay for education has become a fast and convenient option for most students in the midst of economic woes. In fact, as the costs of college education continue to soar, so does the number of students taking out student loans. Over the past decade, the level of student debts has increased rapidly and skyrocketed to 108 percent.

While student loans have been an integral part of college financing, the default rate of student loans has climbed steadily for the past few years. Recent reports indicate that borrowers who defaulted on federal student loans have again substantially increased in number, reflecting the borrowers’ inability to avoid bad credit risks and manage their financial situations in a weak and fragile economic environment.

According to the data released by the U.S. Department of Education, the proportion of borrowers who defaulted on federal student loans within two years of their initial payments soared to 9.1 percent. That was a hefty increase from the previous year’s 8.8 percent. However, this figure represents only a small subset of the more than 4.1 million student loan borrowers who were obliged to start making payments on their loans in the 12 months before October 2010 and defaulted before September of the previous year. Loans are considered in default after 270 days without payment.

On the other hand, the report found a slight decline in the number of borrowers who defaulted within three years of their first payments. The figure has dropped from a rate of 13. 8 percent to 13.4 percent.

More Student Loan Defaults and Sanctions

Schools with two-year default rates of more than 25 percent for three successive years are at risk of sanctions. Unless their appeals are successful, those institutions may no longer remain eligible for federal financial assistance, including Pell Grants. Two of the schools that face the loss of eligibility in federal aid programs are the Centro de Estudios Mutidisciplinarios in San Juan, Puerto Rico and Tidewater Tech in Norfolk, Virginia.

Moreover, the report also shows that among colleges and universities, 218 had 30 percent three-year default rate on loans.
What is clear, however, is that no sanctions will be imposed on schools based on the three-year default rates of 30 percent or higher. During this period, sanctions will only be based on the two-year cohort default rates. But despite that, the department said that it will oblige schools with three-year default rates to establish a default prevention task and submit default management plans.

Justin Draeger, the president of the National Association of Student Financial Aid Administrators, confirmed in a statement that there has been a continued increase in the number of loan defaults since 2007, an upward trend that is directly correlated to the economy.

While the number of defaults continues to rise, the economy and job market are showing no signs of major recovery. To make matters worse, the continued slowdown in job growth is making it more difficult for student borrowers to get out of their mounting debts.