Student Loan Default Rate On the Rise
Weighed down by job losses, limited job availability, and lower salary wages, college graduates — who leave school owing an average of $22,500 in student loans — are defaulting on their federal student loans at the highest rate since 1998 (“In Grim Job Market, Student Loans Are a Costly Burden,” The New York Times, April 18, 2009).
“When it comes down to making your student loan payment or buying gas to go to work, it isn’t a difficult decision to make sometimes,” said David Clark of College Assist, a national guarantee agency that helps its borrowers stay current on their college loans (“Student-Loan Debtors Get Breaks,” The Denver Post, April 12, 2009).
Student loan borrowers who fail to pay on their federal student loans could have 15 percent of their wages garnished, could lose their state and federal tax refunds, and could lose a portion of their Social Security benefits. And many borrowers have learned that, unlike other types of unsecured loans, student loans typically cannot be discharged in a bankruptcy filing.
But borrowers may be able to avoid taking the drastic step of filing for bankruptcy or avoid having the government seize their money by working out a repayment resolution with their lenders, Clark said.
“Once we can get someone on the phone, we have a 90 percent rate of curing an account and keeping it out of default,” he said.
Federal Student Loan Repayment Options
Deferment or Forbearance. Borrowers can postpone their student loan payments for three years if they become unemployed or if they provide proof of economic hardship. In deferment the government pays the interest on borrowers’ subsidized federal loans, but in forbearance borrowers are responsible for any interest that accrues on all of their federal student loans.
“Students may not fully appreciate just how much [deferment or forbearance] increases the size of the loans,” said Mark Kantrowitz, publisher of the financial aid website FinAid.org. “That’s why deferments and forbearances should mainly be used as a method to solve a temporary problem.”
Extend the terms. Graduates can extend the terms of their loans, thereby lowering their monthly payments, although in doing so they could ultimately pay double the interest what they would have originally paid. Graduates can switch back to their original loan terms at any time.
Income-based repayment. Beginning this July, eligible federal student loan borrowers can enroll in an income-based repayment plan that will limit their monthly loan payments to 15 percent of their discretionary income — income that is above 150 percent of the poverty line — and that will forgive borrowers’ remaining loan balances after 25 years of repayment.