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Student Loan Defaults Skyrocket, Double in Past 6 Years

By Rich Williams
Higher Education Advocate

On September 12th, the US Department of Education released the official FY 2009 cohort default rates on student loans. The number of students who defaulted within two years of entering repayment increased to 8.8%, up from 4.5% in FY 2003 and 7% in FY 2008.

Skyrocketing student defaults are just the tip of the iceberg. The new numbers represent just a snap shot in time which does not capture the full magnitude of those borrowers defaulting through the lifetime of their student loans.

For-profit colleges, Wall Street run college programs such as University of Phoenix and Kaplan, reported the largest gains in defaults. Just two years out of college 15% of borrowers from for-profit colleges defaulted, which was double the number of those coming from public schools at 7.2%. For-profit colleges rely almost exclusively on federal funds to operate -- while they educate just around 13% of all students they suck in 25% of all federal aid and are responsible for almost half of every student who defaults in the federal loan program.

Through the down economy, states have been slashing higher education funding leading to increases in tuition, which students and families generally shoulder by taking out loans. Just over a decade ago, only a third of college graduates had to borrow money and their average debt was around $12,000. Now, over two-thirds of graduates must borrow money, carrying an average of $24,000 in debt when they graduate.

A large debt burden makes life tough for graduates. Buying a home, starting a family or starting a small business may not be options for some student loan borrowers, even if they have a job. Those who default on their loans have a damaged credit history and could be discriminated against when applying for a job or even renting an apartment. Worse, student loan debt cannot be discharged in bankruptcy if borrowers run into unforeseen circumstances that prevent loan repayment.

Congress has taken action in recent years to combat high debt levels by increasing student aid, such as increasing the Pell Grant maximum and making loan repayment more manageable through the Income Based Repayment and Public Service Loan Forgiveness programs. As Congress continues to evaluate budget saving measures, student aid must be sustained, if not increased, to avoid even higher levels of defaults.

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