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College students defaulting at record rate
Posted 9/28/2012 11:21 AM ET

Student loan defaults have risen for the fifth straight year, as students from traditional non-profit universities have an increasingly difficult time paying off their college debt.

Numbers released by the Department of Education Friday show that of the 4.1 million borrowers who began making payments in late 2009 and early 2010, 9.1% defaulted within two years, up from 8.8% the year before.

"Student loan defaults still continue to plague too many borrowers," said Debbie Cochrane, research director for the Institute for College Access & Success. "The numbers are distressing, and they needn't be so high."

Experts credited the combination of skyrocketing student debt, the poor economy and a lack of borrower education for the increase. Unlike previous years, when default rates rose because borrowers at for-profit universities were having trouble paying off their loans, this year's rise was attributed to borrowers who attended more traditional non-profit public and private universities. Public school borrowers defaulted at a rate of 8.3%, up from 5.9% just four years ago.

For the first time in four years, the two-year for-profit school default rate dropped from the previous year, to 12.9% from 15%. Mark Kantrowitz, publisher of Finaid.org, a financial aid website, said the drop indicated that new reforms had worked.

Politicians and finance advocates have long been critical of for-profit schools, saying they lure in unqualified students and didn't disclose enough about employment or debt rates. In the past few years, they've implemented new regulations on student recruitment and advertising, and made some changes to financial aid.

"This is a sign those rules are somewhat successful," Kantrowitz said. "All the criticism has lead to these colleges trying to clean up their house."

He added that he expects default rates have hit their peak, and expects them to drop next year based on reforms, a reduction in interest rates and an improving economy.

The two-year default figures released Friday count borrowers who began their repayment in fiscal year 2010 -- meaning they are mostly graduates of the 2009 class -- and measures the percentage who fell a year behind in their payments by September 2011. The data don't measure borrowers who default later in the life of the loan.

The Department of Education for the first time also released an official three-year default rate, which showed that given another year of payments, last year's 8.8% default rate ballooned to 13.4%. The department is in the process of changing its standard to look only at the three-year rate, which critics say gives a more accurate picture of the scope of loan defaults.

The three-year default data showed that nearly half the borrowers in default had attended for-profit colleges, despite comprising only 28% of the total borrowing pool, and 13% of enrolled college students.

Sen. Tom Harkin, D-Iowa, who has led a series of committee investigations into for-profit education, said the 22.7% three-year default rate from for-profit colleges was "troubling."

"This default data raises serious questions about the quality and value of the education students receive from these schools," he said in a statement.

Experts said they were disappointed by the increased level of loan defaults in light of new programs aimed at curbing rates by allowing unemployed or lower-income borrowers to base repayment as a percentage of their incomes.

Tiana Beatty, 25, said she received income-based deferral on one of her loans, but two other lenders rejected her appeal. Beatty isn't counted in the default numbers this year, because she didn't graduate until 2011, but the former University of Charleston basketball player will be included in years to come, because she's already defaulted on most of the $35,000 in student loans.

Beatty has degrees in sports administration and business administration, but upon graduating from the private university was met with West Virginia's slumping economy. Despite applying for more than 100 jobs, she's only found part-time work making $8 an hour. She volunteers as an assistant high school basketball coach on the side.

"You think 'I'm going to get a job when I get out, I'm going to pay back these loans, I'm going to be set'," she said. "The next thing you know, I can't even find anyone to hire me.

"It's a lot of stress. It's scary. And all because you did the right thing -- which was to go to school and get off the street."

Defaults can ruin a borrowers' credit rating for years, lead to wage garnishment and tax return seizures, lawsuits and other problems in joining the military, getting a job or a security clearance, Kantrowitz said.

According to the Project on Student Debt, two-thirds of college seniors graduating from non-profit four-year colleges in 2010 had student loan debt, and the average owed was $25,250 -- up 5% from a year earlier. Unemployment rates among young college graduates, meanwhile, was 9.1% in 2010.

According to the Project on Student Debt, two-thirds of college seniors graduating from non-profit four-year colleges in 2010 had student loan debt, and the average owed was $25,250 -- up 5% from a year earlier. Unemployment rates among young college graduates, meanwhile, was 9.1% in 2010.

Posted 9/28/2012 11:21 AM ET
Experts say rising student debt and the poor economy have pushed an increase in the number of student loan defaults.
Paul Sakuma, AP
Experts say rising student debt and the poor economy have pushed an increase in the number of student loan defaults.