Student debt defaults soar

French students work on the test of philosophy as they take the baccalaureat exam (high school graduation exam) on June 17, 2013 at the Arago high school in Paris. Some 664.709 candidates are registered for the 2013 session. The exam results will be announced on July 5, 2013. AFP PHOTO / FRED DUFOUR (Photo credit should read FRED DUFOUR/AFP/Getty Images) FRED DUFOUR/AFP/Getty Images

(MoneyWatch) The student loan default rate is soaring, and it's flying highest among for-profit schools.

The U.S. Department of Education reports that across the nation, the share of borrowers who default within two years after college loan payments become due has risen nearly a full percentage point to 10 percent, while the rate for people who default within three years is up to 14.7 percent.

The numbers get worse among for-profit schools. For-profit institutions continue to have the highest average rates of defaults, at 13.6 percent within two years and 21.8 percent for the three-year group. Such schools are often criticized for offering debt-funded, high-priced educational programs to vulnerable people who then don't find jobs but are saddled with loan obligations.

"The growing number of students who have defaulted on their federal student loans is troubling," U.S. Secretary of Education Arne Duncan said in a statement. "The department will continue to work with institutions and borrowers to ensure that student debt is affordable. We remain committed to building a shared partnership with states, local governments, institutions, and students -- as well as the business, labor, and philanthropic leaders--to improve college affordability for millions of students and families."

There is more than $1 trillion in student debt in the U.S., as people take on increasing amounts of debt to fund costly educations as they try to gain an edge in an ever more competitive job market. But as bad as the numbers sound, experts who follow the country's debt problems say they're even worse than the data suggests.

First, borrowers need to have missed nine months of payments before being counted as in default -- a much longer string of missed payments than commercial borrowers would accept. Even with that head-start, the statistics don't paint a full picture of people who are staying just ahead of their obligations, or are keeping their heads above water only intermittently.

"It doesn't capture the people who are struggling," said Robert Hiltonsmith, a policy analyst at Demos. He noted that federal statistics show that a third of people who are not considered in default have missed payments.

"Those are a lot of people who have missed payments, are struggling, and racking up late fees and extra interest," he said.

He also noted that the government is charging high rates for the federal loans and is collecting huge profits off the loans. "It's ridiculous that people are paying 6, 7, 8 percent," he said. "The federal government is estimated to be making $50 billion a year in profit off these loans. And guess where that money is going? To pay off our national debt."

Hiltonsmith and others want the government to allow refinancing at more favorable terms. And for the smaller number of cases in which people declare bankruptcy, student debt should be dischargeable in bankruptcy proceedings -- as the law stands now, there is no way for someone to get out from their debt load. He noted that 17 percent of people in bankruptcy have student loan debt.

  • Charles Wilbanks

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