Leadership

Student Loan Defaults Up Despite New Repayment Options

By Jessica Stillman

Updated on: September 13, 2011 / 6:39 AM EDT / MoneyWatch

Americans are graduating with more and more student loan debt. Recent grads are also facing one of the most brutal job markets in decades. Now the Department of Education has confirmed the likely outcome when these two facts are combined -- default rates for student loans are up.

The latest statistics out of the department cover students who began repaying their loans from October 2008 to September 2009 and who were in default by September 2010. And they're not too cheerful:

Overall the default rate rose to 8.8 percent from 7.0 percent
For public schools it went from 6.0 percent to 7.2 percent
For private schools from 4.0 percent to 4.6 percent
For for-profit schools from 11.6 percent to 15 percent

That last statistic gives a hint that while most of the rise in defaults can be put down to the terrible economy, not all of it can. The recruiting practices of for-profit schools had come in for sharp criticism even before these latest statistics, with a congressional investigation resulting in stiffer regulations for these sorts of schools, which get most of their revenue from federal student aid. These new numbers just strengthen the case for the crackdown. Meanwhile, the industry is trying to get in front of the problem with new standards of conduct designed to lower default rates due to be revealed today.

Still, however shady some for-profit colleges, the primary problem remains the weak economy. "These hard economic times have made it even more difficult for student borrowers to repay their loans," said Education Secretary Arne Duncan in a statement.

A new income-based program repayment program, which allows un- or underemployed grads to pay 15 percent of their discretionary income and avoid default, was introduced in 2009 to help ease the pressure on indebted grads, but it "is not as widely used as might be expected," according to the New York Times.

"In the age of income-based repayment, there is no reason for a student to default, since even a payment of zero dollars is acceptable payment, if you have zero discretionary income," Debbie Cochrane, program director at the Institute for College Access & Success, told the newspaper.

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(Image courtesy of Flickr user Memory_Freak, CC 2.0)