New federal data showing a spike in student loan defaults does not simply reflect the bad economy, although that is a factor. A substantial part of the problem also lies in the fast-growing for-profit college industry, which accounts for only about 10 percent of students but nearly half of student loan defaults.
The figures, released on Monday, show that the overall default rate for the fiscal year that ended Sept. 30, 2009, rose to 8.8 percent, up from 7 percent the previous year. The most striking increase was in the for-profit sector, where 15 percent of borrowers who began repaying loans defaulted during their first two years of repayment, up from 11.6 percent in the previous fiscal year. That is more than twice the default rate for public colleges and more than three times the rate for nonprofit private schools.
The federal government is trying to combat this problem by cutting off access to student loans at schools with excessive default rates and at schools that leave students with high debt loads and dismal job prospects. It needs to take more stringent action against schools that use deceptive or unethical practices to attract unqualified students.
Most people want to repay their loans and default only after they become unemployed. Defaulters end up in financial purgatory. Yet there is an important though largely unknown program that helps distressed borrowers by reducing their payments to match their incomes.
The Income-Based Repayment plan, begun in 2009 by the Department of Education, calculates monthly payments that are based on the borrower’s income and family size. In some cases, borrowers may pay no money — and remain in good standing — until they get back on their feet. Most people have never heard of the program and do not know how to enroll in it. Along with cracking down on schools with high default rates, the government needs to make sure that borrowers at risk of default have access to this program.