As College Costs Increase, So Does Rate of Loan Defaults

WASHINGTON — As the cost of a college education continues to soar above the ability of many families to afford it, the number of defaults on student loans is running high with the problem proving particularly acute in Indiana.

And the issue could grow even more troublesome over the next few months if Congress fails to stop a plan that would double the fixed interest rate on a popular student loan program.

"A college education is key to success in today's economy, but for many students the spiraling costs of higher education are creating an immense barrier," said Rep. Joe Courtney, D-Conn., sponsor of legislation to keep student loan interest rates affordable.

"At a time when Americans owe more in student-loan debt than credit card debt, it is critical that we prevent interest rates from rising further," Courtney said. "We cannot allow a de-facto tax increase on middle- and low-income families to exacerbate this problem, especially as we work to continue our economic recovery."

The cost of a college education has increased exponentially over the past 10 years. The average tuition and fees at Hoosier public colleges and universities, for instance, have jumped by more than 100 percent over the past decade, according to the Indiana Commission on Higher Education. The average tuition cost at Indiana's four-year public colleges has grown from $3,510 in 2010 to $7,072 in 2011.

That factor is forcing families to borrow substantial sums to obtain a degree. In 2010, Hoosier students borrowed an average of $27,000 to fund their education.

Meanwhile Indiana's student loan default rate increased by 35 percent during a three-year period ending in 2009. The 2009 default rate, the last year U.S. Department of Education data is available, was 11.6 percent — the nation's third highest.

But default rates are rising all over America. According to the U.S. Department of Education, the rate rose from 7 percent in fiscal year 2008 to 8.8 percent in fiscal year 2009. Defaults increased in all sectors — from 6 percent to 7.2 percent for public institutions, from 4 percent to 4.6 percent for private institutions and from 11.6 percent to 15 percent at for-profit schools. More than 3.6 million borrowers from 5,900 schools entered repayment during this window of time and more than 320,000 defaulted.

Nationally, defaults have gone from 4.5 percent in 2003 to the current 8.8 percent.

"These hard economic times have made it even more difficult for student borrowers to repay their loans, and that's why implementing education reforms and protecting the maximum Pell grant is more important than ever," said U.S. Secretary of Education Arne Duncan. "We need to ensure that all students are able to access and enroll in quality programs that prepare them for well-paying jobs so they can enter the workforce and compete in our global marketplace."

Duncan said the department has taken steps to protect students from programs that leave borrowers with large amounts of debt. A series of regulations adopted over the past year tighten loopholes to protect students from misleading or overly aggressive recruiting practices, ensure institutions are offering high-quality programs and require career college programs to better prepare students for gainful employment or risk losing access to federal student aid.

But there is now the prospect that college loan defaults could rise further without congressional action. The Stafford loan, backed by the full faith and credit of the federal government — meaning they can be offered at a lower rate than conventional loans — are about to become more expensive.

Stafford loans were originally conceived as a part of Title IV of the Higher Education Act of 1965 and subsequently named in honor of former Sen. Robert Stafford, a Vermont Republican. The recipients of Stafford loans, lower-to-moderate income undergraduates, are not scheduled to make payments until six months after they leave school by graduating, dropping below half-time enrollment or withdrawing.

Under the College Cost Reduction and Access Act of 2007 the interest rates on Stafford loans were reduced incrementally over a four-year period to their current 3.4 percent level. But the provision establishing that rate is slated to expire on July 1, pushing the interest rate back to its original 6.8 percent. According to U.S. PIRG, a consumer group, the average subsidized Stafford loan borrower would have $2,800 in increased student loan debt over a 10-year repayment term. Borrowers who assume the maximum $23,000 in subsidized student loans will see their interest balloon to an additional $5,000 over a 10-year repayment period and $11,000 over 20 years.

About 8 million undergraduates currently hold Stafford loans.

"Rising college costs, tight family finances and uncertain job prospects pack a triple whammy for student borrowers,'' said Rich Williams, higher education advocate at U.S. PIRG. "In this economy, the last thing we should do is double the interest rates on student loans."

Samantha Durdock, a sophomore at the University of Maryland studying government and politics, said she already has $8,000 in subsidized Stafford loans and expects to borrow an additional $15,000. The rising interest rate would place her in a financial bind.

"Even though I am only a sophomore, I am worried about the amount of debt I will have at graduation,'' Durdock said. "I have already started weighing options, like my ability to go right to graduate school after completing my undergraduate degree, but my situation will only get much worse if interest rates double this summer. I would be really worried about my ability to pay basic living expenses with what my monthly payments for my loans would increase to if rates increased."

President Obama, in his proposed 2013 budget released in February, recommended that the scheduled increase be suspended with rates remaining at 3.4 percent. The White House noted that "at a time when the economy is still recovering and market interest rates remain low, it makes no sense to double rates on student loans.''

Sen. Jack Reed, D-R.I., has introduced legislation to lock in the current 3.4 percent rate, but he and supporters find themselves working against the legislative clock.

"A college education is an important investment for both individuals and America's global competitiveness,'' Reed said. "It is in our national interest to try and keep student loan rates low. As the price of college continues to increase, more students are forced to take out bigger loans to pay for their education.''


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