Default Rate Rises for Student Loans, U.S. Reports

Student-loan default rates for people who recently left school rose to 6.9 percent from 5.2 percent a year earlier as a deteriorating economy weighed on borrowers, the U.S. government said.

The rise, a preliminary figure that’s sent to schools for possible revision, was reported by the Education Department in a Web posting March 26. The rate is based on borrowers who were to begin making repayments between October 2006 and October 2007, and who fell at least nine months behind by late September 2008.

Almost 232,000 of those borrowers entered default, a 13 percent increase from the previous year and a jump of 43 percent from two years earlier, the department said.

The new rates “are from the early recession period, so that is the likely explanation for the increase,” Robert Shireman, a senior adviser to Education Secretary Arne Duncan, said in a statement.

The default rate for those obligated to repay private loans backed by the federal government was 7.3 percent, and for those repaying loans issued directly by the government was 5.3 percent, the department said.

Private lenders serve a higher proportion of low-income students under stricter repayment rules than those offered with direct loans, Kevin Bruns, executive director of the Washington, D.C.-based industry group America’s Student Loan Providers, said in an interview.

President Barack Obama is urging an end to government subsidies for student loan providers such as Sallie Mae and Citigroup Inc. He wants the government to become the sole provider of federally backed college lending.

The government now offers direct loans through colleges, as well as guarantees for loans made by private lenders such as New York-based Citigroup and Reston, Virginia-based Sallie Mae, officially SLM Corp. Obama proposed the change in the budget he submitted to Congress today for the fiscal year starting Oct. 1.

Duncan said switching to government-funded loans would save more than $4 billion a year.  (Bloomberg)

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