Student Loans: Default Rates Are Soaring

Defaults on student loans are skyrocketing amid a weak job market for graduates and steadily rising tuition costs.

According to new numbers from the U.S. Department of Education, default rates for federally guaranteed student loans are expected to reach 6.9% for fiscal year 2007. That’s up from 4.6% two years earlier and would be the highest rate since 1998.

The situation is mirrored in the smaller private student-loan market. In 2008, SLM Corp. also known as Sallie Mae, wrote off 3.4% of its private loans that were already considered troubled, according to its latest annual report — more than double the figure in 2006. Student Loan Corp., a unit of Citigroup Inc., wrote off 2.3% of those loans in 2008, compared with 1.5% a year earlier.

"The volume of people in trouble is definitely increasing," says Deanne Loonin, a staff attorney at the Boston-based National Consumer Law Center who counsels low-income consumers on student loans and other debt issues.

Lenders say they are hearing more pleas for help as the unemployment rate worsens and debt levels soar among graduates.

Sarah Kostecki, a 24-year-old sales associate in New York, graduated last year from DePaul University with a major in international studies and $87,000 in debt, translating to monthly payments of $685, the vast majority of which are private loans.

The payments represent more than a third of her take-home pay, and to help her make ends meet, her grandparents are giving her $200 a month toward her debt this year. Beginning in January, she’ll be on her own, and she worries about falling behind.

"It feels like I’m being punished for having gone to school," Ms. Kostecki says. She has contemplated some of the options offered by private loan companies, such as temporary interest-only payments. But after two years, her payments would jump by almost $200 a month on top of what she’s paying now, she says. "I don’t want that."

Borrowers having trouble repaying their federally backed loans can call their lender to request that their payments be put on hold until they get back on their feet. Most types of federal loans qualify for "forbearance" — meaning the borrower can suspend payments temporarily but is still on the hook for the interest that continues to build while payments are on hold, which is then amortized over the life of the loan.

Certain need-based loans qualify for "deferment," which means the government will cover any interest payments for a set period. Deferments and forbearances can each be used for a maximum of three years per loan.

There are fewer options for borrowers with private loans, which have soared in recent years as limits on federal borrowing failed to keep up with rising college costs. Students borrowed $19 billion in private loans in the 2007-2008 school year, six times the amount they borrowed a decade earlier, after factoring in inflation, according to the College Board, a New York-based nonprofit.

In the past, it was relatively easy to get a forbearance on a private loan, says Ms. Loonin. The lenders "gave these loans to a lot of people that couldn’t afford them," she says. "To mask the problem, they kept giving forbearances." But as more borrowers are running into trouble, lenders are becoming stricter, she says.

Some major lenders, such as First Marblehead Corp. and J.P. Morgan Chase & Co., declined to say how many forbearances they’ve been granting. Others, including Wells Fargo & Co. and the nonprofit Vermont Student Assistance Corp., said they are granting more lately.

For private borrowers, finding what assistance programs are available is often a chore; information on Web sites can be sparse and hard to find. Here’s how some private lenders are working with students who are having trouble paying back their loans:

Sallie Mae. The lending giant, which makes both federally backed and private loans, says it grants private borrowers forbearances in increments of up to three months, and may be extended several times, typically up to a total of 24 months. There’s a forbearance fee of $50 per loan, up to a maximum of $150. Another option may be to extend the repayment period by several years, which in turn lessens monthly payments, though the minimum balance must be at least $20,000.

Key Corp. Key says it grants forbearances in six-month increments, with conditions depending on individual circumstances. For instance, someone struggling with a job loss may have greater need than someone else whose pay was cut. While some borrowers may qualify for a full forbearance, others may qualify only for reduced payments. Either way, Key says it doesn’t charge any additional fees.

Student Loan Corp. Borrowers in trouble can make interest-only payments for a period of either two or four years. They might also qualify for a forbearance, generally up to a maximum of 12 months. There are no fees for either option.

Wells Fargo. Borrowers can apply for forbearance, granted "generally in cases of extreme financial hardship," a spokeswoman says. There are no fees, and length of time is based on individual circumstances. (Wall Street Journal)

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