After remaining relatively stable for several years, the student loan default rate is now on the rise. The Wall Street Journal reports today that the downturn in the economy, especially the credit crunch, is forcing more student loan borrowers into default and the numbers could rise even further:
The fear is that default rates on student loans will increase, as seen in the mortgage and credit-card worlds. SLM Corp., or Sallie Mae, the largest private student lender, reported a delinquency rate of 9.4 percent in September, up from 8.5 percent a year earlier. “It’s clearly because of economic conditions,” said spokesman Tom Joyce. “The credit crunch has washed onto the student-loan beach.”
Until now, the default rate on federal loans has remained relatively stable. The most recent statistics, from 2007, show only 5 percent of students defaulting within two years after they leave school and begin repayment. Experts think that rate could begin rising as the effects of the credit crunch and slowing economy take hold.
In spite of yet another article on the problems of student borrowers, I’m beginning to think that the people in charge, or at least those reporting on them, don’t understand how troublesome the situation really is. The article mentions some measures that students are taking to avoid default: getting second jobs, borrowing from parents, and, naturally, going to Vegas and hoping for the best. Um, hello? When people’s best option for making their loan payments is a lucky hand at blackjack, it may be time to start rethinking what we’re doing to America’s youth.
The article points out that even as the ability to pay plummets, student loan debt is higher than ever. It also notes (very briefly) that student loans are one of the only debts with no bankruptcy protection. But the solutions it offers are just more of the same – deferments, forebearances, and refinancing. Even though some of the people interviewed for the article specifically note that their deferments or forebearances have run out, they are still being told to simply get a deferment or forebearance. As for refinancing, it’s been widely reported, including on this blog, that the current credit crunch has drastically restricted that possibility. And all of these options mean more debt since the interest will continue to pile up the longer payment is delayed.
It’s clear that the current options for student loan relief are simply not good enough. We need something revolutionary, a radical and total shift in the system. How about a moratorium on interest? How about a bail-out for those who have made good faith efforts to secure employment? How about reinstituting bankruptcy protection after 10 years? Something, ANYTHING, besides the old “Just put it off until later and pay double” mantra. That’s what got us into this mess in the first place.
The Department of Education is rapidly becoming the only student loan consolidation option for new graduates, The Pittsburgh Tribune-Review reports today. The article noted that many lenders, including Sallie Mae, which I reported on previously, have suspended their consolidation programs because in the current credit climate, they say, it is no longer economical:
The Pennsylvania Higher Education Assistance Agency, PHEAA, suspended its consolidation program in February. Sallie Mae, Nelnet and Next Student – all among the top 10 consolidators in 2007 — followed suit. Of the top 100 consolidators, 68 have suspended consolidations, said Mark Kantrowitz of Cranberry, publisher of FinAid, an online resource about financial aid…
In July 2006, federal loans began to carry a fixed 6.8 percent interest rate, so there are now fewer benefits to consolidating, and it’s more expensive for lenders, said Martha Holler, a spokeswoman for student loan lender Sallie Mae.
“It’s just not economical to make these loans,” she said. “The current credit crisis; the turbulence in the capital markets would have to settle down (in order for Sallie Mae to resume consolidation loans.)”
This might not be such a big deal except that many private and state loans are ineligible for consolidation through the Department of Education, which means that consolidating doesn’t necessarily come with one of its biggest benefits anymore – one monthly payment instead of several.
“Goal Financial had used mailings that looked as though they came from the federal government and had offered iPods, spa gift cards and other items to lure borrowers.
Under the terms of the agreement, Goal will adopt a marketing code of conduct developed by the office of the attorney general, Andrew M. Cuomo, and will pay $350,000 to a fund maintained by his office for educating students about the financial aid process.
Eight other lenders have already agreed to abide by the code of conduct, which sets out rules for companies to follow in their direct-to-consumer marketing efforts. Seven of those companies have contributed more than $1.4 million to the attorney general’s fund.”
The Times also reports that in 2006, Goal was one of the top 10 largest providers of student debt consolidation loans. One interesting thing about this whole mess – no report of what, if any remedies, the students who took out these loans are going to get.