Part of the jump in student loan defaults is certainly due to the economy. But the way defaults are reported is also a factor, as this Bloomberg article notes:
The Education Department has revamped the way it reports student-loan defaults, which the government said had reached the highest level in 14 years. Previously, the agency reported the rate only for the first two years payments are required. Congress demanded a more comprehensive measure because of concern that colleges counsel students to defer payments to make default rates appear low.
“Default rates are the tip of the iceberg of borrower distress,” said Pauline Abernathy, vice president of The Institute for College Access & Success, a nonprofit based in Oakland, California.
The data follows complaints that commission-driven debt collectors the government hires aren’t telling students about affordable options to repay their debt, especially a plan that lets them make payments tied to their incomes. Students have borrowed $1 trillion to pay for higher education, surpassing credit-card debt.
Congress is also examining the often deceptive letters that college financial-aid offices send to admitted students that play down the cost of attendance by making government loans seem like grants. Barack Obama’s administration, as well as Republicans and Democrats in Congress, are calling for more disclosure about college costs and student outcomes.
On the stump, President Obama has touted an executive order that eases the process for applying for a loan program that lets students make lower payments tied to their income — easing their burden and making it less likely they will default.
Republican challenger Mitt Romney said that initiative encourages students to take on more debt. Romney advocates cutting education regulation and encouraging colleges to become more efficient, lowering costs partly through the use of online instruction.
Student loan debt now exceeds credit card debt. And with a default rate for the first three years at 13.4%, it’s clear something must be done to not only address the burden placed on students just entering the workforce, but also government guarantees of many of those loans that is costing taxpayers billions.
Some Democrats want to address the problem by increasing the number of grants. It would certainly reduce defaults but at a massive cost to the taxpayer. Some Republicans want to drastically reduce or eliminate the loan guarantee programs all together. It’s not clear that this would necessarily reduce the cost of a college education which is beyond the ability of most Middle Class families to afford, and would certainly increase borrowing costs.
The problem is worse if one looks at where the defaults are occurring. More than one in five come from students who attend for-profit colleges. Some default rates at these proprietary schools are 40%. A recent regulation pulls federal financial aid from colleges that show default rates of 30% or more for 3 years and 40% in one year. This will help in forcing proprietary schools to refrain from urging students to defer payments in the early years, thus hiding their true default rate.
On the other hand, the for-profit college industry claims the problem is demographics; they take on students in poverty and less than ideal financial circumstances. While true to a certain extent, the less than above-board way that these proprietary institutions seek to keep their default rates low only exacerbates the problem. Better to tailor an aid package to the actual income of a student so that the lower payments will help prevent default, than play around with deferred payments that only make it harder for a student to pay what they owe.
If the goal is to protect the taxpayer’s investment while helping students with their higher education costs, then the current default rate is totally unacceptable. Forgiving student loan debt is not the answer. More intelligent use of resources is what’s needed.