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Archive for Tuesday, September 22, 2009

Recession widens student loan sinkhole

September 22, 2009

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— Deep into this recession, we know that an increasing number of people no longer can pay their mortgages, their credit card balances or their car loans. Now throw into the mix the rising number of defaults on student loans.

The percentage of those loans in default grew to 6.7, up from 5.2 percent in 2006. The figures represent borrowers whose first loan repayments came due between Oct. 1, 2006, and Sept. 30, 2007, and who defaulted before Sept. 30, 2008, according to the U.S. Department of Education.

In other words, the department reported, nearly a quarter-million student loan borrowers went into default during that one-year period.

This latest statistic didn’t get a lot of notice in most major newspapers when it was recently announced. But this disturbing trend is worth more than a paragraph or two. While the administration continues to try to find ways to fix the financial industry and health care, there has to be more focus on curtailing what has become for too many the crushing cost of getting a higher education. Without that education, many people won’t be able to get well-paying jobs. And without better jobs, they risk eventually becoming part of this nation’s underemployed or unemployed.

Student loan defaults have been relatively low since hitting their peak of 22.4 percent in 1990. Then, nearly one in four borrowers defaulted, according to the Department of Education.

The rate dropped to a record low of 4.5 percent in 2003.

So at 6.7 percent, things aren’t as bad as they once were, yet they’re still not as good as they should be. But the default rate tells just part of the story. With wages depressed along with the high cost of housing and health care, even those who can keep up with their monthly student loan payments are stretching their education loans out for decades.

How bad is it?

Go to StudentLoanJustice.org and read the stories of “victims” living under crushing student loans. Also go to defaultmovie.com and watch the poignant trailer from “Default: The Student Loan Documentary.” The feature-length film chronicles the stories of borrowers who, years after leaving school, are trying to repay loan balances that have ballooned to two or three times the amount they borrowed.

Reform efforts

For so many, the heavy borrowing is unsustainable, and there are a number of efforts under way to call attention to the student loan sinkhole.

The RainbowPush Coalition, headed by the Rev. Jesse Jackson, has launched a “Reduce the Rate” campaign (reducetherate.org) urging the Obama administration to allow people to borrow at extremely low rates.

“Students should get the same deal banks are getting,” Jackson said in an interview with me. “If banks can borrow at 1 percent, then so should students.”

Until there is a sustainable solution, there has to be a sea change in the view by many parents and students that college at any cost — no matter how unaffordable — is worth the years of financial burden and perhaps ruin.

In a study of 1,400 undergraduate students and parents, “How America Pays for College,” lender Sallie Mae and Gallup found that 42 percent of families did not limit their search based on cost — even after reviewing financial aid packages. Also, 70 percent of students and parents said a student’s expected post-graduation income either was not considered or did not make a difference on their borrowing decisions.

Mark Kantrowitz, publisher of FinAid.org and FastWeb.com, has put out these words of caution: “If you borrow more than twice your expected starting salary, you will be at high risk of default.”

Repayment options

Secretary of Education Arne Duncan said in releasing the default rates that the department is “reaching out to make sure current and prospective student borrowers are aware of the many flexible repayment options designed to assist them with their financial obligations, such as the new income-based repayment plan.”

That program, which took effect in July, will give some borrowers a break. Under it, you may qualify for relief if your federal student loan debt is high relative to your income and family size. You may even be able to have the balance of your loans canceled.

Or, more specifically, the loans can be canceled after you’ve paid on the debt for 25 years. Unfortunately, this option isn’t available for private loans. You also are not eligible if your loan is in default.

While the income-based plan is helpful, it’s just more of the same. It essentially gives borrowers the opportunity to stretch out their payments, adding more interest costs.

I talked recently to a 52-year-old man who was still struggling to pay $50,000 in student loan debt.

Is this what we really want, people dragging their college debt up to or into their retirement years?

Comments

kcmetro 4 years, 6 months ago

Thanks Lawrence Journal World.

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Liberty_One 4 years, 6 months ago

remember_username, they are by definition riskier loans. If they were not then the lenders would have given them out without the need for government guarantee. The financial requirements may mitigate the situation, but they wouldn't completely eliminate the problems that can occur.

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craigers 4 years, 6 months ago

I was fortunate to get student loans during a time where loans were at their lowest. I consolidated 3 months after graduation and my interest rate is 1.675% now after paying on time for 3 years. This should be the type of rates student loans are written for. Makes going to school a good idea and doesn't kill you on the interest rates going forward. However if you are going to forgive or help repay loans, you ought to start with those who are making payments monthly!

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remember_username 4 years, 6 months ago

Liberty - what about VA house loans? The government does remove the risk by guaranteeing the loan and thus there is no mortgage insurance. But the VA loan has established requirements that result in fewer risky loans, plus there are tighter standards for borrower qualifications. Lenders are not making riskier loans to borrowers.

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Liberty_One 4 years, 6 months ago

The simple fact is when the government takes the risk out of loans by insuring them then lenders make riskier loans then they would otherwise (in a free market). More risky loans means more defaults. Of course if this is widespread then it becomes a severe problem (see financial crisis of 2008-09).

In addition this is akin to subsidizing education. Subsidizing something leads to overuse. Is it possible to be overeducated? This is often an emotional issue since many are passionate about the benefits of higher education regarding being good citizens or living a fulfilling life. But in strict economic terms there is such a thing as being overeducated. Thus subsidizing higher education in this fashion does create inefficiency in the economy and retards growth.

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somedude20 4 years, 6 months ago

I know a number of students that use the loan just so they do not have to get a job (ie use money for rent/drinks/morning after pills) and who do not use the money to pay for college. I know these kids do not want to infringe on their right to party, but get a job, will be better in the long run. Remember people, jobs are FUN!!

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Boris 4 years, 6 months ago

Merrill, I am neither your friend nor supporter and not Applebaum's either!

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Richard Heckler 4 years, 6 months ago

IF we can forgive frauds and crooks surely we can forgive student loans.

==============================================

Dear Friends and Supporters

If you've been following the news on the student loan front closely, you'll know that we've created quite a stir amongst the lenders and all those with an entrenched interest in maintaining the status quo.

Disingenuous reports with cherry-picked data from the College Board, SallieMae and others just goes to show that our grassroots efforts have not gone unnoticed and, as such, every effort is being made to diminish and deny the growing crisis that you and I know full well exists.

Just today, an article was published on CNN.com about how more and more students are turning to private loans to fund their educations, not knowing the true costs of doing so. The article also mentions the growing student loan forgiveness movement and forgivestudentloandebt.com!

www.cnn.com/2009/LIVING/personal/08/27/student.loans/index.html

If you haven't checked out the site in a while, please come back and see the amazing progress we've been making in terms of spreading awareness about student loan forgiveness as a means of economic stimulus.

www.forgivestudentloandebt.com/publicity

NOW, I NEED YOUR HELP

The lenders have powerful lobbyists and friends in Congress. We have nobody but ourselves. If ever there was a time where a small financial contribution was needed most, it's now. A donation of just $5, $10, $25, $50, $100 or more would be a tremendous help to allow us to continue to spread awareness and advocate for real change. I realize many of you are already financially strapped - believe me, I understand. But if you can spare just $5, it would go a long way!

http://www.forgivestudentloandebt.com/content/donations

DONATE

Thank you to everyone for making this endeavor such a huge success in just 7 short months since it was launched. I will continue to fight the good fight and I hope you will continue to stand with me.

All my best,

Robert Applebaum Founder & Executive Director ForgiveStudentLoanDebt.com

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Boris 4 years, 6 months ago

Because countrygirl, most university students only live in the here and now, like a dog. They have no concept of their future or how to plan for it. Many though will stay students for many years, sucking off the government teat as long as there are grants to pay for it so they don't have to face the real world.

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countrygirl 4 years, 6 months ago

I've never understood why people take out student loans that total more than 3-4 years of what their salary will be once they graduate. Or worse yet, come out of school and have no idea how much they're borrowed.

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SettingTheRecordStraight 4 years, 6 months ago

Hydra,

And the government should not be in the business of insuring or making student loans. How have we gotten to this point in society where the government is involved in absolutely everything?

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Hydra 4 years, 6 months ago

SettingTheRecordStraight (Anonymous) says…

“Is this what we really want, people dragging their college debt up to or into their retirement years?”

It's none of my business, and it's none of the government's business.

I'm afraid it is the governments business they are the lender or the insures on most loans.

Wait until the general public finds out that a student loan can only be rehabilitated once now.

Any loan that has rehabbed after a set date can no longer be rehabbed more than once and you cannot consolidate a loan that has been consolidated before. People are going to stuck with collection agencies in administrative wage garnishment with no out for a long time!!

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Shardwurm 4 years, 6 months ago

Let me put on my shocked look.

Been calling this one for about 18 months now. In the meantime let's raise tuition and drive the middle class into the ground where they belong.

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SettingTheRecordStraight 4 years, 6 months ago

"Is this what we really want, people dragging their college debt up to or into their retirement years?"

It's none of my business, and it's none of the government's business.

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