Default Rates Are Soaring On Student Loans

Wednesday, April 22, 2009, PM | Leave Comment

Article on wsj.com “Student Loans: Default Rates Are Soaring” by Anne Marie Chaker published on APRIL 20, 2009.

Excerpts from the article:

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.

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. Deferment and forbearance 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.

Moral of the story
Anne Marie, at the end of the article, gives example what some lenders – Sallie Mae, Key Corp, Student Loan Corp, Wells Fargo – do to ease the loan burden on students. That’s good news.

Imagine there might be some students who got loans but never graduated. They will not get the jobs they expected to get and will not be making enough money to repay their loan.

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