Avoiding the Student Debt Crisis

Student loans outpaced credit card debt last year to become the number two source of household debt, second only to mortgages. Between 2000 and 2007, 60 percent of four year college graduates borrowed to fund their education, up from 45 percent in 1981. The average debt per borrow jumped 18 percent from $19,300 to $22,700. In the last 20 years, the cost of attending private colleges has risen faster than the rate of inflation.  

But the default rate for federal student loans is also rising. The rate has increased for the last four years in a row to its highest point since 1997 and, at 8.8 percent, is nearly double 2005’s low of 4.6 percent. The two-year default rate increased to more than 12 percent in 2011. According to the Dept. of Education, the default rate at public colleges rose over 1 percent to 7.2 percent; the not-for-profit colleges rose over .5 percent to 4.6 percent; and for-profit schools had the largest jump of defaults with a rise of nearly 3.5 percent to 15 percent.

Why is the number of defaulted loans on the rise? Part of the problem might be the number of college graduates who are finding it increasingly more difficult to find jobs after graduation. According to the “NY Times” last May, only half the recent college graduates obtained jobs requiring a college degree. The NY Times of Labor Department released a report stating that the half who didn’t were working for the food industry, gas stations, grocery stores, and taxi services, many  times displacing less educated workers. Some weren’t able to find jobs at all. The 9 percent unemployment rate for recent college graduates in 2009 was at its’ highest rate in thirty-five years.

Students who default on loans can be negatively affected in several ways. Lenders can send the loan to a collection agency, which may result in collection fees and court costs for the student. Wages can be garnished and tax return monies seized to offset the loan. Graduates can be prevented from obtaining or renewing professional licenses. Students will also become ineligible for loan deferments or other student aid programs. If the default is reported to the credit bureaus, it will negatively impact the student’s credit rating, making it difficult to get a job, buy a car, or take out a mortgage.  

There is a negative impact on the economy as well. Many graduates, even those who are not in default on their loans, are not buying houses or cars. First time home buyers between the ages of 29 and 34 dropped 8 percent from 2001 to 2009-2011. With a housing market already in trouble, fewer buyers mean fewer sales. Graduates who postpone starting a family could result in fewer people paying in to Social Security in the next generation. College graduates who are under employed contribute to the unemployment rates of less educated workers.

If you’re a student, what can you do to increase your chances of avoiding default?

Don’t borrow more than you really need. Calculate how much you should borrow based on your expected income after graduation. The Stafford Loan website suggests limiting your college loan repayment to no more than 15 percent of your income. Limit your total loan to no more than your expected starting salary after graduation. Choose federal loans over private loans. They have better repayment terms and are cheaper than private loans. If you have to borrow more than $10,000 per year, consider switching to a less expensive college. Live as cheaply as possible while you’re in college. Apply for federal and state grants and look for scholarships.

Student loan debt is on the rise. But with careful planning, students and families can avoid getting a college education now that causes a financial crisis in the future.