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Student-loan defaults rise; unemployment, for-profit schools blamed

Published: Tuesday, Sept. 13 2011 10:27 a.m. MDT

Default rates on federal student loans have skyrocketed in recent years, which reflects the current job market in a weak economy.

The U.S. Department of Education reports the default rate among borrowers at public institutions increased to 7.2 percent, compared with 6 percent in 2010. The default rate for private, not-for-profit schools rose to 4.6 percent, up from 4 percent. Overall, 8.8 percent of borrowers defaulted in the fiscal year ending last Sept. 30, up from 7 percent the previous year, according to the New York Times.

“Borrowers are struggling in this economy,” James Kvaal, deputy undersecretary of education told the New York Times. “We see a strong relationship between student default rates and unemployment rates.”

The biggest increase was found in the for-profit sector, which has led to sanctions from the Department of Education.

For-profit schools are leading the downturn with 15 percent of borrowers defaulting within the first two years of repayment. In an announcement on Monday, the Department of Education named five schools across the U.S. that face possible sanctions because of extremely high default rates, four of which were for-profit schools, according to the Wall Street Journal.

Notable for-profit schools are suffering major increases in default rates.

Department of Education administrators praised the for-profit sector for recent reforms, but made it clear that those schools, along with a faltering economy, are to blame for the current increases. The University of Phoenix chain rose from 12.8 percent to 18.8 percent and ITT Technical Institute jumped from 10.9 percent to 22.6 percent, according to the Chicago Tribune.

“We are disappointed to see increases in the cohort default rates for our students, as well as students in other sectors of higher education,” Brian Moran, interim president and CEO of the Association of Private Sector Colleges and Universities, which represents the for-profit sector, told the Associated Press. “We believe that the default rates will go down when the economy improves and the unemployment rate drops.”

Because of dated data, some groups are not wary of the recent decision from the Department of Education.

APSCU, a trade group of 1,500 for-profit schools, is challenging the rule, among others. The APSCU believes the default rates announced on Monday are misleading, comparing the findings to “looking into a rear view mirror,” according to Reuters.

There are programs to help struggling students, but they are not well known.

Many borrowers can avoid default by participating in an income-based repayment program that began in 2009, but is not widely used. The program allows borrows who pay 15 percent of their discretionary income for 25 years to have the rest of their federal student loan debt forgiven, according to the New York Times.

“In the age of income-based repayment, there is no reason for a student to default, since even a payment of zero dollars is acceptable payment, if you have zero discretionary income,” Debbie Cochrane, program director at the Institute for College Access & Success, told the New York Times. “But as of April of this year, only about 350,000 borrowers have entered income-based payment, a small subset of the eligible population. Students need to understand the options, colleges need to share the information, and the department needs to make it as easy as possible for students to enroll.”

EMAIL: jferguson@desnews.com

TWITTER: @joeyferguson

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