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Students Struggle to Pay Back Loans; Default Rates Rise

News out from the U.S. Department of Education today on student-loan repayment reflects the hard times that young people are having with unemployment and the increasing trouble that those who attend for-profit colleges are having in paying back their debt.

The official fiscal 2009 national student-loan cohort default rate has jumped to 8.8 percent, up from 7.0 percent in FY 2008. This is the highest the default rate has been since 1997. When it was first calculated in 1987, it was 17.6 percent and peaked in 1990 at 22.4 percent.

The increase was felt in every sector, but was most pronounced for proprietary schools, where default rates went from 11.6 percent to 15 percent. Default rates were up from 6.0 percent to 7.2 percent for public institutions and from 4.0 percent to 4.6 percent for private institutions.

"Borrowers are struggling in the economy. We see a strong relationship between student-loan default and unemployment rates," said U.S. Deputy Undersecretary of Education James Kvaal in a press call this afternoon. "Another trend is the growth in for-profit colleges. Many of those colleges offer innovative, excellent program, but we also see a disproportionate default rate among students enrolled in those programs."

This year's figures revealed 150,000 borrowers from proprietary institutions defaulted on loans—a significant increase from 100,000 in last year's report, and most were from four-year for-profit schools, said Kvaal.

The rates are calculated by looking at a snapshot in time for 3.6 million student borrowers from 5,900 schools with first loan repayments due between Oct. 1, 2008, and Sept. 30, 2009. Of those, 320,000 defaulted before Sept. 30, 2010.

This is not a lifetime default rate. Students who default after two years are not included in these figures. Default is defined as a student who is past due in payments by 270 days.

Next year, the Education Department will begin measuring the default rates for three years in hopes of getting a better picture of the loan-repayment landscape, said Kvaal. Because it can only include more students with an additional year, next year's totals are guaranteed to be higher, he noted.

The department reported that four proprietary schools and one private institution with excessive default rates may lose eligibility in one or more federal student-aid programs: Tidewater Technical, Norfolk, Va.; Trend Barber College, Houston; Missouri School of Barbering & Hairstyling, St. Louis; and Sebring Career School, Houston; and Human Resource Development & Employment-Stanley Technical Institute, Clarksburg, W.Va.

Last year, five institutions lost eligibility. In the 1990, there were hundreds each year that had rates so high they were no longer able to make federal student loans, says Kvaal.

For students, defaulting on a student loan has serious consequences, affecting their ability to borrow in the future, receive federal benefits and subject them to wage garnishment, says Kvaal. Most of these defaulted loans will be collected through private agencies.

For student-loan default rates by state or institution, go to the data center of the Federal Student Aid Gateway here.

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