A lot of new graduates are defaulting on their student loans upon graduation. The reasoning is sound that most applied for financial aid, solely based on advertising by for-profit institutions success in preparing graduates for better jobs.
The overall default rate, as per some reports on federal student loans, has risen to 7% for all the student borrowers who have since commenced making their repayments in 2008. By 2009 almost 238,000 students of the 3.4 million defaulted on their first loan repayment. In 1997 the rate was roughly 9% at the highest point. (see here)
Default credit cards and mortgages stand at 9%, which is comparable to the student loan default rate. In the first quarter of 2010, it has been summed up that the figures for total student loan defaults is approximately $876 billion, which has even overtaken sums that debtors owe on their credit cards and can often lead to bankruptcy.
Defaulter statistics are showing that graduates of public colleges are at 6%, private schools are at 4% and for-profit schools are almost standing at a whopping 12%.
Everyone with student loans, even if you did not earn a degree, are having a hard time in landing a job after graduation. You must make payments on your student loans before the deadline of 270 days after graduation or make a case for a forbearance or deferment. The aftereffect for student loan defaults are severe:
- Of course, the student loan default will be shown on your FICO score. In turn it can be troublesome for future credit card applications or auto and home loans. Poor credit ratings might also affect your chances of getting employment or renting an apartment.
- Collection agencies may be brought in to recover the funds. Your liability will be for collection costs as well as court and attorney fees. You could be sued for the whole amount.
- Up to 15% of your paycheck could be deducted to repay student loans, by Federal Law.Any tax returns, State or Federal, might be claimed for repayment. The Federal government may even go as far to garnish part of your Social Security benefits and any future Federal interest benefits will be declined.
- Professional licenses you have might not be able to be renewed.
As mentioned earlier, you can avoid student loan defaults by either delaying repayment with forbearance or deferments. Remember you cannot get either if your loan falls into default status.
The loan holder in a forbearance will allow you to minimize your repayment amount, with the interest still continuing to gather. The time frame for a forbearance is generally between one to three years. An application must be submitted with supporting documentation, as it is not guaranteed to be granted automatically. Do not miss any repayments until after you are notified that you were granted a forbearance.
In a deferment, the lender will allow you to stop repaying the your loan for a specified period. Once again an application must be submitted with supporting documentation, as it is not guaranteed to be granted automatically. Do not miss any repayments until after you are notified that you were granted a deferment. Most commonly deferments are given to students who are still enrolled in school, unemployed or facing financial issues.
The current student loan default rates are mainly caused by two main issues:
- Higher education costs have been increasing exponentially over that last few years. The rates went up by almost 57% at public institutions.
- Secondly, interest rates have been greatly increased due to the current financial turmoil. Obviously as interest rates start to rise so do default rates.
Once in default, you will need to contact your lender and find agreeable repayment terms. As you make a minimum of six continuous payments(without collections) on-time, you might find an option for Title IV aid. As your timely continuous payments reach double digits, you can apply for rehabilitation status and will be on your way out of default. This will also be reflected on your FICO score and reports.
For students looking into the options for funding. Consider the following:
Carefully consider the cost of your degree when compared to employment. Are there jobs or opportunities available in the market? Will the initial income cover expenses and loan repayment? If not the chances are higher that you will be unable to repay your student loans and fall into default status.
There is a lot to take into consideration and will add some key points to judge before your higher education loan choices. Weigh your options well and make an educated decision. In the end the goal is to avoid becoming a part of the statistics on student loan default rates.
