Student Loan Debt: How to Avoid a Default

In 2010, the federal government granted 100 billion dollars in student Loans. A USA Today report from October of this year found that the total amount in outstanding student loans granted by the federal government is currently greater than 1 trillion dollars. And these numbers will continue to increase as more people attend college, tuition at public colleges and universities increases, and as private sources of funding (like grants and scholarships) diminish because of the poor economy.

As the economy worsens, more and more people return to school for better opportunities. Realistically, there are several advantages to returning to school. For example, some new students return to school as a way to boost their resume and become more marketable to potential employers. Others take classes or seek a degree in order to network; this may prove particularly useful for people getting into a profession in which they have no prior experience or contacts. People also return to school with the intention of building skills while waiting for the economy to get better. And while waiting for jobs to come back, going back to school can also reap other benefits like tax credits (e.g., the cost of undergraduate coursework may be off-set by the American Opportunity Credit, while graduate students can get up to $2,000/year back via the Lifetime Learning Credit). While all of these may be legitimate reasons to return to school, anyone considering this should also recognize the high cost of education, as well as whether they can reasonably expect to repay that debt. The importance of this last detail is often overlooked by students, but more significantly, by schools (especially for-profit institutions) that require greater numbers of students to off-set their institutional costs.

According to the U.S. Department of Education, federal student loan defaults increased at an alarming rate last year. A large percentage of these defaults came from the for-profit college sector (as opposed to public or private/non-profit schools). But even so, all colleges and universities are facing a dramatic crises (both fiscally and a crisis of conscience) as they continue to charge tuition rates that outpace job and career prospects for their students. For example, a student who returns to school to seek an MBA may borrow an average of $90,000, and then find that their degree is almost worthless because they did not attend a top business school. This is a real problem, and we should be concerned when students take out tens of thousands of dollars in student loans that they will never be able to repay.

As many people find out, only after they’ve gone to school and gotten into debt, student loans cannot be discharged through bankruptcy. That means that people who cannot afford to repay the federal government have no choice but to default on their entire loan. The U.S. Department of Education has reported that the national student loan default rate rose to 8.8 percent (about a 20 percent increase on the previous year). And while this is still well below the high of 20 percent in 1990, current numbers are misleading because 70 percent of loan defaults occur after the two-year window the Department of Education statistics are based upon.

Continue reading, next: "Student Loan Debt: Strategies for Preventing a Default"

by CreditQ Staff

Published 11/30/11 10:04

What do you think about this article? Leave your feedback below!