BOSTON (TheStreet) — The weak economy and double-digit unemployment rates have caused student-loan defaults to hit their highest level in nine years. It's a trend that could cost the government billions of dollars and harm the creditworthiness of an up-and-coming generation.
Federal student loan borrowers are considered in default if they don't pay for 270 days. The default rate increased to 6.7% for fiscal 2007 from 5.2% in fiscal 2006, according to the most recent figures available from the Department of Education.
The rate represents borrowers whose first loan repayments came due between Oct. 1, 2006, and Sept. 30, 2007, and who defaulted before Sept. 30, 2008. Nearly 3.3 million borrowers entered repayment during that time, and more than 225,300 borrowers — divided among 5,776 institutions — defaulted.
Because federal default statistics are typically two years old by the time they are processed and released, the most current data is starting to reflect the recession's impact. That suggests that defaults could rise further.
In 1990, nearly one in four borrowers defaulted on their federal loans when default rates set an all-time high of 22.4%. The rate dropped to a record low of 4.5% in 2003.
"When a borrower falls 60 days or more behind in paying back a federal student loan, they are required to contact a guarantor and seek assistance," says Bob Murray, a spokesman for USA Funds, an Indianapolis-based loan guarantor. "Requests from lenders is up 20% year-to-year, so it's pretty clear that the economy is having a significant impact on the repayment success rates of students. We have a financial stake if a borrower defaults. We are on the hook financially for part of it."
Kimberly Carter, repayment assistance manager for Boston-based American Student Assistance (AMSA), is used to hearing "get in line" when she reaches out to past-due graduates.
AMSA, a federally funded nonprofit, became the nation's first private student loan guarantor in 1956. It manages more than $45 billion in loans.
There are several options for borrowers falling behind, including repayment plans with monthly sums that start low and increase along with the debtor's salary. A new option enacted by Congress on July 1 allows qualified borrowers to limit their monthly payments to 15% of their discretionary income. Payments can also be deferred up to three years if the borrower can prove a hardship, such as unemployment.
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