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Seven Reasons Why You're More Likely to Default On Your Student Loan Now

Jul 16, 2010 Jennifer Williamson, Distance Columnist | 0 Comments

Student loan default rates are up. According to the Department of Education, around 7.2% of students defaulted on their loans in 2008—a rise from a rate of 6.7% the following year. Here are just a few reasons why you’re more likely to default on your student loans now, because of economical conditions, than you were in past years.

Because your debt is likely to be higher

In 2008, the average student had debt of over $23,000. Compare that with a student debt load of $12,750 in 1996. It’s not unheard of for students to have loans of well over $100,000 for undergraduate and graduate school.

In 2008-2009, the US Department of Education showed a 25% increase in the amount students have borrowed from the previous year—the highest increase in recent memory, surpassing even the 17% increase of 1994-1995.

Because your job prospects are slim

Money Problems

Today, it’s hard to get a job at all, even a low-paying one—employers say they plan to hire 22% fewer college grads than they did last year.

Because your competition is high

To make it worse, there are more recent grads these days competing for fewer jobs—the number of college graduates goes up every year. And you’re not just competing for entry-level jobs with your fellow recent grads. You’re competing with 2009 graduates who are still unemployed, as well as more experienced workers who are looking to take anything—for any wage—to get back to work.

Because even if you get a job—it won’t pay much

College might be more expensive now—but a college degree isn’t paying off like it used to. Graduates were seeing reduced wages even before the recession—between 2002 and 2007, hourly wages for graduates with bachelor’s degrees fell 4.5% for men and 4.8% for women. And because you’re likely to find less promising opportunities in a recession, these are likely to lead to less promising opportunities in the future. Those who graduate during recessions earn 7% to 8% less in their first year out than those who graduate during job booms, and the effect can persist for a decade or more. 

Because college costs rise faster than inflation

College costs rise much faster than the inflation rate. According to the College Board, the price this year has risen 6.6% at four-year public schools. This adds to your student debt burden—and could keep you from taking key steps into adulthood for longer.

Because the federal government can’t cover the gap

Federal Pell grants are key to many low-income students trying to find the funds to go to college. But they only pay a maximum of $5,500 per year as of 2011—although they’re scheduled to go up every year in relation to inflation. Of course, college costs go up faster than inflation—and to start with, Pell grants only cover a small fractions of many colleges’ tuition costs. In 2008, approximately 87% of students who received Pell Grants had to take out loans to cover the rest of their college costs.

And only the most financially needy get the full amount of a Pell grant. Many others get much less—even though they can’t afford to pay the full ride of their college tuition. This means that even those financially needy enough to qualify for some aid don’t get a lot of it.

Because college is still seen as not optional in our society

If you’re from a middle-income family, it’s not likely that you’ll consider skipping college in order to avoid the huge debt load. Most middle income students will choose to take on the debt rather than forego college.

Fewer available jobs, heightened competition from a higher number of qualified graduates, depressed pay, higher college costs and the failure of debt aid to keep up—all of these factors stack up in the lives of students to make their debt load tougher to carry. While the federal government has taken steps to lighten the load—such as introducing Income-Based Repayment options—it’s too early to see whether this will have any effect on rising student loan default rates. It’s possible nothing will—except a concerted political effort to control college costs and funnel more federal dollars toward student debt relief.




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