Student debt levels portend rising loan default rates

Not long ago, dan brown and his roommate headed from San Francisco to Las Vegas. They were aiming to win big so they could pay off their student loans.

"If you don't try, you can't win," said Brown, a 26-year-old marketing consultant. He's sitting on nearly $100,000 in loans taken out to pay for his bachelor's and master's degrees. His monthly loan bill is $1,000.
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Business at his company has slowed recently, making him nervous about his job security. He already has deferred his student loans, and his lenders are asking for payment.

As Americans curb their spending and battle to keep up with credit cards and mortgages, another type of debt is starting to overtake people: student loans. Although the U.S. has experienced economic downturns before, never has one converged with such high levels of student debt.

Total borrowing for school has more than doubled to $85 billion in the 2007-2008 school year from $41 billion 10 years earlier, adjusted for inflation, according to the college board, the research and testing concern. Meanwhile, subsidized federal aid has remained relatively flat at $42.8 billion per year.

The fear is that default rates on student loans will increase, as seen in the mortgage and credit-card worlds. slm corp., or sallie mae, the largest private student lender, reported a delinquency rate of 9.4 percent in September, up from 8.5 percent a year earlier. "It's clearly because of economic conditions," said spokesman tom joyce. "The credit crunch has washed onto the student-loan beach."

Until now, the default rate on federal loans has remained relatively stable. The most recent statistics, from 2007, show only 5 percent of students defaulting within two years after they leave school and begin repayment. Experts think that rate could begin rising as the effects of the credit crunch and slowing economy take hold.
preventive measures

That's a far cry from the late 1980s, when student-loan default rates skyrocketed as high as 30 percent.

This time around, lenders -- both federal and private -- are working with borrowers to renegotiate loan terms to keep default rates low.

Elina Agnoli, a recent University of San Francisco Law School graduate, has $120,000 in debt and no formal job offers. She is clerking at a small litigation firm in Oakland, Calif., until she passes the bar exam. Depending on the outcome, she might have to refinance her loans.

"People have this notion of law school graduates getting $150,000 right off the bat," she said. "But that's not the reality for the law grad in 2008. I've got friends waitressing with J.D.s (doctor of jurisprudence degrees). There's something wrong with that scenario."

Recent graduates traditionally live on a shoestring, but they often were protected by a financial safety net: their parents. Now, as 401(k) balances erode and home values plunge, many families are coping with other financial problems and are less able to help the children.

Mandy Kakavas graduated in 2007 with $25,000 in student loans and $3,000 in credit-card debt. Her mother raided her 401(k) to help her daughter pay for a degree in mass communications from the University of California-Berkeley and no longer can help her financially.

"I look at the headlines about the bad economy, and I feel like I've already been there for a while," she said.

Although Kakavas has cut corners on dining out and taken a second job to earn extra cash, she said she often uses her credit cards to pay her student-loan bills. In January, a new batch of student loans that were deferred will land.

"It's going to catch up to me," she said. "It's hard to see financially where you're going to be 20 years from now when you don't know how you're going to make payments next month."
Loans and more loans

Some are taking out loans to cover the loans. Lindsay Fletcher of Wilmington, N.C., has $50,000 in student loans. To make ends meet for the next couple of months, she has taken out a $2,500 personal loan at a 13.9 percent interest rate to help pay off her credit cards and student loans, which come out of forbearance -- deferment due to financial hardship -- in November.

"There's been a lot of tearful calls to Mom," Fletcher said. "And I know that if she could help me, she would. But I don't want her to have to. That's why I went to college."

Unlike mortgages and credit cards, student loans are not forgiven in bankruptcy proceedings.

Borrowers with massive student debt do have some options. The first thing those daunted by their loans should do is speak with their lenders. Most offer forbearance because of economic hardship or allow borrowers to defer. However, interest might rack up.

Refinancing loans into smaller monthly payments might be a solution for some, though this strategy increases the total loan balance. Some federal loans have income-contingent plans; in July 2009, a program called the income-based repayment plan -- designed to help those who take jobs with lower salaries -- will be another option for people with federal loans.

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Monday, December 01, 2008 |

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