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Student loan defaults are on the rise

September 30, 2011

As college costs and the amount of students taking out more loans increases, so has the rate of loan default. With the latest default landing at 8.8 percent in 2009, the highest since 1997, Monmouth College has increased its own exit loan counseling to lower the default rate among its own graduates.

“From our perspective, there are many reasons that students default on loans,” said Jayne Shreck, Director of Financial Aid.

When a student defaults on a loan, he or she fails to pay back the money borrowed from the federal government or another lender. According to Shreck, some of the reasons for an increasing default rate are a poor job market, dropping out of college, lack of awareness on the responsibilities and rights as a borrower, increasing college costs that many students pay with little or no help from parents due to a poor economy and a change in the formula in how default rates are calculated.

The latest fiscal year (FY) results posted by the Department of Education came from 2009 when Monmouth College’s default rate was 8.3 percent. Under the new formula, the Department of Education would record the default rate every three years in an effort to capture a more accurate picture.

“The formula is changing some default rates,” Shreck said. “It causes a lot of confusion when the results come in. Is the change because of students defaulting, or is it because of the different formula?”

One main cause of confusion regarding loans is faced primarily by this spring’s graduating class. In 2008, when most seniors were freshmen, federal loans were processed through private lenders (Chase, Wells Fargo, etc.) that had federal government permission. The private lenders also collected payments from the students.

In recent years, however, that system has changed. Now a federal loan comes directly from the government. Private lenders are contracted to only interact with the borrower but cannot give out a loan.

Since older students took out loans both with the old system and the new system, as well as private loans and loans through Monmouth College, the confusion lies when payment notices come in the mail and the student does not know which loan they are repaying.

“When these loans enter repayment, a student is trying to balance the payments of multiple types of loans,” Shreck said. “Keeping it all straight is a challenge.”

To lower the default rate, the Office of Financial Aid addresses as many of the issues as possible when assisting graduating seniors with the college exit process, including helping students with organization and, based on the details of their payment plan, when to expect their first payment notice.

“Many times it’s not intended when students default on their loans,” Shreck said. “They’re too busy with finding a job and an apartment, plus preparing for graduation, that all the notices for their first payment get lost.”

Cassie Burton
Staff Writer

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