School of Hard Knocks for Student Loans

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October 11, 2010 | COMMENTS

A painful real-life education is slamming many who hold student loans, as excessive debt and paltry incomes result in inflating student loan defaults. Even higher default rates could be the norm should Congress allow private loans to become dischargeable in bankruptcy, according to The Wall Street Journal.

The rising default rate reflects a related issue—the amounts that students borrow relative to projected earnings upon graduation. That controversy centers largely on for-profit schools rather than public institutions.

“While for-profit schools have profited and prospered thanks to federal dollars, some of their students have not,” says U.S. Secretary of Education Arne Duncan in a recent press release. “Far too many for-profit schools are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use.”

For-profit institutions make up the majority of student defaulters, as they comprise 26% of borrowers but 43% of the bad loans. Those obtaining associate degrees at such institutions carry a median federal student loan debt of $14,000.

For-profit college students consist of a large percentage of subprime, low-income borrowers who frequently take out private loans to make up for shortcomings of government loan dollars. In the past, rates for these loans have reached more than 20%, reports the Journal. Jobs earned upon graduation often provide incomes too low to make debt payments, leading to rising defaults.

In contrast, most community college students do not take out student loans.

Proposed regulations from the Obama administration are designed to protect student borrowers from misleading for-profit college recruitment, and they would provide assurance that only eligible students and programs benefit from federal financial assistance, according to The New York Times.

One such consideration is that for-profit colleges would be required to ready students for gainful employment or lose federal dollars. Student debt and post-graduate income levels would be considered in this scenario.

At present, institutions experiencing at least 25% default rates for three years in a row, or a rate above 40% for a given year, lose federal student assistance funding—a hit that represents most of the “profit” in for-profit schools.