Congress Cuts, Obama Attempts to Collect as Loan Default Rates Rise

A new deficit reduction plan and action on Capitol Hill will hurt students who need to borrow.

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Your very own Student Loan Ranger (and many others) have chronicled the rapid growth of student loans and the associated rise in default rates (not to mention deferment, forbearance, and delinquency rates). This rise in default rates was reaffirmed by the U.S. Department of Education's release of its fiscal year 2009 national student loan cohort default rate.

The rate of default for the fiscal year 2009 cohort (which consists of borrowers whose first loan repayments came due between Oct. 1, 2008, and Sept. 30, 2009, and who defaulted before Sept. 30, 2010) was 8.8 percent, up from 7.0 percent in fiscal year 2008. (The Department of Education also released an interesting graph of student loan default rates since 1989.)

[Read about how to repay student loans based on your income.]

Notably, default rates increased across every higher education sector: from 6.0 percent to 7.2 percent for public institutions, from 4.0 percent to 4.6 percent for private institutions, and from 11.6 percent to 15 percent at for-profit schools.

The scary part is that these statistics are two years old and do not include borrowers who defaulted after Sept. 30, 2010. Given the continuing recession, a continued acceleration of student loan default rates is probable.

[Consider options to avoid defaulting on your student loans.]

And it's not just individual borrowers that are impacted by the burden of student loans. According to some reports, the pressure of the increasing debt burden may be fundamentally reshaping entire professions. As this article in DVM Newsmagazine explains, for example, mean debt for veterinarians in 2010 jumped to 198 percent of starting salaries due to ballooning tuition.

In response, increasing numbers of veterinarians are seeking to become specialists and experts fear that many veterinarians will struggle to raise children, save for retirement, assist elderly parents, buy a home, or start a practice.

Unfortunately, instead of looking for long-term solutions, some of the recent legislative proposals coming from inside the beltway are deleterious and downright punitive.

In the House of Representatives, as the Chronicle for Higher Education reported, Rep. Denny Rehberg (R-Mont.)—the chairman of the House Appropriations panel that oversees education—has proposed tightening the eligibility criteria for Pell grants, completely eliminating 31 education programs, and cutting spending on many more.

[Learn more about Pell grants and other ways to pay for college.]

The cuts would end aid to many minority-serving institutions and reduce spending by 83 percent to institutions serving Hispanics and by 36 percent to historically black colleges. While the bill may just be an attempt to stake out ground for bargaining over the omnibus budget package to occur later in the year, the reality is that these kinds of cuts will force students to take out even more in loans.

Meanwhile, President Obama's deficit reduction plan (see page 28 of the PDF) proposes allowing private debt collectors to call cell phones to collect debts either owed to or guaranteed by the federal government, including student loans.

Currently, debt collectors can independently call cell phones, but only after checking a list of known cell phones and only if the number has been provided as a way of reaching the borrower.

If this proposal becomes law, the debt collection industry—which received 140,000 Federal Trade Commission complaints in 2010, more than any other industry could begin robo-calling the cell phones of delinquent student loan borrowers.

However, according to Margot Saunders, of counsel to the National Consumer Law Center, robo-calling borrowers on their cell phones is unlikely to raise enough funds to impact the federal deficit because many borrowers are simply unable to pay their student loans because they have other expenses or they have lost their jobs.

Outside the beltway, on the other hand, a growing demand for more fundamental reform can be heard. A petition to forgive student loan debt initiated by founder Robert Applebaum has gathered close to a half million signatures. And, as we noted on our Twitter feed and Applebaum described in a recent article, frustration with the burden of educational debt is one of the themes voiced by participants in the Occupy movement.

Let us know what you think. Are you worried about the impact of student loans in your life or profession? And what kind of reform, if any, would you like to see?

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.