Student loan defaults rise nationally, Nebraska graduates stays below average

The share of students unable to pay back their loans jumped last year, even as student debt steadily rises, according to data released by the U.S. Department of Education last week. Students in Nebraska are less likely to default on their loans than the country as a whole, however. And when loan payments are too large for students to handle, default is only one of several possible options to make loan repayment more manageable.

The report showed that 8.8 percent of student borrowers defaulted on their debt in the fiscal year ending Sept. 30, 2010, up from 7 percent the previous year and the highest percentage since 1997.

That rate was lower when limited to public institutions like the University of Nebraska-Lincoln: 7.2 percent of students at state colleges and universities defaulted in that time, up from 6 percent the previous year.

At UNL, only 2 percent defaulted. The year before, that figure was 1.7 percent, putting UNL comfortably within the norm among its peer institutions and the Big Ten Conference.

"It's a testimony to Nebraska students that it didn't go up as dramatically," said Craig Munier, director of UNL Scholarship and Financial Aid.

After a student graduates, he or she has six months before the first payment on a loan is due. If no payment is made in the following nine months, the loan goes into default.

"(But) it doesn't mean that they'll never pay," Munier said. The report's numbers are simply a snapshot of roughly two years' time, in which 3.6 million students started paying off their debt.

Overall in Nebraska, just more than one in 20 student borrowers failed to make payments on their federal loans. North Dakota and Montana had the lowest rates at about half that, and Arizona was the high mark, with 16 percent of student borrowers defaulting. It's a temporary solution that can reach far beyond any single year.

"Any sort of default, especially early in someone's life when they're establishing their credit rating, will have a substantial impact," said Eric Thompson, an associate professor of economics.

For example, the federal government can withhold tax refunds or take other measures to get what students owe. Damaged credit has its own impact, making it more difficult to borrow for a car or house or even to get a job, as employers increasingly turn to applicants' credit ratings, according to a Sept. 13 article in The New York Times.

But Munier pointed out one key fact for students to remember: Defaulting isn't the only option when a student can't pay.

"The thing I would want to emphasize … is there are so many alternatives to defaulting," he said. "There's really no reason for anyone to default."

Loans can be extended beyond the standard 10-year repayment plan. With graduated repayment, monthly payments can start small and grow as time goes on. Payments can also be calculated as a portion of a student's income; if students have no disposable income, their payment can even be nothing. All options and their details are available at the Department of Education's Federal Student Aid website, www.direct.ed.gov.

And while those options are less desirable than the standard plan because they can accrue more interest, they're all better than defaulting, Munier said. "I think a lot of it could be a lack of information," he said when asked why students would default anyway. "People who get into difficulty financially … will even go so far as to not open their mail."

The bump in default comes as the nation continues to struggle to shake off the effects of the recession and the financial security of Americans continues to falter. The number of Americans in poverty is at record levels, unemployment has remained at roughly 9 percent for months, and median household income is at a level not seen since the mid-1990s.

It's an even grimmer picture for ethnic minorities, whose average wealth fell to just a fraction of that of white families, according to a study by the Pew Research Center last summer.

These echoes of the recession are likely related to the student loan default rate, though they aren't necessarily the cause, Thompson said

"I think part of the reason the default rate has risen is because it's more difficult for students to find employment opportunities," he said.

In May, for instance, more than one-fifth of all 2009 college graduates were unemployed, according to The New York Times. When the same employment difficulty is extended throughout families — students' financial backup — "It might be harder for people to get help right now," Thompson said.

But Nebraska and its residents have largely weathered the recession better than many others, with Nebraska's unemployment rate less than half the national average. Nonetheless, students have had to adapt to a world of more debt and sparser jobs.

Aid has seen "significantly increased requests for help" this year, Munier said.

"A family's ability to pay is going down," he said. "We have people that are less able to pay … Emotions have run quite a bit higher in the financial aid office in the last couple of years."

Last May, a graduating UNL student's average debt was almost $20,000, according to information provided by Munier. For graduate students, it was more than $30,000. Both levels are the highest ever, while the university's ability to help is diminished.

"We have $2.5 million less in need-based grant money that this office controls than a year ago," Munier said.

States like Nebraska are less able to fill the gap between what public universities charge and what their education actually costs, and families have to make up the difference even as their income is dropping. It's a situation of competing financial dynamics "I haven't seen the likes of," Munier said.