When it comes to a college education, the number one concern shared by both parents and students is the rising student loan debt. While many students aim to secure financial assistance in the form of government grants, private money, or scholarships, sometimes the only option is to secure a student loan. The exact impact of the student loan would depend on the actual type of loan but also the amount of money borrowed. Unfortunately, many people graduate from college only to be faced with years of debt as they try to pay off all the money borrowed. As a result, getting ahead financially can be quite challenging.
The biggest problem is that with so many student loans, the level of default is growing significantly. Keep in mind, students who default on these loans are not doing so intentionally but simply faced with the same problem that millions of people deal with – no jobs or low paying jobs. Even with a college degree, trying to secure a lucrative job after graduating is tough. After all, the number of people vying for one position is staggering. Without the means to pay the loan payments, the outcome is default. Obviously, this is disconcerting to students but also devastating to lenders.
Some of the most recent numbers released by the United States Department of Education show the number of people defaulting on student loans has grown since 2007. During 2008, 7% of students who graduated using student loans defaulted. Officially known as the “cohort default rate”, most federal student loans were defaulted on during the first year of the repayment schedule. Now, while the increase from the prior year had only a modest increase of 0.3%, from 2006 to 2008, the overall increase was significant at 35%.
Moving ahead to today, we continue to see rising student loan debt, as well as loan defaults. Although non-profit colleges and universities have also been affected, the greatest defaults are associated with for profit schools, showing an increase of almost 12%. Even worse, of students who defaulted on student loans, those who graduated accounted for almost 50% of all student loan defaults. As you can see, this has become a very serious problem that leads to damaged credit for students and financial woes for lenders but alto serious consequences for educational institutions.
As an example, the United States Department of Education can cut off college funding for federal student loans for any college or university that has a cohort default rate of 25% or more for three years in a row, or for any school who has graduating students with a student loan default rate of 40% or higher within any given year. As you can imagine, if a college or university were to face these stiff consequences, students needing federal assistance would have nothing to depend on. Therefore, many students would not have the money needed for tuition, books, lab, and other expenses needed to earn a college degree.
Under the current regulations set forth by the federal government, the other problem is that if the issue with defaulted student loans is not resolved in a timely manner, the option of offering students federal aid would be eliminated. With this, the college or university would quickly fold. Making the issue of student loan defaults even worse is that a greater number of students are starting to turn to government grants such as the Pell grant but only last week, President Obama announced a proposed budget cut that includes eliminating $100 billion in funding over the next 10 years for this particular grant. This means government grants could also be eliminated or at minimum, the awards greatly reduced.
The one thing that most people fear most is that low income students would be without financial support to enter college. Remember, government grants along with subsidized student loans, which are loans whereby interest is paid for by the government, are made available to people who do not have the financial means to get a college education. If something is not done to reduce the number of student loans being defaulted on and if Pell grant money, as well as money for other government grants is not offered, we will quickly see a huge reduction of low income students getting to earn a coveted college degree.