Recent college graduates with student loans are increasingly defaulting on their debt, according to a recent report by the National Association of Consumer Bankruptcy Attorneys.
The report attributed the level of student debt to the high unemployment rate among recent graduates, and it warned that unmanageable student loan debt could lead to a repeat of the mortgage debt crisis in 2008.
In 2010, national student loans averaged $25,250, constituting a 5 percent increase from 2009, according to the report. This increase is consistent with similar annual increases for the past 5 years.
With total outstanding student loans topping $1 trillion, Americans now owe more on student loans than on credit cards, according to a separate report by the Federal Reserve Bank of New York released last week.
Defaults on student loans occur when graduates are unable to fulfill their payment agreements. If they don’t pay back a loan in time, the lender can sue them – the first step in bankruptcy proceedings.
Student loans are different from normal loans because students are not required to put collateral up front, which makes it harder for their debts to be forgiven in the bankruptcy process, said Moritz Meyer-ter-Vehn, an economics professor at UCLA.
The federal government provides about 86 percent of student loans. Private lenders consider a student’s major when awarding loans, but federal lenders do not, said Harold Demsetz, a professor emeritus of economics at UCLA. For instance, an engineering student is more likely to receive a private loan than an art student, since engineers have higher average incomes.
Federal intervention makes it possible for students, who otherwise might not receive loans, to have access, he said.
But students now find it hard to get jobs that pay what they hope to earn because of the current economic climate, said Ronald Johnson, director of financial aid at UCLA. Without their desired income, graduates find it difficult to pay off their loans, he said.
Demsetz said, on the other hand, that he thinks the problem is rooted in unemployment among graduates, which keeps students from repaying their loans.
The statistics do not necessarily correspond to the numbers at UCLA – in fact, the number of UCLA students holding student loans has actually slightly declined, according to records from UCLA’s financial aid office. The class of 2010 held an average of $16,824 in loans per student, roughly 40 percent below the national average.
In fact, California as a whole averages nearly $7,000 less than the national average and has the fifth lowest debt figures, according to the Project on Student Debt, which annually releases national student loan data.
Defaults of loans by UCLA graduates declined from 2010 to 2011, Johnson said. Perkins loans, a university allocated federal loan, also saw defaults decrease from 2.6 percent to 2.4 percent.
Even with UCLA performing better than the national average, Johnson said he thinks there is still a need for major changes to the student loan system. Higher attendance costs are causing many incoming college students to take out large loans, he said.
Christina Callas, a third-year UCLA economics student, said both she and her parents hold loans to pay for her education at UCLA.
“Of course, I’m worried about paying the interest on my loans on time,” Callas said. “It’s always a concern.”
There is no consensus, however, on how to keep more students from defaulting on their debts. That could take the form of legislative action – Johnson said Congress should fix interest rates on student loans at the current 3.4 percent. Without such action, this interest rate will double in July, Johnson said.
“It is my hope that the Congress will do everything they can to keep interest rates lower for students,” Johnson said.
He added that without reform, the incoming freshman class may find it more difficult to afford a college education.
To avoid difficulties paying off their loans and to lower the chances of filing bankruptcy, students should talk with their school and their lenders, Johnson said.
Students can also participate in federal support programs, which gives them the option to delay payments toward loans while they are enrolled in school, consolidate loans into a single long-term payment plan, or agree to pay 10 percent of their income to lenders for 20 years, he said.
“Defaults need not … occur if student loan borrowers take advantage of the various options available for effective management of student loan debt,” Johnson said.