December 1, 2009
by Agnes Jasinski
The U.S. Supreme Court began hearing arguments today on the intricacies of one student's 20-year-old debt that could change the way bankruptcy law handles student loan cases.
The case, United Student Aid Funds Inc. v Espinosa, goes back to 1992, when Francisco Espinosa, a technical school graduate, filed for Chapter 13 bankruptcy. Espinosa by then owed nearly $18,000 in not only student loans taken out four years earlier, but interest on those loans to lender United Student Aid Funds Inc. He filed for bankruptcy to relieve him not of his loan debt, but the nearly $5,000 in interest accrued on the $13,000 he initially borrowed. Thinking he had reached an agreement with his lender, Espinosa eventually paid off the principal on the loan over a five-year period.
Several years later, however, he received notice from his lender that he still owed the remaining interest. The lender claimed Espinosa had not sufficiently shown "undue hardship," a requirement under bankruptcy law for students to qualify their student loans under Chapter 13. Espinosa says he fell on hard times when the hours for his baggage handler job through airline America West were cut, and he was unable to find a job that fit his degree in computer drafting and design through the technical college.
That's when the legal battle began. Espinosa won on the bankruptcy court level, but the district courts ruled in favor of the lender and demanded a hearing to show whether Espinosa met the criteria for a bankruptcy filing. The Ninth Circuit Court of Appeals ruled that it was too late for the lender to challenge the filing, which then landed the case in the U.S. Supreme Court.
An article in the Chronicle of Higher Education previewing the case this week looked at the implications of the court's eventual ruling. If the Supreme Court overturns the last appeals court's decision, lenders could feel free to collect back interest on student loans that have already been approved for Chapter 13. If the Supreme Court rules in favor of Espinosa, lenders could be open to abuse by borrowers taking advantage of the law to get out of their student loan repayments. The article suggests that the Court should consider redefining the "undue hardship" criteria to make it easier for judges to apply that criteria across the board, as many say it is already too subjective.
The case is an important one for students, especially in a difficult economic time when college students are not only borrowing more, but having a tougher time finding jobs to make payments on their student loan debt. Student loan default rates are also on the rise for both federal and private loans as tuitions only continue to rise. If you're worried about the amount of debt you'll accrue going to that dream school, consider all of your options. Factor college cost into your college search, and make sure you have a good idea of financial aid and scholarship money available to you before taking out student loans.
December 14, 2009
As Congress continues to puzzle out questions of student loans and consumer protection, new information released today suggests that young adults attempting to repay their student loans may be having even more trouble than previously thought.
As a condition of the Higher Education Opportunity Act, the US Department of Education has started tracking three-year instead of two-year default rates for federal student loans. The first set of data was released today and the numbers are pretty shocking: the three-year cohort default rates are nearly twice as high as the two-year rates overall--11.8 percent compared to 6.7 percent.
Default is defined as failure to make payments on a student loan according to the terms of the master promissory note the borrower signed, and federal student loans are considered in default only after nine months of missed payments. This means that 12 percent of students who started repaying their loans in 2006 had stopped making payments for 270 days or more by September 2009.
The difference between two-year and three-year default rates was most dramatic at for-profit colleges, rising from 11% to 21.2%. For-profit colleges have the highest default rates in both two-year and three-year measures, and also make up the largest proportion of institutions that may lose the ability to distribute federal student financial aid in 2014, when the rule changes associated with the new three-year default rate calculations go into place.
Colleges will become ineligible to participate in federal student aid programs if their cohort default rates are above 30 percent (currently 25 percent) for three consecutive years, or if they go over 40 percent any one year. Inside Higher Ed has published a list of institutions whose three-year cohort default rate is over 30 percent this year-in addition to a number of for-profit colleges, several community colleges have also made the list.
In addition to this information's implications for colleges, it also means that default on federal student loans is even more common than previously assumed. More than 1 in 10 students currently default on a loan within three years, and it's possible that a significant percentage of students may default on their loans after more time has passed. If you're planning to borrow to pay for college, do so wisely. You may want to make sure that you only take out an amount that you can pay back in a worst-case employment scenario. It's not too late to start your scholarship search for next year (or even this year) to help cut down on the amount you have to borrow, as well.
September 15, 2009
According to newly released data, default rates on federal student loans continued to climb in 2008, reaching a nine-year high of 6.7 percent, most likely as a result of the recession. The annual cohort default rate, released by the Department of Education on Monday, covers federal student loans that went into repayment between October 2006 and September 2007 and had gone into default by September 2008.
The 2007 cohort default rate was 1.5 percentage points higher than the rate for the previous year, as significant increases took place across the board. Defaults were higher in the bank-based Federal Family Education Loan (FFEL) Program than in the Federal Direct Loans Program, which is typically the case, but the discrepancy between the two grew this year. A total of 7.2 percent of loans in the bank-based system were in default, compared to 4.8 percent of the loans in the Direct Loans program. he numbers for 2006 were 5.3 and 4.7 percent, respectively.
Much of this discrepancy can be attributed to a higher percentage of students at proprietary schools participating in the FFEL Program, as these schools carried a default rate of 11.1 percent, compared to rates of 6.0 percent and 3.8 percent at public and private colleges. Still, the lower default rate in the direct lending program is likely to be brought up as Congress debates moving all lending from FFEL into Direct Loans.
Default is defined as failure to make payments on a student loan according to the terms of the master promissory note the borrower signed, and federal student loans are considered in default only after several months of missed payments. This means that 6.7 percent of students in this cohort had stopped making payments for 270 days or more within 1-2 years of their first loan payment coming due. It's likely that the cohort default rate numbers released paint an optimistic picture of the number of borrowers currently having trouble making payments on student loans.
New repayment options may help troubled borrowers, though, and several have been introduced in recent months. One is the federal Income-Based Repayment Plan, which allows students to make payments they can afford and forgives all remaining debt after 25 years. Borrowers worried about repayment can also look into loan forgiveness programs offered in exchange for public service, which have been expanded under the Higher Education Act and national service legislation.
The best way for students to avoid the prospect of defaulting on loans is to limit borrowing as much as possible. Put some serious effort into a scholarship search, and consider affordability when doing your college search, as well. Practices such as keeping your options open and landing a scholarship can go a long way towards reducing your loan debt and your risk of being unable to pay once you graduate.
July 13, 2010
An analysis of long-term data conducted by The Chronicle of Higher Education has found that the number of students who default on their loans is far greater than what the federal government has been reporting. According to the data, about one in every five federal student loans overall has gone into default since 1995; the default rate for student loans covering costs at for-profit colleges is even higher, at 40 percent. The default rate for community college students is about 31 percent.
The federal government’s numbers are much lower. The U.S. Department of Education reported default rates for federally guaranteed student loans at about 6.9 percent for fiscal year 2007’s cohort. Why the disparity? The Chronicle says the government’s numbers only show those students who defaulted on their loans two years after entering repayment. The Chronicle’s analysis looks at 15 years of data. According to their new analysis, default rates only worsened as time went on, increasing years after those borrowers had left college.
For-profit colleges have already been getting some negative attention lately, with legislators concerned about the share of federal financial aid the schools receive compared to their total enrollment numbers. (The for-profit sector accounts for less than 10 percent of total enrollments but about 25 percent of federal financial aid disbursements.) This new data certainly won’t help them. If the federal government moves to pass rules on student loan default rates, a number of those institutions could be at risk for losing federal aid if they cannot improve their numbers. According to the Chronicle, there are a number of for-profit colleges out there that have default rates even higher than 40 percent, including the Tesst College of Technology and Chicago’s College of Office Technology.
No matter how you skeptically you look at the numbers—critics of the data have already said the numbers don’t consider the economy and the demographics and total enrolled at community college and for-profit universities versus four-year institutions—default rates should be taken seriously. Defaulting on your student loan is never a good idea. It hurts your credit, and any wages you do have may be seized by the government that issued you that loan. It’ll then be harder to not only make ends meet, but to get other loans years down the line, including mortgages and new credit cards. You may also be faced with higher interest rates if you are able to land that car loan. You can see now how important it is to borrow responsibly and make sure that if you do need to take out student loans, you’re doing so to pay for the costs of an accredited program that will help you land a decent job after graduation.
September 22, 2009
For-profit career colleges have had a rocky history, being met with skepticism and criticism from traditional academic institutions, as well as undergoing a great degree of government scrutiny over the years, as some institutions have been revealed to engage in a variety of questionable practices. So, when the Government Accountability Office announced an investigation of proprietary institutions that participate in federal student financial aid programs, few in the education industry were surprised. The results of these investigations were released on Monday, and they indicate that in at least some cases, distrust towards career colleges may still be warranted.
For-profit colleges have higher student loan default rates than any other sector of higher education, with two-year cohort default rates topping 11 percent according to recently released annual Department of Education data, and four-year default rates clearing 23 percent according to the GAO report. By comparison, state colleges have two-year default rates of 6 percent and 9.5 percent respectively, with the default rates for private colleges falling even lower.
While acknowledging that much of this discrepancy is likely due to the different student populations these institutions serve, the GAO found that part of this high default rate could be connected to questionable admission and aid application practices at for-profit colleges. Under current federal law, in order for students to qualify for financial aid, they need to demonstrate "ability to benefit" from higher education. This means that they must have either earned a high school diploma or GED or passed a test indicating they are prepared for college-level instruction. Some of the proprietary colleges investigated by the GAO encouraged students to purchase high school diplomas from diploma mills to circumvent the testing process.
It appears that in at least one case, employees of a career college helped prospective students cheat on an ability to benefit test, even changing their answers after the fact to ensure their scores were high enough. GAO investigators posed as sudents at a school in the Washington, DC area and attempted to deliberately fail this test. According to the report, they were given some of the answers to the test and also saw evidence of the school tampering with their scores to ensure that they passed and qualified for aid.
These practices allow students who wouldn't otherwise qualify for federal aid access to college instruction and money for school, but also can saddle students who are likely to be unable to complete and benefit from college coursework with large amounts of student loan debt. The Career College Association, which represents proprietary colleges, assures that these practices are not widespread and that strict standards are in place. However, the GAO still urges the federal government to provide more oversight of ability to benefit testing and financial aid disbursement at for-profit colleges.
If you're considering attending a career college, be sure to make sure its practices are legitimate and you are likely to enhance your earning potential by completing a degree or certificate there. Do your research about the school's reputation, the program's reputation and job and salary prospects for graduates of your prospective program. Also, be wary about borrowing and make sure you don't get into a position where you've taken out too many federal or private loans to be able to pay them back. Attending a career college can help you land a better job or a higher salary, but this report indicates that there are still schools with dodgy practices out there, so diligence is still required when choosing a college.
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