Interest rates for student loans are increasing and so is the default rate for those loans, according to Eastern Michigan University Director of Financial Aid Cynthia Van Pelt.
At the end of last semester, Van Pelt made a report to the EMU Board of Regents about financial aid, in which she made several points.
First, the default rate for EMU students is rising: from 2.6 percent in fiscal year 2007 to 4.9 percent in 2009.
Even with this rise, EMU students are doing well compared to students in the state of Michigan as a whole, which rose from 5.7 percent in 2007 to 8.2 percent in 2009. National rates were even higher, according to her report: 6.7 percent in 2007 and 8.8 percent in 2009.
Van Pelt’s second point was the interest rate for subsidized Stafford undergraduate loans will
double in 2012-2013, jumping from 3.4 percent to 6.8 percent.
Both graduate and undergraduate unsubsidized Stafford loans will remain at 6.8 percent.
Outside of EMU’s Financial Aid office on the fourth floor of Pierce Hall, there is a huge chart that shows monthly and total costs for borrowing various amounts of money at various interest rates. The chart emphasizes how the total cost of borrowed money can balloon.
The increase in interest rates and the effect of using longer loans might serve to increase the default rate, but Van Pelt’s office hopes to avoid that.
The average debt of an EMU undergraduate in 2010-2011 was $18,054, and the median was $14,439. For graduate students at EMU, the numbers are $37,995 and $31,530, according to Van Pelt.
Van Pelt was unable to provide historical data, which would reveal whether EMU student debt is rising, as it is nationally according to The Washington Post.
March 11, the Post reported that outstanding U.S. student debt rose to $867 billion in 2011, up from 2010’s estimated $767-830 billion.
“Loan debt is absolutely going up, but there are many factors besides tuition,” Van Pelt said.
According to Van Pelt, in the fall of 2008, the Obama administration made a major change in federal student loan administration, shifting the program from one based on multiple individual banks and other lending organizations to one administered directly through the federal government.
However, according to Van Pelt, the government has contracted out the collection of overdue repayments.
According to news reports, such as one in Bloomberg News yesterday by John Hechinger, “Obama
relies on debt collectors profiting from student loan woe.”
The National Association of Consumer Bankruptcy Lawyers released a survey on Feb. 7, reporting “four out of five U.S. bankruptcy attorneys report major jump in student loan debtors seeking help, fears growth of next mortgage-style debt threat to U.S.”
Van Pelt described steps her office is taking to help EMU students avoid default, which is defined as being 270 days behind in payments.
Her staff is able to identify students who are in danger of default and be sure students know all options available to them, especially automatic payments.
In order to avoid excessive debt, Van Pelt said students should try to graduate as soon as they can so they can get a job and start repaying their debt rather than accumulating more.
She also said students shouldn’t treat the annual limits on the amount they can borrow as a goal
or a target, but rather as limits to use when they absolutely have to.
Van Pelt said students should keep their overall loan total as low as possible. She quoted Mark Kantrowitz, author of Fastweb.com, who said: “Before buying something with student loan money, ask yourself if you’d still buy it at twice the price.”
Van Pelt recommends using www.studentloan.gov to estimate your loan payments, and www.nslds.ed.gov to keep track of your loans.