LINCOLN — Nobody warned her this could happen.
While going through a divorce, a Lincoln woman in her 40s defaulted on the student loans she took out in the 1990s to finish her college degree.
Her lawyer advised her to halt making the loan payments as the divorce played out. That turned out to be bad advice. Penalties and interest initially ballooned the original $22,000 loan amount to $45,000.
Her wages were being garnisheed and she barely had enough left to support herself and her two children. She didn’t know what to do or where to turn.
She wound up filing for bankruptcy, but that doesn’t discharge a student loan. The last time she checked, she said, her debt had grown to more than $60,000.
“If I live to be 100, I’ll be working every day to pay them,” said Ann, an office manager who did not give her last name because she did not want to embarrass her family. “I’ll never be able to retire. I’ll never be able to own anything.”
Her current attorney, Vic Covalt, who specializes in bankruptcy law, said he has been unable to find a resolution for Ann’s situation.
College financial aid officers say student loans can be a good investment, because a college degree improves a graduate’s chances of landing a good-paying job.
But Covalt is among those who warn that student loans can become a millstone for those who fail to complete their degrees, who borrow too much or who don’t land very lucrative jobs.
“Student loans are not financial aid, they’re a trap,” Covalt said. He said he advised his own daughter against taking out a student loan.
A new study from the U.S. Department of Education showed that more than one of every 10 student borrowers in Nebraska and Iowa defaulted on their federal college loans within three years of leaving school.
If they attended a community college or private for-profit vocational school, they were even more likely to wind up in default.
On the other hand, students who make it to their third year of college are less likely to default, financial aid officers said.
And those who make their first payment when it’s due — generally, six months after leaving school — also are less likely to default.
Though student loan default rates may partly reflect the economy — they have steadily climbed in all categories in the past two years — they also can be a measure of a school’s record of discouraging students from overborrowing and, ultimately, of producing graduates able to generate enough income to repay their loans.
Student loans are considered in default if they go unpaid for 270 days — much longer than the typical 90 days that must elapse before lenders begin collecting on most consumer loans.
To get a clearer picture of how many student borrowers leave school unable or unwilling to pay, the federal government is changing its standard default rate to include the first three years of payment history instead of the current two.
The most recent figures showed that, nationally, nearly 12 percent of loans scheduled to begin repayment in 2006-07 were in default by Oct. 1, 2009. That’s up from 9.2 percent for 2005-06 loans.
In Nebraska, 16 of 48 schools participating in the student loan program had double-digit default rates on loans that began repayment in 2006-07. In Iowa, it was 39 of 86.
For-profit schools, such as Kaplan University and Vatterott College, had the highest default rates, often exceeding 20 percent, but community colleges weren’t far behind, with default rates averaging around 15 percent.
Nebraska Banking Director John Munn said banks generally initiate collection efforts if a typical consumer loan goes unpaid for 90 days. And they start getting nervous if nonperforming loans exceed 2 percent of their portfolios.
But student loans are hard to compare with car loans or mortgages, he said.
Federally financed student loans are made without a credit history check and without an analysis of the borrower’s income compared with debts.
“We’re loaning money to 18- to 22-year-olds without jobs and without assets,” said Craig Munier, director of financial aid at the University of Nebraska-Lincoln.
“This is a social program. We put our taxpayer dollars at risk because we think there’s a greater potential to society with education.”
Munier said the federal student loan program offers options to avoid situations such as the one faced by Ann: loan deferments, if students return to college; forbearances, if they haven’t yet found jobs in their fields; and reduced payment plans, if they enter a public service field.
He said his office works with former students who are late with payments so the situation can be fixed before their loans go into default.
“Default is a terrible place to be,” Munier said. “The federal government has a long, long memory.”
Financial aid officers said community colleges and private vocational schools tend to see higher default rates because the students they serve tend to be pressed for time and money, while some have struggled academically.
“We get a little bit more of a higher-risk population,” said Vicki Kucera, financial aid director of the Hastings campus of Central Community College, which has a 15 percent default rate on its 2006-07 loans.
Kucera said the default rate is further boosted by students who drop out early in their college careers.
“Mostly it’s people with less than $1,500 in loans who have dropped out after one semester and one check,” she said.
The University of Nebraska-Lincoln had the lowest default rate in the Big 12 conference, 2.6 percent for 2006-07 loans, Munier said, an improvement from a decade ago, when it ranked among the top third.
It wasn’t because of anything the financial aid office did, he said.
“We raised our admissions standards, so that we have better academically prepared students,” he said.
To reduce its 23 percent default rate, Kaplan University is beefing up its academic support services to improve student completion rates; providing “intensive counseling” on managing loans; and discontinuing the acceptance of certain students with a high dropout propensity, said spokeswoman Abigail Hunt.
Metropolitan Community College’s default rates have held steady in recent years, said Wilma Hjellum, financial aid director at the Omaha-based college.
Hjellum said Metro is trying to lower its 15 percent default rate by offering academic support services and pre-borrowing counseling. It also waits to issue loan checks until 30 days after classes start, which reduces the likelihood of borrowers signing up for classes and then bailing out after they get the loan check.
Kucera said 10 percent default rates are unsurprising, considering rising student debt levels and the nature of the loans.
“Any time you have a loan program that requires no co-signer and no credit checks and you can get 90 percent of your students to pay those back, that’s pretty good,” she said. “When you’re serving a high-risk population, that’s not bad at all.”
Contact the writer:
402-473-9581, leslie.reed@owh.com
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