For Student Borrowers, a Hard Truth

Annamaria Andriotis:

As many students and parents struggle to make payments on their student loans, many are finding this debt comes with some serious strings attached.

After years of economic difficulty and rising college tuition, the recent news that the default rate on federal student loans has risen came as little surprise to many. Nearly one in ten federal student-loan borrowers defaulted during the two years ended Sept. 30, 2010, meaning they failed to make a payment on their loans for more than 270 days, according to the Department of Education. That's up from 7% in 2008. Much of that increase came from for-profit colleges, whose students' default rate jumped to 15% from 11.6%, but the default rate among students at public and private, four-year universities also increased.

What many people may not realize, however, when taking out a student loan is just how different it is from other kinds of debt. Credit-card debt, for example, can be wiped out in bankruptcy. Mortgages can be discharged through foreclosure. For borrowers with crippling student loan debt, financial failure offers no such fresh start. The loan still must be paid off, and often with new collection costs tacked on, making it much more expensive than before. On top of that, up to 25% of a person's wages can be deducted until the loan is paid back in full. (Private lenders must get court approval for wage garnishment and the amount they can take varies.) With federal loans, the government can also keep your federal and state income tax refunds, intercept future lottery winnings and withhold part of your Social Security payments. "Defaulting can be completely devastating to a family's finances and sense of well being," says Mark Kantrowitz, publisher of FinAid.org and Fastweb.com.

Posted by Jim Zellmer at September 18, 2011 2:40 AM
Subscribe to this site via RSS/Atom: Newsletter signup | Send us your ideas