Credit Score Articles

Student loan defaults are on the rise

Most will not dispute the value of a good education, but it's no secret that paying for college can be costly. Many students are unable to pay for their entire education out of pocket and grants or scholarships may only cover a portion of tuition, books and housing costs. Therefore, many are forced to take out student loans to finance their university studies. High unemployment rates have made it difficult for most new graduates to find a job, leaving them without income to repay their student loan debts. Recent studies show that the number of students defaulting on their loans is increasing.

According to the Department of Education, the percentage of graduates who defaulted on their loans increased by 7.2 percent in 2008. The study focused solely on those who secured student loans from the Federal Family Education Loan and William D. Ford Federal Direct Loan programs. Known as the cohort default rate, the figure represents the number of young Americans who began repaying their debt between October 1, 2007 and September 30, 2008 and subsequently defaulted on or before September 30, 2009.

Studies also show that default rates increased across all student loan sectors, with graduates who attended for-profit college experiencing the highest rate of default at 11.9 percent, according to Inside Higher Ed.

Defaulting on a student loan will affect an individual's credit score in the same way that failing to pay a mortgage or other type of debt will lower their ranking. Having negative marks on a recent graduate's credit report at such a young age can significantly jeopardize their future finances. Those with a tarnished credit score may find it more difficult to secure a job or an apartment.

There are many payments options available for recent graduates. Most repayment programs bill the individual a fixed amount that would allow them to repay the loan in a period ranging from 10 to 30 years, depending on which plan they choose, according to FinAid.org. Other more flexible options offer income-based repayment plans, which are dependent upon how much the individual earns.

Young Americans who are having difficulties paying their student loans may benefit from contacting their lender and discussing their financial options. Keeping the lines of communication open and finding a mutually-agreeable repayment alternative may save recent graduates from defaulting and damaging their credit standing.