May Exceed $1 Billion for Year; Tougher Rules Planned : Student Loan Defaults Called Alarming

Defaults on government-guaranteed student loans are rising at an “alarming” rate, despite considerable efforts in recent years to force or shame errant borrowers into paying what they owe, Education Secretary William J. Bennett reported Thursday.

In a message to congressional leaders, Bennett said that 11.7% of these low-interest, easy-to-obtain student loans are expected to go unpaid in 1985, up a full percentage point from last year.

Thus, the department estimated, taxpayers will be stuck with $1.17 out of every $10 lent--or a total of $1.09 billion.

Wipeout in Saving Seen

Looking ahead, Bennett said that the defaults will more than wipe out what the Reagan Administration expected would be an $800-million budget saving for student loans in 1986. And, if the “sharp and alarming increase in the default rate” continues unchecked, he said, the cumulative total of student-loan defaults could balloon to $12 billion in five years.

As a result, the department announced that it will impose new regulations next week to try to weed out “casual students,” who otherwise might not take their studies--or their financial obligations--seriously. For example, it will make it harder for students in some states to squander their loan money by making checks payable not only to the student but to the college or university.

Moreover, education officials said that they are contemplating still harsher steps. Under consideration are efforts to make banks partly responsible for the loans they process and to prohibit loans to students with bad credit histories.

Finally, Bennett issued a plea for Congress to pass pending legislation, backed by his department, that would lengthen the statute of limitations for collecting bad loans and require that loans be disbursed in smaller installments.

Rules Called Too Broad

Under federal law, the standards for issuing student loans, which currently average 8% interest, are drawn so broadly that, as one department official put it, “just about anybody can get one.”

That, plus a seemingly lax collection policy in the past, contributed to flagrant and publicized defaults, officials said. Particularly unnerving, they said, was the discovery that large numbers of federal employees who had received student loans were ignoring default notices from the government that issues their paychecks.

Since then, several steps have been taken, among them the docking of 10,000 federal workers’ paychecks to cover outstanding loans. In addition, the names of 16,000 other borrowers have been submitted to the Justice Department this year for prosecution.

In what was perhaps its most dramatic move, the department announced earlier this month that it will impound tax refunds next spring for individuals who are in arrears on student loans.

About 2 million notices of default will be mailed out this year, half by the Education Department and the rest by state agencies. Private collection agencies also have been hired.