Student Loans: Many Flunk Repayment : Congress is taking a close look as the politically sensitive issue grows more rapidly.

Share via

Congress is preparing to tackle one of Washington’s fastest growing--and politically sensitive--education problems: the increasing number of defaults by young Americans on government-guaranteed student loans.

The problem is mushrooming. Over the past five years, defaults on federal student loans have more than doubled. The net default rate--including money that is later recouped--has climbed to 10.3%. And the program has drawn wide criticism for fraud and abuse.

Secretary of Education Lamar Alexander has cited the student loan default problem as a major dilemma for Congress and the Administration. Last year, such defaults cost the government some $3.6 billion--almost half again as much as in the previous fiscal year.


THE BACKGROUND: Experts say part of the reason for the surge in defaults is structural: Although most Americans envision the program as designed mainly to help college students, the loans increasingly are going to finance enrollment in lower-level vocational or trade schools.

Students who attend such institutions often are poorer than most and often have not had experience in handling credit. Some drop out before finishing and cannot make enough to repay their loans on schedule. Others do not earn very much even after graduation.

A breakdown of the overall default rate shows a wide disparity among students in different categories of institutions--from a 6.8% rate for students at four-year public colleges (not including recouped losses) to 32.6% for those at trade and vocational schools.

PROPOSED SOLUTIONS: What to do about the problem has eluded both the Administration and Congress. Washington tightened the program in 1989, ordering schools to warn students about reneging and requiring administrators to ride herd on defaulters more effectively.

And state authorities, who administer the program on a day-to-day basis on behalf of the federal government, have begun seeking court judgments against students who default. Delinquents also are reported to local credit bureaus, blocking them from getting new credit.

But William L. Moran, director of student financial assistance programs for the education department, warns that because of timing technicalities, it could be another year or so before the changes begin to show. “It takes awhile before you see any results,” he says.


Meanwhile, lawmakers have begun pushing through a spate of new proposals designed to tighten administration of the program and tailor the size of monthly loan payments to the amount that a former student actually earns:

--The House Education and Labor Committee already has reported out legislation that would end Washington’s role of merely guaranteeing student loans that are made by banks, and instead have the government begin lending money directly to students.

--The measure just signed by President Bush to extend unemployment insurance benefits contains a new Administration provision requiring students 21 or older to seek credit-worthy co-signers for student loans if they themselves cannot pass a credit check.

--Sens. Paul Simon (D-Ill.) and Dave Durenberger (R-Minn.) have proposed legislation that would direct the Internal Revenue Service to dun borrowers for loan payments along with their income taxes. Again, the amount a borrower paid would be based on what he earned.

But such notions are controversial. For example, the nation’s banks, which would lose another source of income if the government went into the lending business on its own, oppose the direct-loan concept as unworkable.

Ian Macoy, government affairs specialist for the American Bankers’ Assn., says the industry “fails to see any savings to be derived” by having the government rather than banks provide the loans. If anything, he argues, a government-run program actually could cost more.


THE OUTLOOK: College administrators themselves are split on the proposed solutions, with larger colleges favoring direct loans by the government while smaller institutions continue to back the current system.

A bill just approved by the Senate Labor and Human Resources Committee omits any mention of the Simon-Durenberger bill. Chairman Edward M. Kennedy (D-Mass.) says he would rather test the plan as a pilot project than put it fully into effect.

Both houses are expected to take up student aid legislation in January or February.

The Student Loan Problem (dollar figures in billions)

1984 1985 1986 1987 1988 1989 1990 Millions of Loans 3.4 3.8 3.6 3.9 4.5 4.7 4.5 Dollar Amount $7.9 $8.9 $8.6 $9.7 $11.8 $12.5 $12.3 Net Federal Cost $2.3 $3.8 $3.3 $2.7 $2.6 $4.1 $3.8 Net Default Rate 8.4% 8.9% 9.4% 9.4% 9.2% 9.6% 10.4%

Source: U.S. Department of Education