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College student loan default rate declines

January 9, 1997

WASHINGTON (AP) _ The college loan default rate appears to have hit a seven-year low, news that President Clinton is likely to use as a springboard to tout proposed tax breaks he says will make higher education more affordable.

In advance of Clinton’s announcement on defaults today, higher education officials predicted the fiscal 1994 rate would be reported at around 10.5 percent _ the lowest since the Education Department began reporting it in 1988. The high was 22.4 percent in 1990.

The default rate, they say, has declined because of a crackdown on delinquent borrowers by Congress, the Education Department, schools, lenders and student loan guarantors.

Many trade schools that had high default rates have been expelled from national student aid programs, and rules now allow wages to be garnisheed or tax refunds withheld from defaulters.

Also, more students are being counseled about their loan responsibilities, more flexible repayment options are being offered and technological advances have helped track borrowers.

``The underlying number behind the drop in defaults is really the sharp increase in the amount of defaults prevented,″ said Mark Cannon, director of the Coalition for Student Loan Reform.

The coalition is a group of nonprofit guarantors and secondary markets in the traditional guaranteed loan programs. The default rate being released today does not include money lent under the Clinton administration’s new direct loan program. Under direct lending, the Education Department, not banks, collects repayments.

The department says the volume of student loans rose from $12.3 billion in 1990 to $23.1 billion in 1994, because of more borrowers, and in some cases, larger loans.

However, the amount of money collected on defaulted loans doubled from about $1 billion in 1992 to $2.2 billion in fiscal 1996.

``This administration has tightened up on weaknesses in the system, and defaults are down,″ said Dave Merkowitz, a spokesman for the American Council on Education, which represents colleges and universities, ``Now, they’re addressing need.″

Clinton has proposed two tax breaks to help students from middle-income families afford a college education:

_Hope Scholarships to make two years of college or vocational training as accessible as high school. In the first year, students or their parents would receive a $1,500 tax credit. Those whose taxes amount to less than that amount would get a check from the government. A second $1,500 credit would be available if the student earns a B average and is drug-free.

_Up to $10,000 annual tax deduction for tuition costs for students not using the tax credit.

Not everyone, however, favors the plans.

Brett Lief, president of the National Council of Higher Education Loan Programs, said he would rather see more support for Pell grants offered to low-income students and campus-based student aid like work-study programs.

Ed Elmendorf, vice president of governmental relations for the American Association of State Colleges and Universities, said neither plan gives new benefits to the neediest students and they provide relief only after tuition bills are paid.

The use of the B average puts needy students at a further disadvantage, puts the government in a position of having to verify grades and could cause grade inflation because instructors would not want to disqualify students from getting Hope scholarships.

Other officials worry states might cut higher education funding if they thought the federal government was helping to offset costs through the tax system. That could push tuition even higher.

Tuition at public four-year colleges and universities rose 234 percent between the 1980-81 and 1994-95 school years, the General Accounting Office reported. That compares with an 82 percent rise in median household income.

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