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Missouri College Loan Default Rates on the Rise

December 07, 1999
By: Francie Krantz
State Capital Bureau

JEFFERSON CITY - MU Junior Natalee Boland already has a lot of debt -- car payments, doctor bills, and mounting credit card balances.

"It's ironic, I'm an accounting major, but I have more debt than anyone I know," says Boland.

Add to the list $12,000 in student loans and Boland voices fears she may become one of an increasing number of former students in Missouri that are defaulting on their loans.

Recent statistics from the U.S. Education Department show that while the national default rate has declined in recent years, the number of Missouri college students who are failing to pay back their loans on time is on the rise.

Of those Missouri students who graduated or left school in 1996 and were required to begin payment 270 days later, 9.8 percent defaulted. In the next year, 10.1 percent didn't pay. Beth Ziehmer, an official with the state's Missouri Student Assistance Resource Services (MOSTARS), says this was the first time that default rates have risen in recent years.

"Missouri has been at or just below the national average for the last four years," Ziehmer says. "This is the first year that it has inched up."

MOSTARS is the state's body that distributes government student loans.

The definition of default changed in 1998. Then, students who did not began payment within 180 days were officially in default. Now, students get 270 days.

The default statistics for MU students are significantly lower than the state average, but still reflect the rising statewide figures. The default rate of students who left school in 1996 was 4.3 percent, rising to 5.1 percent for students in the 1997 class.

Joe Camille, director of financial aid at MU, says he's troubled by the rise in student default.

He says one reason that default rates are increasing is that students are borrowing more money than necessary.

"Federal regulations allow students to borrow beyond their calculated need," Camille says. "It is too easy to borrow money now, and some students borrow too much."

Camille says another reason that a large number of students default on their loans is that their income levels are so low after they graduate, they can't afford to repay their loans on time.

In addition, students who owe the most on their loans often do not make high ~enough earnings to offset their debts.

Boland, who plans to also receive a masters degree in accounting and will probably need to apply for more money to do so, says it will probably take her more than the maximum 20 years to repay her loans.

"I have all of this debt, and that's just now, while I'm still living in the dorms," Boland says. "Wait until I get out of college and I have to pay for things like utilities and rent-I'm going to have a serious income adjustment."

One study found that the average accountant, starting out, makes about $30,000 per year. Boland says in order to pay off her debts in a relatively short time period, she'll need to earn a much higher salary.

Most students with lower incomes are embarrassed by the fact that they can't repay their loans. Feelings of inadequacy and guilt often prevent students from contacting their lender, which is another reason that so many are prone to default.

"It's denial," Camille says. "They try to walk away from repaying and don't talk to their lender about it."

Once a student defaults on a college loan, the chances are the student's credit report will be negatively effected, Ziehmer says. Students are subject to having their wages garnished and their tax refunds withheld. A 25 percent collection cost may be assigned, and the student will be reported to at least three national credit bureaus.

In order to protect students from the dangers of default, MOSTARS has instituted a number of programs to educate borrowers on their repayment options.

In 1998, a Default Prevention Task Force, made up of financial aid directors and other education officials from across the state, was formed.

"The task force helps educate schools about keeping students in touch more and keep them in touch with their lender," Ziehmer says. When students are having problems repaying loans, the student and the lender "should just keep talking and make arrangements."

In addition to the task force, MOSTARS has started a program to educate students earlier about the importance of financial management. This October, the agency issued a magazine called "Life101" to high school seniors. Its purpose, Ziehmer says, was to teach students about managing credit card debt, and introduce them to the complexities of paying for college.

For students like Boland, the reality of paying back the loans is setting in. She realizes she will be paying for her college education for many years to come.

"I have interest on top of interest, so I will probably end up paying 25 percent more than I actually owe," she said. "I'm not looking forward to it."