Student loan default rates up in Valley

New graduates finding it difficult to get a job.

The Fresno BeeNovember 3, 2012 

More Valley students are defaulting on federal student loans soon after they get out of college, and some of the highest default rates are found at the region's community colleges.

The higher default rates, reported by the U.S. Department of Education, come as college students confront a perfect storm of circumstances. Rising college costs create a need to borrow more money for tuition and other expenses, and a near-stagnant economy makes it harder for new graduates to find jobs.

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From Stanislaus County in the north to Kings and Tulare counties in the south, nearly one in five community college students who took out federal loans defaulted less than two years after leaving college in 2010. That's more than double the 9.1% default rate for all federal student loan borrowers nationwide, and nearly triple California's rate of 7.2%.

The problem isn't that students are dodging their obligations, but many don't have the money to keep up with payments after getting out of school.

"I think most of the people who have defaulted are not proud of it," said William Garcia, associate dean of student services at College of the Sequoias in Visalia. "Most of them would tell you, 'As soon as I get back on my feet and get a steady job, I would love to have the opportunity to pay the loan back.' "

Tied to jobless rate

Most blame the recession that began in 2007 and its continuing effects on the Valley's labor market.

"I definitely think the economy has a big role to play," said Joseph Koroma, financial aid director at West Hills-Coalinga. "Students are taking out more loans than before. Their initial intention is quite clear: 'I'll get a loan and, after I graduate, I'll get a job and start making payments.'

"But unfortunately, it is not always coming out the way students would like it to be. Sometimes they don't even graduate."

Even in the best of times, the Valley has higher unemployment rates than the state and nation. That has only intensified since the recession hit, said Garcia, who is also director of financial aid at COS.

"A lot of these students were taking out loans when the economy was good," Garcia said. "They were told to invest in their education, and when they get out there's a job for them."

But the difficult job market has created a stark new reality.

"No one anticipated this recession lasting this long or hurting us this hard," Garcia said. "Six months after they graduate, those first loan payments are due.

"Those who are unemployed or underemployed are thinking about survival -- a roof over their head, food on the plate or clothes on their back," he said. "When they set priorities, they see student loans as one of the first things to let go."

Because college costs are rising faster than the average family income, many students have little choice but to take out larger loans for college, Heidi Shierholz, an economist with the Washington-based Economic Policy Institute, wrote in a May 2012 economic analysis.

After graduation, they face a tough job market where wages for new graduates have fallen by 5.4% since 2000 when adjusted for inflation.

"For the next 10 to 15 years," Shierholz wrote, "the Class of 2012 will likely earn less than they would have if they had graduated when job opportunities were plentiful."

The default problem isn't confined to public institutions or to publicly funded loans. Some of the highest default rates are at private, for-profit colleges, universities or vocational schools.

San Joaquin Valley College, a private junior college in Visalia with 11 campuses throughout the state, had a default rate of 15.2%. That's lower than a few other schools. But with a larger enrollment and more loan recipients, more SJVC students defaulted on their federal loans than any other private or public school in the Valley. More than 540 who were due to start repaying after leaving the school in 2010 defaulted within two years.

The private, for-profit University of Phoenix is the nation's single largest institution with programs across the country, including a center in Fresno. It also had the most defaults among students who were due to start repaying in 2010 -- more than 41,000 nationally, or 17.9% of its students who had federal loans.

Federal loans aren't the only ones students have trouble managing. Banks and other lenders hold more than 850,000 loans that are in default, according to the federal Consumer Financial Protection Bureau.

Nationwide, student loans have overtaken credit cards as the second-largest source of consumer debt, behind only mortgages. The total amount of outstanding student loan debt is estimated at more than $1 trillion, according to the bureau. About 85% of that is federal student loans.

Costly consequences

The stakes can be enormous for the government. In 2011-12, colleges and universities across the country generated more than 18.8 million federal student loans and distributed about $97.6 billion to students.

The Department of Education can penalize schools if their default rates are too high for too long -- 25% or higher for three or more consecutive years. Among Valley schools, West Hills-Coalinga flitted above that threshold in 2008 and 2010, but dropped below it in 2009. Colleges and universities can be disqualified from participating in the federally backed loans and also cut off from federal student grant programs.

There are also consequences for students who default. While the federal government offers ways to help students manage their debt, including repayment plans or deferrals of payments, problems can mount once a loan goes into default and the entire balance becomes immediately due.

Defaulted loans are assigned to collection agencies and reported to credit bureaus, affecting a student's credit rating for years. The government can seize state and federal tax refunds, and may garnish an employee's wages to collect the debt.

Some students get into trouble because they overborrow. Although the loans are intended to cover education expenses, students can apply for more than they would need for tuition, books and fees. Koroma, the West Hills-Coalinga financial aid director, said some borrow to cover living expenses.

"The way the loans are set up, a student doesn't need a credit check" to qualify, Koroma said. "If they qualify for it, we have to give it to them."

Colleges in federal loan programs must provide counseling to students on borrowing and repayment before students can apply for a loan. Garcia, from Visalia's COS, said that's critical for students.

They might qualify to borrow $3,500, he said, "but we ask them, 'Will $1,000 get you through the year?' " he said. "There's no point borrowing more than you need."

The reporter can be reached at (559) 441-6319, or @tsheehan on Twitter.

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