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September 12, 2011 – Although student loans can help finance a college education for many students who need the extra help, studies released today from the U.S. Department of Education show that student loans are increasingly throwing students in over their heads in debt.
“These hard economic times have made it even more difficult for student borrowers to repay their loans,” U.S. Secretary of Education Arne Duncan said in a press release.
The department’s data shows that the default rate for student loans rose substantially between the fiscal years 2008 and 2009. The overall national student loan cohort default rate rose from seven percent to 8.8 percent. Broken down by department, the data indicates that the rate rose from six percent to 7.2 percent for public institutions, from four percent to 4.6 percent for private institutions and from 11.6 percent to 15 percent at for-profit schools.
These rates account for students whose first loan payment was due between Oct. 1, 2008 and Sept. 30, 2009 and who defaulted before Sept. 30, 2010. There are 320,000 students that fall in this category, out of 3.6 million who took out loans at 5,900 different schools.
The increase in students that are unable to pay off their student loans will not only affect the students, but may also cause schools with the highest rates to face federal consequences, such as losing eligibility for federal aid programs.
Based on the data released today, five schools face possible penalties; these schools are those that had a default rate above 25 percent for three consecutive years, a rate that was more than 40 percent in the most recent fiscal year or both. The institutions are: Tidewater Technical, Norfolk, Va.; Trend Barber College, Houston, Texas; Missouri School of Barbering & Hairstyling, St. Louis, Mo.; Sebring Career School, Houston, Texas; and Human Resource Development & Employment – Stanley Technical Institute, Clarksburg, W.Va.
In response to this increase in student default, the U.S. Department of Education has taken new measures to ensure that schools are accurately and extensively informing students about their financial decisions. These protective measures include a college affordability and transparency list, which shows “schools with the lowest and highest tuition and fees, their average net price and those institutions whose prices are rising at a particularly fast rate, and they allow students to compare costs at similar types of institutions,” the press release stated.
In addition to these changes, the department announced that it will begin measuring default statistics based on a three-year period, rather than the two-year one it has employed previously.
For the sixth straight year in a row college loan defaults have risen, according to a Department of Education report.
Numbers released by the Department of Education reveal that of the 4.1 million borrowers that began making payments in late 2009 and early 2010, 9.1 percent defaulted within just two years. This is a 0.3 percent increase in defaults from the 8.8 percent seen one year ago.
“Student loan defaults still continue to plague too many borrowers. The numbers are distressing, and they needn’t be so high,” said Debbie Cochrane, research director for The Institute for College Access & Success, in a USA Today news report.
Experts attribute the default increase to soaring college loan debt, the weak economy, and a lack of borrower education. Unlike previous years where the increase was largely attributed to for-profit colleges, this year’s increase can be blamed on borrowers who attended non-profit colleges. Public college loan default rates stand at 8.3 percent compared to 5.9 percent just four years ago, according to the report.
Surprisingly, for the first time in four years, the two-year default rate for for-profit colleges fell from 15 percent last year to 12.9 percent this year.
For-profit schools have long been criticized for luring in unqualified students while failing to disclose employment and college loan debt rates. In recent years, for-profit schools have implemented new policies that control student recruitment and advertising while changing some financial aid aspects. This may have contributed to the for-profit default rate dropping.
“This is a sign those rules are somewhat successful. All the criticism has lead to these colleges trying to clean up their house,” said Mark Kantrowitz, publisher of FinAid.org and fastweb.com, in a USA Today interview.
Kantrowitz believes college loan default rates have reached their peak and he expects them to drop next year based upon reforms, lower interest rates, and a better economy.
At least one politician joined Kantrowitz in his criticism of the current situation.
“This default data raises serious questions about the quality and value of the education students receive from these schools,” said Sen. Tom Harkin, D-Iowa who led several committee investigations into for-profit educations, in a USA Today interview.
Mortgage loan interest rates were impacted by several industry factors and continued to increase according to this week’s rate reports.
Despite a general upwards trend, over the past few weeks all three mortgage loan interest rates have changed minimally, usually increasing less than 10 basis points per week. Both fixed and adjustable interest rates decreased due to the government shutdown in September, but all three rates have slowly rebounded in the following weeks.
For the week ending Nov. 14, 2013, the 30-year fixed-rate mortgage averaged 4.16 percent, a seven basis point increase from 4.09 percent reported in the previous week.
The second rate change this week is the 15-year FRM which averaged 3.14 percent, a small upswing from last week’s 3.1 percent.
The 5/1 adjustable-rate mortgage, the final mortgage loan interest rate reported, increased only three basis points from 2.74 percent to 2.77 percent.
In comparison to several weeks in September that were mainly influenced by a singular event, the government shutdown, this week’s housing report was influenced by several factors.
One change in the housing economy is the downtrend of down payments. The average down payment in the United States decreased 2.74 percent from the last fiscal quarter, according to a new report from LendingTree. On a national scale, average down payments decreased from 16.1 percent in Q2 2013 to 15.74 percent in Q3 2013.
The three states with the lowest average down payment percentage on a 30-year mortgage loan are Nebraska (12.5 percent), South Dakota (12.8 percent) and Arkansas (12.9 percent). The three states with the highest average down payments are in generally high-cost areas of housing such as New York (18 percent), California (18.6 percent) and New Jersey (18.8 percent).
Average loan amounts also fell. Mortgage loan amounts decreased from $221,694 to $218,343 in the same time period.
The changes are an outcome of looser lending standards according to Doug Lebda, founder and CEO of LendingTree. He said that lenders are adjusting the minimum requirements as an incentive to attract more mortgage loan borrowers.
Lending risks have also decreased.
“When we see lenders accept lower down payments from qualified borrowers, it shows lender confidence in the market and in home values,” Lebda said.
The improved market has created a more positive lending environment, causing approval rates to grow. A J.D. Power report released today found that customer satisfaction with mortgage loan origination lenders has jumped to a seven-year high.
Fixed mortgage loan interest rates changed considerably this week while adjustable rates barely changed, according to rate reports provided by loans.org.
For the week ending Dec. 5, 2013, the 30-year fixed-rate mortgage averaged 4.32, a 14 basis point increase from 4.18 percent set last week.
The 15-year FRM averaged 3.29 percent, another large increase from 3.17 reported previously.
Adjustable rates changed less this week in comparison to fixed mortgage loan interest rates. The 5/1 adjustable-rate mortgage only increased three basis points from 2.73 to 2.76 percent.
Housing permits reached a five year high in October, according to recently released reports from the Commerce Department. New construction applications rose 6.2 percent, reaching a 1.03 million annualized rate. The numbers are the highest since June 2008, right before the housing crash. The large increase signals a strengthening housing market according to Don Frommeyer, president of the Association of Mortgage Professionals.
Another positive change is an increase in property values, which increased the most in the past seven years.
These two changes will be beneficial in aiding the economy in the coming months as the lending market shifts importance from one loan type to another. On Freddie Mac’s recent outlook report, it predicted that there will be a shift from a refinance dominated market to a purchase dominated market.
Grace Keister, an online marketing specialist for First Team Real Estate, said this would be the first time the market has been dominated by new purchases since 2000.
“Refinances have been dominating the market but economists predict home purchase loans will be taking the lead now,” she said.
Changes in mortgage loan interest rates, property values and a shift towards a purchase dominated market should all be supported by the upcoming change in Fed leadership. As Janet Yellen takes over as chairman, many experts believe the market will remain steady, if not improve.
Patrick Palzkill, a real estate broker for Beacon Rock Real Estate and Mortgage, said that Yellen will lead similarly to her predecessors, such as Alan Greenspan and Ben Bernanke, because she has a similar mindset and educational background.
“Yellen is seen as more of a dove and will likely keep rates low to help with unemployment,” he said but stipulated that she will not hesitate to increase mortgage loan interest rates if there are any visible signs of inflation.