Students at Arizona colleges and universities are defaulting on their student loans at a higher rate than the national average, according to a study by the U.S. Department of Education.
The study found that 14% of students at Arizona postsecondary schools who were scheduled to begin paying their loans in 2013 were in default by the third year of repayment. Arizona’s default rate was tied for seventh-highest in the nation.
The overall U.S. default rate was 11.3%. (See the default rates for all 50 states.)
The study looked at more than 6,000 postsecondary schools in the nation and 98 in Arizona, including private, public and proprietary (for-profit) schools. Among the largest in the state by enrollment, default rates were:
- Rio Salado Community College: 22.4%.
- University of Phoenix: 13.3%.
- Grand Canyon University: 9.2%.
- Arizona State University: 6.9%.
- University of Arizona: 5.6%.
(Click here to search the federal database for statistics by school, city or state.)
Nationwide, public community colleges had an average default rate for 2013 of 18.5%, and proprietary schools were at 15%. For four-year public colleges, the average rate was 7.3%, and for four-year private colleges it was 6.5%.
The default rates for community colleges, vocational schools and for-profit colleges tend to be higher because former students are less likely to have completed their studies or see a boost in earnings, and often can’t keep up with loan payments, according to a report in the Brookings Papers on Economic Activity.
The new report provides a detailed look at default rates, but it may not show a complete picture of the debt burden on students. While the report takes a snapshot of borrowers who are within the first three-year window of their repayment phase, it doesn’t capture those who delay repayment until after the three-year measurement window expires.
Scottsdale financial advisor: Pay back loans but build savings, too
People with college degrees earn more, on average, than those with only a high school diploma. In 2014, the median income of young adults with a bachelor’s degree was $49,900, compared with $30,000 for people who completed high school, according to the National Center for Education Statistics.
However, excessive student loan debt is a major burden for many Americans. It can significantly hamper borrowers’ finances by increasing their overall debt burden and cutting into money they could use for mortgages, retirement and other long-term investments. Total student loan debt was $1.36 trillion as of June, according to the Federal Reserve Board, up from $961 billion in 2011.
We asked Scottsdale, Arizona-based financial advisor Adam Harding about how families can integrate student loans into their financial lives.
How can students and families make sure their loans are a good investment in their future?
To determine whether student loans are a wise investment, consider a student’s career path and earnings potential, then weigh these against the total impact of the loans. Families should also consider the income a student might forgo by entering a four-year degree program instead of going directly into the workforce or pursuing other educational options such as a two-year associate degree or a trade school.
The student and family should understand how much their debt is likely to be, what the monthly payments and terms would be, the career options and expected income for the student’s degree path and the demand for graduates in the student’s desired job field.
How does taking out student loans potentially affect students’ future financial lives?
As student loans enter the repayment phase, the added monthly liability can hurt a borrower’s ability to build an emergency fund and save for major goals like a down payment on a house.
Today’s employment landscape sees significantly greater turnover than in previous periods, so building an emergency fund to draw on during periods of unemployment is increasingly important.
Recent grads may hesitate to enter the housing market because of the recent housing bubble or because they don’t want to commit to staying in one place for a long time. But because of the tax deductions that come with paying a mortgage, it almost always makes more sense to buy a home rather than rent.
What should parents and students keep in mind when taking out student loans?
Under current tax law, individuals and married couples can deduct only up to $2,500 in student loan interest per year, depending on income and filing status. While paying off any debt can be tough, paying interest with after-tax dollars only increases the burden.
If possible, try to keep the student loan debt under the threshold where interest loses its deductibility. One rule of thumb is to divide $2,500 by the loan’s interest rate. For example, if your interest rate is 5%, dividing $2,500 by 0.05 equals $50,000. Keeping your debt below that amount can keep your interest deductible.
This deductible interest limit presents an interesting opportunity for people whose home has appreciated in value to a level that would allow them to refinance. They may be able to pay off student loans with the refinance and essentially swap nondeductible student loan debt for deductible mortgage interest. Tax issues can be complex, so consult with a tax advisor before making a decision.
State student loan default ratesThe 50 states ranked from highest student loan default rate to lowest.
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