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California Students Default Less Than US Average on Student Loans

Dec. 15, 2016
Loans, Student Loans
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Students at California colleges and universities are defaulting on their student loans at a lower rate than the national average, according to a study by the U.S. Department of Education,

The study found that 10.4% of students at California postsecondary schools who were scheduled to begin paying their loans in 2013 were in default by the third year of repayment.

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 604 in California, including private, public and proprietary (for-profit) schools. Among the largest in the state by enrollment, default rates were:

  • City College of San Francisco: 18.7%.
  • East Los Angeles College: 14.2%.
  • Santa Ana College: 11.7%.
  • Diablo Valley College: 10.8%.
  • San Francisco State University: 4%.
  • San Jose State University: 3.7%.
  • University of California, Berkeley: 2%.
  • University of California, Los Angeles: 2%.
  • University of Southern California: 1.7%.
  • Stanford University: 0.7%.

(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.

>> MORE: Student loan default: What it means and how to deal with it

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.

San Francisco financial planner: ‘Harder for many to justify the cost’

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 San Francisco-based financial planner Kyle Morgan 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?

A college education can be one of the best investments a person can make, though it’s becoming harder for many to justify the cost. Higher-education costs have been rising faster than inflation for decades, so it’s no wonder many potential students face the same question: “How will I afford college?”

Ideally, families should think out their college funding strategies years in advance. Student loans provide access to money for college, but they come at a cost. I suggest first exploring alternative options, including self-funding, grants, scholarships and other financial aid. Then use loans to supplement your costs, if you have to.

Students should also focus on colleges they can afford, which may mean attending a school in their state of residence. Each state runs its own public university system. Public, state-run universities are partly funded with taxes paid by the residents of that state. For that reason, tuition for state residents is typically much cheaper than for out-of-state students. California residents who decide to stay in state for college are lucky to have some of the world’s most prestigious public schools to choose from.

If student loans end up being your only option, focus on getting the best return on your education spending by excelling in a major that’s in demand in the job market. A degree in a desirable major will help you land a job that pays well, and a good salary will let you focus on paying off your student loan debt as quickly as possible.

How does taking out student loans potentially affect students’ future financial lives?

If you’re spending a lot of money to pay off student loans after you graduate, you’ll miss out on having that money go into other important buckets, such as an emergency fund or retirement savings.

Let’s say you leave college with $50,000 of student loan debt with an interest rate of 6%, a loan term of 10 years and a monthly payment of $555. At the end of 10 years, you’ll have paid back $50,000 in principal and $16,612 in interest, for a total of $66,612.

If, instead, you invested $555 at the beginning of each month for 10 years at an 8% interest rate, you’d have $102,165. That’s a huge swing, and a great start to building a retirement nest egg.

The burden of student loan debt may also affect other big decisions, like taking a trip, getting married, buying a home or having children.

What should parents and students keep in mind when taking out student loans?

First, determine who will take the loan: parents, student or both. Then determine which loan is the best fit based on your needs.

For whichever loan you choose, make sure you completely understand the terms before signing. For instance, many parents don’t know that a federal parent PLUS loan has much less flexible repayment and forgiveness options than PLUS loans taken directly by the student. Also, federal student loans typically have lower interest rates and more flexible payment options than private loans. Federal student loans require the borrower to complete the Free Application for Federal Student Aid (FAFSA).

Make sure you understand how important it is to pay back your loans. Defaulting on your student loan debt could have serious consequences for your financial future. Delinquent payments or loan default will cause your credit to suffer, which could affect your ability to rent an apartment, sign up for utilities, get a cell phone, be approved for other loans — and even get hired for a job.

Student loan default can lead to wage garnishment, in which the federal government takes a percentage of your paycheck every month. If you think filing for bankruptcy would make your student loans disappear, think again. Student loan obligations, private or federal, generally aren’t discharged in bankruptcy.

Take a step back and think about all your options. If you’re having trouble deciding what’s best for you, consider seeking help from an expert such as a financial planner or an independent college consultant. They may help you identify solutions you weren’t aware of.

What options exist to improve the terms of student loan debt?

Many companies offer programs for refinancing student loans. Current interest rates are low, which means you might be able to refinance to a lower fixed interest rate and save thousands of dollars over the life of the loan. To participate in these programs, typically you must have good credit.

Also, most student loans allow for early repayment. Making extra principal payments on your loans will lower the total amount of interest you pay.

What should families do if they find they can’t make payments?

Start with an audit of your personal spending to see if you can lower or eliminate expenses. Everyone has basic needs such as shelter, clothing, food, electricity and heat, but you may have to cut spending on other, less important items in the short term to make your student loan payments.

If you own a home and have equity, consider taking a home equity line of credit to pay off the school loan, if the interest rate would be lower than that on your student loan.

Alternatives include loan consolidation or modified repayment plans. Loan consolidation can lower your monthly payment by stretching the amount you owe over a longer repayment period.

Depending on the type of loan, you may qualify for the Pay As You Earn or Income Contingent Repayment plan. Deferment or forbearance of your loans is available under certain circumstances and allows you to postpone or reduce your federal loan payments.

Are income-driven repayment plans a good option? What should borrowers know about that?

Income-driven repayment plans may be available as a modification to your existing federal student loan. They allow you to cap your monthly payment based on a percentage of your current income and household size. The downside: The term of your loan is extended, so the lower payments can lead to greater interest payments over the life of the loan.

Some income-driven plans offer loan forgiveness after a period of time — typically 20 to 25 years — but the amount forgiven is taxable as income, which can be an unexpected shock come tax time.

Kyle Morgan is an associate financial planner with Mosaic Financial Partners in San Francisco.

State student loan default rates

The 50 states ranked from highest student loan default rate to lowest.
RankingState Percent defaulting on student loans
1.New Mexico18.9

West Virginia16.2
12.South Carolina13.2
16.South Dakota12.3
22.North Carolina11.6
41.New Jersey9
45.New York8
46.Rhode Island7.9
47.New Hampshire7.8
49.North Dakota6.5