Students at Iowa 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 11.9% of students at Iowa 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 87 in Iowa, including private, public and proprietary (for-profit) schools. Among the largest in the state by enrollment, default rates were:
- Des Moines Area Community College: 20.6%.
- Kaplan University: 12.4%.
- Iowa State University: 3.5%.
- University of Iowa: 2.7%.
(Click here to search the federal database for default 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.
Coralville advisor: Don’t borrow more than you absolutely need
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 Coralville, Iowa-based financial advisor Carrie Houchins-Witt 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?
Students and their families need to better understand the average income for the career field the student is working toward. Primarily, students should understand whether the income they’re likely to earn will allow them to make their monthly loan payments and achieve other financial goals, such as buying a house, buying a car, saving for retirement and having a family.
Many schools are notoriously bad at advising their students on this basic cost-benefit analysis, so it’s crucial that the student take responsibility for this research. The internet is chock-full of resources on average incomes by career field — most importantly, the numbers that the Bureau of Labor Statistics issues regularly.
In particular, students should be wary of for-profit schools and always do their own research to confirm any information or statistics these schools provide.
How does taking out student loans potentially affect students’ future financial lives?
I can’t overstate the impact that student loan debt has on students’ future financial lives. That monthly student loan payment will have an impact on major financial goals like buying a car, making a down payment on a house or saving for retirement. If your student loan payment is too big, it will use up money you need for other financial goals and could prevent you from achieving common life milestones.
In addition, a heavy student loan debt reduces your ability to be flexible as your life’s circumstances change. For example, I have some clients who would like for one of the parents to stay home with the children, but they can’t afford that because of high student loan payments. This is heartbreaking for the new parent who has to drop off a 3-month-old infant at a day care center in order to work to pay off student debt, when that parent would rather be caring for the child at home.
What should parents and students keep in mind when taking out student loans?
This may seem self-evident, but parents — and particularly young students — need to understand that they are taking out a loan they’ll have to pay back. I think the actual repayment of student loan debt, the idea that “I’m going to be responsible for making a monthly payment to a lender after I graduate,” is the furthest thing from an 18-year-old student’s mind when starting college.
To compound the problem, college financial aid offices, particularly at for-profit schools, often gloss over projections of students’ ability to repay the loans.
Parents and students need to understand that it’s hard to shed education debt through bankruptcy and that the Department of Education can even garnish money from your Social Security benefits to repay student loans. There really is no escape except death.
Also, I find that many students, especially graduate students, are offered more money in loans than they need to pay for school. They end up taking out loans to pay for vacations, cars or living expenses. Borrow only the amount necessary to pay for your education, and consider other options to pay for other expenses. Can you hold a part-time job while in school? Can you find a couple more roommates?
What options exist to improve the terms of student loan debt?
Researching whether you can get a lower interest rate by refinancing your student loans is a good first step. A lower interest rate can lower your monthly payment and save you money over the life of the loan. Lower interest rates aren’t available through government loan consolidation but may be available through private lenders.
However, converting student loans from public to private may eliminate some of the benefits, such as eligibility for the Public Service Loan Forgiveness Program. Through this program, if you work for the government or a qualifying nonprofit, your loans may be forgiven in full after 10 years of consistent payments. This program can be particularly effective when paired with one of the income-driven repayment plans, which bases your monthly payment on a percentage of your discretionary income.
Other student loan forgiveness programs are available through the military and several states. For instance, Iowa has programs for teachers, health care workers and others.
Another option is to refinance the student loan through a home equity loan, if the student or family has enough equity in the home. The advantage of this kind of refinance is that you may deduct interest on as much as $100,000 in home equity debt from your federal income taxes. The student loan interest deduction is capped at $2,500 and phases out earlier.
What should families do if they find they can’t make payments?
If you can’t make your student loan payments because of a hardship such as a job loss or illness, ask the lender for deferment or forbearance. That would let you postpone payments to avoid defaulting on the loan. The goal is to allow you some time to get back on your feet and improve your financial standing so you can resume paying off the loan.
Use this option judiciously, because interest on the student loan will continue to accrue and may be added to the principal, depending on the type of loan. Also, you must apply for deferment or forbearance and meet specific criteria — it’s not granted automatically.
Are income-driven repayment plans a good option? What should borrowers know about that?
Income-driven repayment plans can be a good option for students and families when the monthly payment under the 10-year standard repayment plan is just too high. The goal of these plans is to better match your payment amount with your ability to pay. Rather than a fixed amount, the payment generally is 10% or 15% of your discretionary income.
The pros of using one of these plans include lower monthly payments, forgiveness of the loan balance after the 20- or 25-year term and a payment amount that will change with your ability to pay rather than with interest rate fluctuations.
However, you’ll pay more in interest over the life of the loan, because the repayment term is stretched out from 10 years to 20 or 25 years. And at the end of the term, you’ll have to pay income taxes on the amount forgiven, unless you’re in the Public Service Loan Forgiveness plan.
State student loan default ratesThe 50 states ranked from highest student loan default rate to lowest.
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