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Graduates better at paying loans

Improved credit counseling and lower interest rates help account for the drop to an all-time low in defaults.

By Associated Press
Published September 17, 2003

The default rate on federally backed college loans hit an all-time low during the 2001 fiscal year, the Education Department said Tuesday.

The department said 5.4 percent of college graduates who began making payments in fiscal 2001 defaulted on their debt. In the previous fiscal year, 5.9 percent of students with outstanding loans defaulted. Florida had a 7.1 percent default rate.

Tuesday's announcement stands as something of a contrast to two recently published reports that indicate college debt is resulting in long-term financial problems for many Americans. Even so, Education Department officials heralded the 2001 results.

"Some of us have been around long enough to remember when we dreaded these announcements," said Sally Stroup, assistant secretary for postsecondary education. "That is no longer the case."

The peak default rate, 22.4 percent in 1990, occurred before federal legislation curtailed student loan abuse by beauty colleges, truck driving academies and other trade schools.

Department officials attributed the drop in defaults to improved credit counseling, more flexible repayment schedules and low interest rates.

While the 2001 findings do not measure the consequences of major tuition increases imposed by many colleges and universities over the past two years, Stroup does not expect the tuition hikes caused default rates to rise.

"You can only borrow so much money regardless of where tuition goes," Stroup said. "There are limits that can control how much people can borrow."

In addition to loan limits, Mary Mowdy, the executive director of the Oklahoma Guaranteed Student Loan Program, said borrowing on an as-needed basis is key to avoiding devastating post-graduation debt.

"Just because a financial aid office says you can borrow "X' amount of dollars doesn't mean you have to take those dollars," Mowdy said.

Using statistics from schools and lenders, the Education Department's default rate is based on the number of students who go 270 days without making a payment during their first year of repaying a student loan.

In 2001, 5.7-million students got $39.7-billion in federally backed loans.

A Cambridge Consumer Credit Index survey issued this month found outstanding college debt hampered the ability of 68 percent of graduates with student loans to make major purchases like homes or automobiles.

And a poll conducted by Harris Interactive for Collegiate Funding Services, an education finance and debt management corporation, revealed that 55 percent of college graduates are having problems meeting their financial goals because of student loan debt.

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