Loan defaults decrease with tough penalties

By Michael McVey

Study now, pay later, but you will pay.

At least that’s how the Stafford Loan Program operates on paper. But how close is that ideal to reality, especially at a recession-plagued campus like NIU?

Student loan default rates are unacceptably high nationwide. At least that’s the consensus of many lenders, universities and government officials. In fact, some agencies claim more than 25 percent of the funding for the Stafford Loan Program is used to cover defaults.

Actually defaults at NIU are not common, said Jerry Augsburger, student financial aid office director. In fiscal year 1991 the Stafford Loan default rate was 4.1 percent. First of America in Rockford, a major lender to NIU students, claimed a 1988 default rate of 4.3 percent. Marie Schlieben, supervisor of student loans receivable, said the Perkins Loan default rate was 5.67 percent for October 1993 and it has never been above 6 percent.

Schlieben said the default rates were higher several years ago, but when the government started assessing penalties to unpaid loans, the rates started coming down. Also, exit interviews, in-house collection procedures and legal departments suing for unpaid balances have all held default rates to well under the federal standard of 7.5 percent.

Schlieben said student loans receivable would like to see default rates under 5 percent.

Richard Duellman, vice president of First National Bank in DeKalb, said about five years ago the government responded to increasing default rates with more aggressive collection procedures. During the 80s, easy credit and slack collection ran up the default rate. But in the past five years, despite constant recession and very high unemployment rates among young adult singles, default rates actually have levelled off.

Both the Stafford and Perkins Loan programs offer hardship deferments and forbearances, Schlieben noted, so graduates having difficulty finding work need only inform Schlieben’s office or the appropriate lending agency of their situation. This is discussed at some length in both the initial and exit interviews NIU students are required to attend if borrowing for their education.

Possible consequences of default include, but are not limited to: loss of tax refunds, wage garnishment, collection agencies, poor credit record, lawsuits, demands to pay the entire balance (acceleration) and prosecution.

Augsburger said default rates tend to be low at four-year public universities, moderate at community colleges and high at other institutions such as trade schools. He added NIU is in the lowest tier of default rates among universities nationwide.

About five years ago the government responded to increasing default rates with more aggressive collection procedures.