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Student loan defaults on the upswing

19302390New figures from the U.S. Department of Education show that default rates for federal student loans are projected to reach 6.9% for fiscal year 2007–up from 4.6% two years ago–the highest default rate since 1998. And these numbers don’t reflect what’s been going on in the market since 2007, where a weak job market for new graduates and steadily rising tuition costs are likely to add to the misery. “The volume of people in trouble is definitely increasing,” says Deanne Loonin, a staff attorney at the National Consumer Law Center.

Borrowers having trouble repaying their federal student loans can request a forbearance or deferment, which allows them to suspend payments temporarily. (With a forbearance, the borrower must pay the interest that continues to accrue while payments are on hold; with a deferment, the government pays the interest.) Either way, there are limits on the number of times a forbearance or deferment request can be made. Other options include extending the borrowing period or making interest-only payments, but these choices end up costing much more in the long run. Borrowers with private student loans have fewer options. Such borrowers have soared in recent years as limits on federal student loans failed to keep up with skyrocketing college costs. Many private lenders have become more strict about when, and whether, they will grant a forbearance.

In any event, as students borrow ever-increasing amounts to attend college and with the economy shaking off years of excess, look for the number of student loan defaults to increase in the months, and possibly years, ahead.

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