Financial experts urge college students to avoid defaulting on education debt

Posted December 9, 2015

Editor’s note: Total student debt in the United States now tops $1.2 trillion, a financial burden that has wide implications for the economy and society. In a series of stories, student journalists of the Falcon News Service examined what student debt means at the University of Wisconsin-River Falls.

Nearly 14 percent of college students in the United States who in 2011 began to pay back their education loans had defaulted on that debt two years later, according to the federal National Center for Education Statistics (NCES). At UW-River Falls, where four out of every five students receive some form of financial aid, the default rate is much lower.

Financial aid advisers caution that students should avoid defaulting on education loans, and that begins with making smart decisions about where to get money for school.

Anthony Rubis, assistant director of Financial Aid at UWRF, said that students should always apply for a federal loan first.

“The benefits of the federal loan program outweigh the private loan benefits,” Rubis said. “The federal loan programs offer loan forgiveness, loan cancellation and loan discharge.”

When a student enrolls in a university, they should fill out the Free Application for Federal Student Aid (FAFSA). The application determines the eligibility of students for federal aid. The FAFSA is prepared annually and generally should be filled out after the tax season is over. If a student qualifies for federal aid, they are awarded whatever amount they qualified for and that is sent to the university of their choosing.

Federal student loans and private loans differ in many ways. Federal loans do not have to be paid back while the student is in school, but a lot of private student loans require students to start paying while they are still in school. The interest rate on a federal student loan is fixed and is typically lower than private student loans. Private student loan interest rates will vary, but can be seen higher than 18 percent.

Federal student loans can be consolidated into a Direct Consolidation Loan, while private student loans cannot, therefore resulting in paying more interest on more than one loan. Federal loans can be deferred while some private student loans may not offer that option.

Another form of aid that students can be eligible for are grants. Grants are considered “gift aid” and do not have to be repaid like a federal or private loan. Along with scholarships, Rubis said grants are a way for students to minimize their debt and decrease the chances of defaulting on a loan.

The most recent calculated federal default rate on the UWRF campus is 4.3 percent. Rubis said that the default rate is the calculated percentage of borrowers who fail to repay their loans according to the terms of their promissory note.

“The percentage is the amount of UWRF’s federal loan borrowers who entered repayment on certain federal loans during a fiscal year,” Rubis said, “and then default within a three-year period.”

Chad Steger, retail banker at the First National Bank of River Falls, said defaulting on a loan could have many consequences that can affect a student for many years.

“It could be harder to qualify for future loans,” Steger said, “or if you do qualify for a loan you might be given a higher interest rate.”

First National Bank maintains a satellite office in the University Center to service campus customers. However, the bank does not offer student loans.

Steger said the bank works with all loan customers to make sure that people are able to pay back the loans. While the consequences of default could follow someone for life, Steger said that recent college graduates should not be afraid to reach out for help.

“My advice to recent graduates who may be getting into trouble paying back student debt is don’t be afraid to read out to the bank who gave you the loan and ask for help,” Steger said.

According to Rubis, the federal loan program is the same for all students, from all states. Private loans may have their own criteria based on their own rules that they develop for their loan program.

Both Rubis and Steger highly recommend not defaulting on loans, because of the lifelong consequences that can affect the person.

Rubis said that the Financial Aid office reaches out to every student who has a education loan when they graduate.

“We tell them that they need to complete ‘Exit Counseling,'” Rubis said. “Exit counseling provides important information that they need to repay their loans.”

Rubis also said that financial aid counselors are available to help answer questions about repayment of student loans. Typically, with federal loans there is a six-month grace period before any payment is due. This allows time for the recent graduate to find a job before having to start paying back the loan.

Steger said students and recent graduates should create a budget and stick to it.

“This is advice that everyone hears, but few people do and it is the best advice you can get,” Steger said. “Separate ‘needs’ from ‘wants’ and go from there. Once you know what you need to pay each month you can see how much money you have left for ‘wants.'”

Rubis suggested that if a student has the ability to pay off debt while they are in school, they should take advantage of it.

“If a student has a loan that accrues interest while they are attending school,” Rubis said, “making payments towards the loan will decrease the amount interest accruing on the loan, thus a smaller amount of debt to repay when repayment begins.

The best way to prevent defaulting on a student loan after graduation, Steger said, is to minimize the amount of debt that is accrued while in school.

“Working a part-time job while you’re in school or even a full-time job over the summer break is a great way to earn money so you have to borrow less during the school year,” Steger said.

Steger also recommended not carrying a high balance on a credit card and pay off the amount immediately to keep outside costs lower, and therefore, have more money to pay off the student debt faster.

More information about federal student financial aid is available from the U.S. government website