Nebraskans and Iowans are in the thick of what many are calling the next big debt crisis: student loan default.
The U.S. Department of Education says 5.6 percent of Nebraskans defaulted on their federal student loans in 2009, the most recent year for which numbers are available. Though well below the national rate of 8.8 percent, it still is an increase from 5 percent in 2008 and 3.9 percent in 2007.
Iowa's default rate in 2009 was much higher: 11.5 percent. The year before, it was 9.9 percent; in 2007, 8.2 percent.
Total outstanding student debt in the United States has passed $1 trillion, more than the nation owes on credit cards. Student loans are now the second-largest source of U.S. household debt behind mortgages.
Heather Doe, a spokeswoman for the Iowa College Student Aid Commission, said Iowa's higher rate might be due to the significant number of community colleges in the state, 15, compared with five in Nebraska. Vocational schools in Iowa also factor in.
Even though tuition in those institutions is typically lower than at four-year universities, more students who enroll in them quit school before they earn a degree or certificate.
"It makes more sense when you consider that community colleges have a more transient base of students," Doe said. "If they leave without completing a degree, they can really struggle with finding a job and paying off the loans."
Community colleges and for-profit vocational schools in both states had the highest rate of defaults. State universities and private colleges had the lowest.
The rising default rate is part of the fallout of a growing debt load.
Average U.S. student debt has topped $25,000 for the first time. Graduates in 2010 had an average student-loan burden of $25,250, up 5.2 percent from the $24,000 owed by the class of 2009, according to a report by the Project on Student Debt at the Institute for College Access & Success in Oakland, Calif.
For the Class of 2010, the average debt for Iowa graduates was $29,598, up from $28,883 in 2009. In Nebraska, that number actually fell a bit, from $22,361 in 2009 to $21,227 in 2010.
Craig Munier, director of the University of Nebraska-Lincoln's Office of Scholarships and Financial Aid, said Iowa's average student debt load might be higher because the state has more private schools than Nebraska. Private colleges and universities tend to cost more.
Students generally have a six-month grace period once they leave college before they must begin repaying loans. Student loans are considered in default if they go unpaid for 270 days beyond that grace period — much longer than the typical 90 days for most consumer loans. Student loans can't be discharged through bankruptcy.
The number of loan defaults nationally and in the Midlands grew from 2007 to 2009, as the recession hit and unemployment figures climbed.
Between 2008 and 2009, about 3.6 million students nationwide started paying back their federal student loans. Of those, about 320,000 had defaulted within two years. The figures do not include default rates among private student loan lenders.
"These hard economic times have made it even more difficult for student borrowers to repay their loans," U.S. Education Secretary Arne Duncan said in a statement.
Sheila Johns, financial aid director for Western Nebraska Community College, said the school works closely with students to make sure they understand their student loan obligations. Even so, the college — with campuses in Scottsbluff, Sidney and Alliance — saw a default rate of 16.1 percent.
Default rates varied among private and four-year schools in Nebraska and Iowa.
Fewer than 2 percent of Creighton grads defaulted on their federal student loans, compared to 5.3 percent at the University of Nebraska at Omaha and 2 percent at UNL.
The rates were higher at Peru State (8.7 percent) and York College (10.2 percent).
In Iowa, 2.6 percent of Iowa State University students defaulted. At the University of Iowa, it was 1.9 percent. Grinnell College's default rate was 1 percent, while Drake University's was 2.2 percent.
"Any default is more than we want to have," said Marshall Hill, executive director of the Nebraska Coordinating Commission for Postsecondary Education. "We generally believe that the figures are the result of economic difficulties we've had over the years, even though Nebraska wasn't hit as hard as other states."
Help may be on the way. Last month, President Barack Obama issued an executive order reducing loan payments and helping borrowers consolidate some loans. The order does not require congressional approval.
Obama's plan speeds up by years implementation of a federal law to cap the required payment on student loans at 10 percent of annual income, down from 15 percent. Remaining debt will be forgiven after 20 years, instead of the current 25.
Borrowers with at least one loan from each of the mostly private Federal Family Education Loan Program and the separate Direct Loan government program will be able to consolidate loans at an interest rate of up to a half-percentage point less than they can today.
Only borrowers with accounts in good standing will be eligible. Many eligible for consolidation will receive notice in early 2012 from the U.S. Department of Education.
Despite the president's announcement, college and university leaders are concerned.
Hill said his agency has appealed to the Nebraska Legislature to try and help make more student aid available to would-be college students, so they don't have to take out as many student loans. But with state budget cuts, that's been a difficult sell to lawmakers.
"Accumulating a great deal of student debt is really a problem for people," Hill said. "They're starting their lives, and this is an obligation that follows them."
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