More Sacramento State students are defaulting on their loans than before the economic downturn began, but the number pales in comparison to for-profit colleges in the state.

The Department of Education considers a loan to be in default when at least 270 days have passed with no payments, according to the Project on Student Debt.

Sac State’s cohort default rate, or the percentage of students who default on their loans within two years of beginning to repay them, has risen from 2.5 percent in fiscal year 2006 to 4.4 percent in fiscal year 2009, the most recent year available, according to data released last week by the U.S. Department of Education.

Financial Aid Director Craig Yamamoto said he expected the rate would continue to climb because the economy has yet to rebound. Because the most recent set of data shows students who began repayments in 2009, and the unemployment rate has remained stubbornly high since then, the next several years will probably show higher default rates.

California State University spokesman Erik Fallis said the rates are a symptom of the state’s broader economic problems.

“Certainly if you’re struggling, as a lot of people are in this economy, then any sort of debt obligation would be more difficult to pay back,” Fallis said.

About half of CSU students do not have to pay tuition because they receive federal Pell grants or state university grants because of financial need, Fallis said. While the loan data is troubling, “At least our students who are identified as having the highest financial need are provided for through a pretty generous system in California,” he said.

A comparison of the data among the 23 CSU campuses shows some degree of regional variation. CSU Monterey Bay, for example, has the highest default rate, at 6.8 percent, while Cal Poly San Luis Obispo is at 1.6 percent, the lowest of the system. No University of California campus had a default rate above UC Santa Cruz’s 2.5 percent.

This could be because more students study science, technology, engineering and math fields at Cal Poly, and those students tend to have an easier time finding work that pays well, Fallis said.

These statistics are one indicator of how many students at a given school experience severe economic difficulty relative to other schools, and how easily a school’s graduates are able to find employment that will help them repay their loans.

At for-profit colleges, students tend to default at much higher rates than public institutions. Federal regulators have begun to scrutinize the for-profit college industry as their loan default rates continue to increase.

In 2008, the Obama administration announced that the Department of Education would switch to a three-year default rate instead of two years, like it does now. This change in measurement is expected to produce higher rates, since students are more likely to default within a larger window of time. Starting in 2014, schools with three-year default rates of 30 percent or more for three years in a row face losing their eligibility for federal student aid.

The Sacramento region showed similar results, with for-profit schools posting the highest default rates.

For-profit Carrington College posted the highest default rate at 16.7 percent, but Jennifer Dooley, a spokesperson for Carrington’s parent company, DeVry, Inc., said in an email to the State Hornet that although the data was listed under the Sacramento campus, it was actually an aggregate of student loan defaults from Carrington’s nine California campuses. The other campuses, in Antioch, Citrus Heights, Emeryville, Pleasant Hill, Pomona, San Jose, San Leandro and Stockton, were not listed with the Department of Education. Dooley said DeVry tracked the specific rates internally, but those were not publicly reported.

“Default rates are a factor of the demographic served… many of our students are high need and [the] first generation to attend college,” Dooley wrote. The school’s default rate was less than some public colleges and Carrington is adding financial literacy consultants at its campuses, she said.

The school offers programs in various healthcare fields.

At 16.5 percent, Kaplan College’s Sacramento campus has the highest default rate that can be definitively attributed to the region. Kaplan, owned by the Washington Post Company, has faced scrutiny for its high default rates. At Kaplan’s Sacramento campus, 26 percent of students who began repayment in fiscal year 2008 had defaulted within three years, according to trial three-year default rates released by the Department of Education. A Kaplan representative did not respond to a request for comment.

Even public American River College was not far behind. While the school has a miniscule portion of students repaying loans compared to the size of its student body of about 38,000, the number of students taking out loans to cover community college costs there has risen steadily in the past three years, from 780 entering repayment in fiscal year 2007 to 950 in 2009. ARC’s default rate of 16.4 percent was the highest of any public institution in the region.

Students with a financial need receive a fee waiver from the community college system, called a Board of Governors’ grant. So when students borrow money for junior college, it typically means they have additional financial need the fee waiver does not meet or want to use the funds to help with their living expenses, said Roy Beckhorn, director of financial aid systems at the Los Rios Community College District.

When they default, these students face a litany of problems.

Unlike other forms of debt, student loans cannot be discharged through bankruptcy. Defaulted loans can follow a student for life. The Department of Education, which administers the direct loan program, can have a borrower’s wages garnished and used toward the cost of the loan. The Internal Revenue Service and the state Franchise Tax Board can intercept tax refunds and use them to pay the defaulted loan. Even Social Security checks can be garnished to compel payment of loans.

The worst consequence, Yamamoto said, was that students in default are barred from obtaining any further federal financial aid until the defaulted loan is paid. So a student who drops out of American River College and defaults on his loans must earn money on the back of a partially finished associate’s degree in order to repay the loans and gain access to further financing to continue his education.

Similarly, a student who defaults from a for-profit college like Carrington or Kaplan cannot receive federal aid to attend Sac State until the debt for the earlier loans is taken care of.

It might seem like the only option for students in such dire straits is to win the lottery. But in California, even those winnings are first diverted to pay defaulted student loans.

While the consequences of defaulting are severe, there are programs in place to prevent it, Yamamoto said. The federal government requires institutions to provide entrance loan counseling to students who are borrowing money. At Los Rios, students receive counseling each year, instead of just at the beginning of the loan.

When students leave school, Sac State sends them instructions on how to complete loan exit counseling online.

If the student fails to complete the online course, the school mails them materials, Yamamoto said, admitting that at that point, the financial aid department could not force them to read it. The exit counseling reminds students what the interest rates and terms are for their loans.

Throughout the year, the Financial Aid office seeks to educate students about how the lending process works, and the Student Financial Services Center puts on financial literacy workshops, and other events.

While Yamamoto said Sac State does not have the resources for intensive one-on-one financial aid counseling, reaching out to students at larger events is also effective. Students can receive individual counseling on a drop-in basis at the financial aid office, but are not required to.

If students have trouble finding employment after graduation or dropping out of school, there are ways to postpone payments without allowing a default to occur, Yamamoto said.

Students can work with the lender as soon as they begin to have trouble making payments on the loan. Federal student loans offer deferments for economic hardship for up to three years. At the lender’s discretion, they can offer forbearance – that is, an additional delay in payments to help the student stay current with their loan.

The important thing, Yamamoto said, is to work with the lender before the loan is turned over to a collections agency, which may be less inclined to work out a mutually agreeable solution.

Because it takes 270 days to reach default, students have time to consider their options to avoid a worst-case scenario.

“If the student blows them off or ignores them or makes no effort at all, that’s usually when it’ll go into default,” Yamamoto said.

For now, it is clear that as long as the state’s economic outlook remains poor, there will be problems with student borrowing, Beckhorn said. For students in default, “they’re in an economy where they can’t work,” he said, citing persistent unemployment. “That’s pretty much indicative of our economy today.”