Credit Crisis Leaves Defaulted Student Loan Borrowers Stranded

Credit Crisis Leaves Defaulted Student Loan Borrowers Stranded
Lenders Like NextStudent Await a Legislative Fix
PHOENIX, AZ--(Marketwire - March 9, 2009) - Each month, some 15,000 defaulted student loan borrowers join the ranks of those who, despite having brought their defaulted student loans current, are being forced to remain in default and suffer the continuing stain on their credit.
Take the story of Judy Ellis, reported in The Chronicle of Higher Education: After defaulting on her $40,000 student loan, Ellis made the nine on-time payments required to "rehabilitate" her loan -- bring it out of default -- and restore her credit. And yet her loan remains in default.
"I've done what I'm supposed to do, and they're holding me hostage," Ellis said. "I want to make this right, and I want to move on."
Thousands of borrowers like Ellis, despite doing everything in their power to catch up on payments and rehabilitate their student loans, are currently in a default limbo with guarantors, the organizations that insure student loans against default.
Before a defaulted borrower's student loan can be considered fully rehabilitated and the borrower's credit and loan status returned to good standing, the guarantor must resell the borrower's college loan to a new lender. But in the current credit freeze, no lenders are buying.
In November, the sole commercial bank still buying rehabilitated student loans announced it would no longer do so. Although a few non-bank entities may still purchase some of these college loans, 19 of the nation's 35 guarantors currently have no buyers for their student loans.
Each month, the Chronicle reports, $150 million in student loan debt is being added to the growing backlog of student loans awaiting rehabilitation.
Consumer advocates and guarantors are concerned that if something isn't done soon to help move these student loans out of default and restore borrower credit, borrowers may get tired of remaining in default and stop making payments on their student loans altogether -- which would lead to even more, snowballing defaults.
"The last thing we want is for people to pack it in and say, 'Oh, never mind,'" said Michael Ryan, vice president of borrower services for American Student Assistance, the guarantor for Massachusetts.
Although legislation passed last year gave the Department of Education the authority to purchase student loans from guarantors, the new law only authorizes the Department to purchase loans disbursed after 2003, while a majority of rehabilitated loans were issued before 2003.
About NextStudent
NextStudent, www.nextstudent.com, offers a wide range of education finance products and services, including a free online scholarship search engine, links to a network of student loan providers, and extensive information on federally guaranteed parent and student loans, private student loans, and student loan consolidation programs.