Student loan default rate creeps higher

NEW YORK (CNNMoney.com) -- College isn't paying off for everyone: An increasing number of graduates are defaulting on their student loans -- with the worst offenders coming out of for-profit schools.

The overall default rate on federal student loans climbed to 7% in fiscal 2008 from 6.7% a year earlier, the Department of Education said on Monday. That's the highest since 1997, when the rate stood at 8.8%.

Of the 3.4 million students that were due to make their first loan repayments between Oct. 1, 2007 and Sept. 30, 2008, more than 238,000 defaulted before Sept. 30, 2009.

Graduates of public colleges defaulted at a rate of 6%, up from 5.9% a year earlier. Students coming from private schools had a 4% default rate, up from 3.7%. The default rate for borrowers at for-profit schools, however, rose to 11.6% from 11% a year earlier.

"This data confirms what we already know: that many students are struggling to pay back their student loans during very difficult economic times," said U.S. Education Secretary Arne Duncan in a statement.

During a recession, the job placement rate declines, so recent grads can't start repaying their huge debts, said Mark Kantrowitz of Finaid.org.

"Those with a college degree are better off than those without them, but unemployment for everybody is about twice what it was before the credit crisis," he said.

The Education Department's Duncan said that the data also shows that "students attending for-profit schools are the most likely to default."

Students at those institutions represented only 26% of the borrower population, but accounted for 43% of all defaulters.

"While for-profit schools have profited and prospered thanks to federal dollars, some of their students have not," Duncan said. "Far too many for-profit schools are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use. This is a disservice to students and taxpayers, and undermines the valuable work being done by the for-profit education industry as a whole."

The state with the highest default rate of 10.9% was Arizona, which is home to the Apollo Group's (APOL) University of Phoenix, the largest for-profit institution.

Earlier this summer, the Obama Administration and the Department of Education proposed a set of rules to protect students from "misleading and overly aggressive recruiting practices" at for-profit schools and from debt they cannot repay.

The Department of Education is in the process of developing final regulations and is expected to publish rules in the coming months.