The term “strategic default” was added to the financial glossary during the housing crisis of 2007-08.

It meant homeowners made deliberate decisions not to keep making mortgage payments because they believed foreclosure would ultimately cost less than continued ownership of underwater homes.

Now, the trend is gaining ground among recent college graduates with student loans--but it is impacting certain types of students and schools far more than others.

Nationally, about 14 percent of all federal student loans default within three years after students leave college.

A default generally is declared when a student fails to make timely payments for 270 days, and the consequences are severe including wage garnishment, loss of Social Security benefits, and confiscation of federal tax refunds. Click here to see a full list of default terms and consequences.

What is driving default rates higher?

There are two factors, above all others.

The first is for-profit schools that sell largely online learning and have seemingly infinite ability to attract federal student loans.

Students at the University of Phoenix have received almost $2 billion of federal student loans, according to an analysis by The Wall Street Journal, far more than any other school in the nation, and those students are defaulting at a 19.0 percent rate.

Kaplan University students have received $711 million and are defaulting at 20.4 percent. Devry University students have received $665 million and are defaulting at 18.5 percent, WSJ says.

The second influencer is relatively small private colleges that cater to lower-income students and have low graduation rates. According to WSJ, six such schools in the U.S. have default rates above 30.0 percent, the cut-off point for continuing to qualify for federal financial aid.

In both cases, default rates are highest among students who do not graduate, can’t find work, and don’t feel they received education of value.

They may think they are victims of misguided policies that promoted heavy personal debt loads in return for low-value educations.

They also may believe the federal government will bail them out.

You can check the default and nonpayment rates of colleges in your area or state with an interactive tool provided by The Wall Street Journal: It’s an eye-opener.

“Nonpayment” means students are not in default, even though they haven’t yet made a loan payment within three years of leaving school.

Many nonpaying students are taking advantage of payment deferral provisions in the law, such as Income-Based Repayments (IBRs) and public service work.

Strategic defaults in student loans, as in mortgages, will have long-term negative consequences for the U.S. economy.

Until they are addressed by policymakers, it’s not a bad idea for students with loans to do the following: 1) avoid defaults; but 2) take advantage of any payment minimization or deferral options; and 3) hope for a taxpayer bailout.

As the $1.2 trillion federal student debt mountain keeps growing, the odds in favor of bailouts keep rising.

Instant Insights /

2 factors driving the trend toward strategic defaults for student loans

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