As college costs continue to rise, so does the number of students taking out student loans: Nearly two-thirds of students attending four-year schools now graduate with debt from student loans. Over the past decade, student debt levels have shot up by 108 percent.

While these numbers are significant on their own, the number of borrowers who are defaulting on their student loans has also skyrocketed to the highest level in over a decade. Preliminary data from the Department of Education shows that federal student loan default rates are coming close to topping 7 percent, compared to 4.6 percent just two years earlier, an increase that’s raising alarms about borrowers’ ability to pay off their student loan debt in the current economy.

"The volume of people in trouble is definitely increasing," said Deanne Loonin, a staff attorney for the Boston-based National Consumer Law Center and consultant for low-income student loan borrowers.

Unstable Job Market Leading to More Student Loan Defaults

Education Department officials warn that while these default numbers are high, they may be just the tip of the iceberg.

This most recent federal student loan default rate is for the fiscal year 2007 and only accounts for students who started repaying their federal college loans between Oct. 1, 2006, and Sept. 30, 2007, and who had defaulted by the end of September 2008. The data doesn’t include borrowers who, unable to repay their federal student loans, have gone into deferment or forbearance or borrowers who have defaulted on non-federal private student loans.

The student loan default rate is poised to climb even higher as the 1.8 million students graduating college next month who are saddled with student loan debt face one of the toughest job markets in over a quarter-century. The national unemployment rate has already broken the 10-percent mark, with regional unemployment ballooning even higher in certain states.

"It’s scary thinking I could have spent $50,000 a year for the last four years and still go back to working at Wegmans, but it’s a reality," Catherine Mendola, a senior at Colgate University, told The Associated Press ("College Grads Face Worst Job Market in Years," USA Today, April 3, 2009).

Debt From Private Student Loans Particularly Troubling

To make matters worse, an increasing number of these soon-to-be graduates will be leaving school with debt from private student loans, which typically carry higher interest rates than federal student loans, along with less-flexible repayment options.

The percentage of undergraduates who took out private student loans in the 2007–08 academic year jumped to 14 percent, up from 5 percent in 2003–04, according to the Project on Student Debt.

Private student loans aren’t required to offer the same deferment, forbearance, or income-based repayment options as federal loans, making it generally more difficult for struggling private loan borrowers to obtain a reprieve from their student loan payments and avoid defaulting.

"Unfortunately, private loan borrowers remain at the mercy of their lenders if they are having trouble making payments in these tough times," said Lauren Asher, acting president of the Institute for College Access & Success, which runs the Project on Student Debt.

And lenders say they’re already seeing signs of trouble.

Sallie Mae, in 2008, wrote off 3.4 percent of its private student loans that were considered "troubled," more than double the figure in 2006. Citigroup’s Student Loan Corp. wrote off 2.3 percent of its troubled private loans in 2008, up from 1.5 percent a year earlier ("Student Loans: Default Rates Are Soaring," The Wall Street Journal, April 21, 2009).

Sarah Kostecki, who graduated from DePaul University in New York two years ago, is doing everything she can to make her $685-a-month payments on her $87,000 student loan debt, but she’s already tapping her lenders for alternate repayment options.

So far, the only assistance her private student loan lenders have offered is temporary interest-only payments, which, although allowing her to pay less each month now, would increase her payments by $200 a month after two years.

"I don’t want that," Kostecki said. "It feels like I’m being punished for having gone to school."