With a lingering recession and a terrible job market, students who have left New Mexico colleges and universities have the highest student loan default rate in the United States.

Data from the U.S. Department of Education’s annual report show that New Mexico’s 20.8 percent default rate leads the nation. It’s considerably higher than the 13.7 percent national average and more than 3 points above Arizona’s 18.4 percent, the second highest rate in the country.

The data show that while the national default rate has declined from 14.7 percent last year, New Mexico’s rate has soared from a rate of 12.5 percent two years ago. The state’s rising default rate is baffling, given that New Mexico fully covers many students’ tuition costs through the Legislative Lottery Scholarship program.

Financial advisers with the state’s universities attribute the high rate to the New Mexico’s slumping economy and weak job market. And many say universities can be powerless to lower the rates, as they lack influence over former students who have long since cut ties with them.

“Most of the students are scared,” said David Macoubrie, a vice president for the Inceptia Institute, a third-party group that many New Mexico schools hire to help lower their default rates. “They kind of get lost. They have needed someone to reach out to them. Most we talk to, this isn’t their only problem.”

“There are larger factors that we don’t have control over,” added Brian Malone, head of The University of New Mexico’s financial aid department. “But it’s a reflection on us. We don’t want a higher default rate. We want our students to be successful.”

How federal aid works

Prior to 2010, private corporations such as Sallie Mae and local lending group New Mexico Student Loans would lend money to students and receive federal subsidies to keep interest rates low. But in 2010, Congress passed a student loan reform bill that ended federal subsidies for the banks. Instead, the government started providing student loans directly from the U.S. Treasury. Students seek loans through university financial aid offices, and colleges are held accountable if borrowers default. If a school’s default rate gets too high, the federal government can intervene and even bar any further lending to the school’s students.

It helps to understand how the government calculates the default rate. Student borrowers don’t have to repay their loans while they’re enrolled in school or for six months after they graduate or drop out. The default rate measurement period starts at the beginning of the fiscal year, Oct. 1, when a borrower has started to repay a loan; it includes three full fiscal years. So the recently reported default rate covers students who entered repayment in late 2011.

Borrowers are delinquent on loans if they miss a payment, and they reach default after 270 days of nonpayment. Default comes with a deluge of fiscal and legal consequences. The government can garnish wages, loanholders can sue borrowers and, perhaps worst of all, the student loan debt is likely to increase thanks to late fees, additional interest and other costs. Default also thrashes a borrower’s credit rating, and declaring bankruptcy does not erase student loans.

Some in Congress, notably Democratic Sen. Elizabeth Warren of Massachusetts, are trying to change that, though they face an uphill battle.

New Mexico’s rates

In New Mexico, student loan default rates paint a grim picture. The state’s overall rate is determined by the average of its 30 schools.

New Mexico State University in Las Cruces has the highest default rate in the state for a large public university. Nearly 1 in 5 students have defaulted. The University of New Mexico fared slightly better, with a 13 percent rate, but that rate has risen in the past few years.

Nationally, schools with high student loan default rates tend to be public universities that draw a more diverse mix of low-income and middle-income students, such as Ohio University, 15 percent; Kent State University, 14.7 percent; and Western Kentucky University, 13.7 percent. Those numbers come from the publication Quartz, which ranked New Mexico State as the large public university with the highest default rate. The writer defined “large” schools as those having 5,000 students or more entering loan repayment.

The figures are similar closer to home. Santa Fe Community College, which offers associate degrees, has had a default rate in the low 20s for the past two years. Northern New Mexico College in Española and El Rito climbed to 19.1 percent, up from 16.9 percent. New Mexico Highlands University in Las Vegas rose to 16.2 percent, up from 11 percent. The Santa Fe University of Art and Design has a rate of 11.4 percent, up from last year’s 8.8 percent. The Institute of American Indian Arts fared the worst, with a 34.3 percent rate, up from 27.2 percent. Because of its small student population, however, only 11 IAIA grads and former students were actually in default.

In contrast, St. John’s College, a private liberal arts school, has one of the lowest default rates in the state. It consistently hovers in the 4 percent range.

Notably, the default rates do not indicate how much each borrower owes. Many students in New Mexico who attend public universities use the lottery scholarship for tuition but borrow some money for housing and other costs.

Factors behind default

Amanda Don, a 2001 graduate of The University of New Mexico, earned her theater degree in 2001 with about $20,000 in student debt; that number is now closer to $56,000.

“I feel awful,” Don said. “It’s not good to have this debt hanging around my neck.”

She said she knew right after graduation that paying back the loans would be a challenge. The problem was simple: Albuquerque had plenty of community theater productions, which is great for experience but not great financially. She took on low-paying “survival jobs” and was briefly a substitute teacher until 2004. But she never had enough money to start chipping away at her loans. If she faced a choice of paying rent or paying for a loan, she chose rent every time.

And she received so many calls from so many different collection agencies that she started to avoid them altogether. The ceaseless barrage of calls taxed her mentally. At one point, she said, an agency threatened to sue her. And when she did talk to the callers, she said, they wouldn’t listen to her.

“A lot of these people were not pleasant,” Don said. “They were not going to listen.”

Don said she does want to pay back the loans. Even if she could clear her credit history by declaring bankruptcy, she won’t do it, she said, because she feels responsible for the money.

She said being in default hasn’t really affected her life. She knows she can’t take out another loan. She doesn’t have a car and has no plans to buy one. But she has always been able to find a place to live, and she hopes to find work soon in the movie industry so she can earn enough to whittle down the loans.

Malone said many students have stories similar to Don’s.

Other financial advisers point out that the default rates are skewed by university branch campuses, as is the case both for The University of New Mexico and New Mexico State University. The branch schools are often easier to get into than the main campuses and are decentralized, which makes it easier for borrowers to disappear without getting counseling.

Scott Whitaker, the head of Santa Fe Community College’s financial aid department, blames students’ fears of collection agencies for the rising default rate. Whitaker said instead of talking to agencies that might be able to help lower their payment rates, students avoid the callers, which leads to delinquency and default. Congress’ 2010 reform bill includes a provision that allows students to have a loan payment that’s no more than 10 percent of their income. And those who work in public service can have their loans forgiven after 10 years. But students won’t know this, Whitaker said, if they don’t talk to collectors.

Most administrators agreed that those who drop out of college have a higher default rate than those who graduate. Dropouts still end up with debt, but not the increased earning power that usually comes with a college degree.

Michael Nemelka, president and CEO of New Mexico Student Loans, offered a different explanation for the default rate. He claimed the rate was lower when his agency was in charge of issuing loans on behalf of the federal government prior to 2010.

He said students, who are often first-time and inexperienced borrowers, need a guiding hand that the federal program fails to provide. He said students need attention and help from real people rather than impersonal online systems. Many people would cite the economy as a factor in the rising default rate, but he called it a nonissue, given deferment options and graduated repayment plans.

“We don’t have any local, interactive services assisting borrowers with repayment,” he said. “New Mexico loans need to be serviced in New Mexico.”

Macoubrie said his group had yet to isolate a specific reason why New Mexico graduates are struggling more than others, though he noted that this year’s data likely includes students who started classes in 2008 or 2009, when the recession struck the nation. Macoubrie said that if New Mexico was hit harder by the national recession — and data show the state is coming out of it later — that could affect the default rates.

He also said that schools serving more “disenfranchised” students, like the community college, are prone to higher default rates compared to more selective universities.

“They’re taking a chance on a student who may not be quite as academically prepared,” Macoubrie said. “We need schools to take a chance on people. But they’re penalized at some level if they don’t get the kids through.”

Search for a solution

The colleges’ battle strategies include increased counseling and education, academic cost-cutting and the hiring of third-party firms to track defaulted borrowers.

Ricky Serna, a vice president at Northern New Mexico College, said administrators there have trimmed graduation requirements and cut back on prerequisite classes. If students graduate faster, he said, they’ll incur less debt. He also said the university will streamline how students pay for their education by combining tuition and student fees so there’s less confusion about how much money they actually need.

Similar measures have been adopted at the Santa Fe University of Art and Design, according to its president, Larry Hinz. He said the for-profit university froze tuition rates, which vary from $8,900 to $14,418, depending on the courses, and lowered fees in four of the university’s programs. Hinz said there’s plenty of education for students about the school’s costs.

“If they come in naïve about the costs, we view it as our obligation to make them aware,” Hinz said. “We’re not shy in recommending that students choose another school.”

The Santa Fe Community College has added roadblocks to obtaining loans. Whitaker said students have to get face-to-face loan counseling in contrast to the old system, which only required attending an online seminar. The college no longer lists loans on student financial aid reward letters. That doesn’t mean they’re not available, Whitaker said; it’s a matter of not waving around money that students may not need. Already, fewer students have borrowed, he said.

New Mexico State University and others use third-party firms to help lower their default rate. Vice President Bernadette Montoya said NMSU hired Inceptia, a group that tracks borrowers in default and encourages them to deal with their debts. New Mexico Student Loans runs a similar service for UNM, Highlands and Santa Fe Community College.

NMSU also requires students to wait 30 days before borrowing. Montoya said the beginning of a new semester or year is an anxious time for new students. She said many panic and take out more money than necessary. But forcing them to wait a month could lower their anxiety.

IAIA took the most dramatic approach. It ceased providing federal student loans in 2010, and instead tries to help cover tuition through scholarships and other incentives, said Nena Martinez Anaya. Tuition at the school costs $1,800 a semester.

Groups like Macoubrie’s are looking ahead by offering free financial aid programs for high school students. Financial Avenue, he said, is a free online resource for New Mexico high-schoolers that teaches about financial responsibility. The idea, he said, is to teach students how to avoid debt in the future.

“We’re trying to slow that whole train down,” he said.

Don’t expect any changes in the default rate soon. Given the nature of the data, changes made this year or last year won’t have an effect until 2017 or 2018. That also means it will be a while until the colleges’ efforts have proved successful. But Montoya said students should still make use of the resources available.

“Our families are fortunate to have so many institutions,” she said. “But they have got to take advantage of the help that every institution in our state provides.”

Contact Chris Quintana at 986-3093 or cquintana@sfnewmexican.com. Follow him on Twitter @CQuintanaSF.