Here's Why the Student Loan Crisis Is Far From Over

Although the latest data from the Department of Education appears to indicate that the worst of the student loan crisis could be over, there's still reason to believe that student loans will continue to threaten college graduates' finances for years to come.

The Department of Education last month released its annual look at default rates on student loans that have been in repayment status for three years. Looking at student loans that entered repayment in the government's 2011 fiscal year, the official three-year default rate fell to 13.7 percent. With the rate down a full percentage point from the previous year's figures, many reports praised federal efforts in making it easier for student borrowers to avoid default.

In addition, rates fell for all three classes of schools: private schools, public schools and for-profit institutions.

Why Student Loans Are Still a Problem

Yet when you compare how different types of schools fared, it's clear that some student borrowers are in greater danger than others. Among private schools, default rates came in at just 7.2 percent, down a full percentage point from the previous year. Public school default rates eased down a tenth of a percentage point to 12.9 percent. For those attending for-profit schools, however, even a dramatic improvement to 19.1 percent from 21.8 percent the previous year shows just how much greater the risk of default is for students of those institutions.

In addition, just because technical default rates are low doesn't mean that the finances of the typical student borrower are healthy. To count as being in default, a student has to have missed payments for roughly nine straight months. Measured so soon after graduation, that definition leaves out a huge number of struggling graduates who manage to avoid technical default yet are still in danger of falling behind on their loan payments over the long run.

Secretary of Education Arne Duncan stopped well short of declaring victory on the student loan front, noting that "the number of students who default on their federal student loans is still too high, and we remain committed to working with postsecondary education institutions and borrowers to ensure that student debt is manageable." The news release detailed initiatives designed to make student loan burdens easier to manage, including ceilings on monthly payments and programs providing flexible loan repayment plans.

The Missing Link to Student Loan Financial Sustainability

Such measures will inevitably reduce default rates. But the real problem facing students and graduates is that they've taken on too much debt in the first place. Reducing minimum payments on those loans can make it easier for struggling graduates to make those payments, but it will only result in their remaining in debt for longer periods. Initiatives like income-driven repayment plans partially address the issue by capping repayment periods at 20 to 25 years, but that leaves taxpayers on the hook for forgiven loan amounts.

The most sustainable solution for student borrowers is to educate themselves about how much debt they can realistically afford to take on. Too often, the dream of attending college leads students to borrow far more than their likely post-graduate employment prospects will support. The Department of Education mentions efforts to require career colleges to prepare students more effectively to get good-paying jobs, but part of the onus also has to be on students to be pragmatic about their long-term prospects.

In the end, the best way to avoid high student loan default rates is to have students never borrow more than they can afford. As long as policies take for granted the idea that students have to take on huge amounts of debt, then the danger of a continuing student loan crisis won't go away.

You can follow Motley Fool contributorDan Caplingeron Twitter@DanCaplingeror onGoogle+. To read about our favorite high-yielding dividend stocks for any investor, check outour free report.