‘Gainful employment’ rule drops defaults

Community college leaders like the U.S. Education Department’s final gainful employment rules, which focus on graduates’ debt-to-earnings ratio, but don’t consider default rates.

The new regulations “protect students from predatory programs that lead to high levels of indebtedness,” said J. Noah Brown, president of the Association of Community College Trustees in a statement. “The final regulations contain a critical modification sought by community colleges, and the result is a stronger and simpler framework.”

Because tuition is low, only nine percent of certificate students at public two-year institutions take out federal loans, said Brown. Community colleges feared losing aid eligibility because of high default rates for a small number of students.

However, some consumer groups said the new rules are too weak.

 

“The final gainful employment regulation does not do enough to stop the fleecing of students and taxpayers,” according to the Institute for College Access and Success (TICAS).

Dropping the default rate opens “a giant policy loophole,” writes Ben Miller on EdCentral. The debt-to-earnings measure holds career colleges accountable for their graduates’ success. The default rate included borrowers who dropped out. That’s a large group.

We know that dropouts, especially those with debt, are substantially more likely to default on their student loans, be unemployed and suffer other negative consequences. In fact, dropouts account for more than 60 percent of defaulters. Ignoring these issues could encourage colleges to be judicious about who they allow to graduate and could lead to tactics like giving retroactive scholarships to students who are about to graduate just so they can keep their debt balances down.

Career colleges will be “at liberty to defraud students with impunity, so long as they make sure they don’t graduate,” said education policy analyst Barmak Nassirian.

For-profit career colleges “will feel almost all of the sting from gainful employment,” predicts Inside Higher Ed.  Education Secretary Arne Duncan estimates that 1,400 academic programs with 840,000 students will fail to meet the standards, unless they improve. Ninety-nine percent of those programs are at for-profit colleges, he said.

The for-profit colleges’ trade association said the new regulations are based on an “arbitrary and capricious” metric. “The latest version of the gainful employment regulation has done nothing to fix this fundamentally flawed and misguided proposal,” said Steve Gunderson, president and CEO of the Association of Private Sector Colleges and Universities in a statement.

Broward limits loans to cut defaults

Students at Broward College in Fort Lauderdale, Fla., attend a debt management workshop. Broward is one of 29 colleges that no longer accepts unsubsidized student loans. The effort is part of an experiment to cut down on student loan debt and defaults.
Broward students attend a debt management workshop. John O’Connor/WLRN

“Neither a borrower nor a lender be,” Polonius advised Hamlet. At Florida’s Broward College, financial aid officer Kent Dunston tells would-be borrowers not to borrow more than they need.  The two-hour money-management workshop is required. “You’ll be offered more,” says Dunston. “You don’t need it.”

Starting this year, Broward will not accept unsubsidized federal loans that require students to begin making interest payments immediately, reports NPR. Twenty-eight other community, four-year and online colleges around the country take subsidized loans only to prevent defaults. Broward has gone farther: The college no longer accepts private loans.

About 75 students were in (Dunston’s) class on a recent day, listening as he tells them the story of a young woman concerned about how her $137,000 student debt might affect her chances of getting married.

“That can throw a lot of cold water on a relationship, unless the guy can say, ‘Well, that’s OK baby, I owe $87,000 myself,’ ” Dunston says.

Broward student George Aleman thinks he owes about $60,000 in student loans. The middle-school dropout, who went on to complete his GED, came to Broward already owing that much in debt from a previous attempt at trade school.

The Broward College admissions and financial aid staff “couldn’t believe that I owed so much, and I only have an associate’s degree,” he says.

Aleman is eligible for one more year of loans. After that, he’ll have to pay Broward’s tuition of $2,400 a year and cover his living expenses.

Debbie Cochrane with The Institute for College Access and Success “fears that rejecting unsubsidized loans may force some students to turn to credit cards or other high-interest loans to pay for school and living expenses,” reports NPR.

Broward’s default rate has fallen to 12 percent, lower than the national rate of 13.7 percent.

Colleges get break on default penalties

Only 21 colleges with high default rates — 20 for-profits and one public adult education program — are set to lose access to student aid this year. Many more were at risk. At the last minute, the U.S. Department of Education decided to omit some defaulted loans when calculating default rates

The rate is based on the percentage of borrowers who defaulted three years after entering repayment. Tuesday, the department announced it wouldn’t count borrowers who defaulted on one loan but not on a second loan. In some cases, borrowers must repay different loan-servicing companies, which can cause confusion. The adjustment was made only for colleges that risked losing eligibility for student aid.

It’s a Get-Out-of-Jail-Free Card applied selectively with no transparency, writes Clare McCann on EdCentral. Cherry-picked colleges now have lower default rates than colleges that weren’t at risk of sanctions. “There’s no indication of which institutions benefited, in which sectors, or by exactly how much.”

 Federal regulations already provide opportunities for colleges to appeal their default rates based on a variety of factors, including poor-quality servicing. Why not simply run this process before finalizing the rates, rather than oddly offering up this upfront assistance?

High-default colleges get a break, but students don’t, adds McCann. Borrowers still are considered in default, even if it isn’t counted against their college.

Community colleges and historically black colleges and universities — both with low-income students and high default rates — had lobbied for relief, notes Inside Higher Ed. “On Tuesday, Education Secretary Arne Duncan said he was pleased that no historically black colleges and universities would face penalties for their default rates this year. Fourteen historically black institutions had default rates above the 30-percent threshold last year.”

Default rates fell slightly for community colleges, the Education Department announced. No community colleges face sanctions.

Critics said the last-minute adjustment undercuts accountability.

“If a school isn’t held accountable for a default, then the borrower shouldn’t be either,” said Debbie Cochrane, a researcher at the Institute for College Access and Success.

Representative George Miller of California, the top Democrat on the House education committee, was one lawmaker who pushed for the expanded three-year default rates. He questioned the department’s adjustment to the loan rates on Tuesday.

“Any changes in the student loan system that reduce transparency and consistency may compromise our ability to hold poor-performing colleges accountable,” Miller said in a statement. “The department should be doing everything it can to ensure student borrowers who have defaulted have every opportunity for redress.”

Community college advocates praised the adjustment. “We believe that the department has acted responsibly by not holding financially needy students hostage to the shortcomings of servicers and other parties involved in loan administration,” said David Baime, senior vice president for government relations and policy analysis at the American Association of Community Colleges.

Colleges go after aid-stealing ‘Pell runners”

Police are investigating a $200,000 financial aid scam at the San Francisco Bay Area’s College of Marin, reports the San Francisco Chronicle. Twenty-three people are suspected of posing as online students to collect Pell Grants.

Two faculty members noticed that “several students in their online classes shared the same address and phone number, weren’t participating in online discussions and withdrew soon after financial aid had been disbursed,” reports the Chronicle.

California community colleges give fee waivers to Pell-eligible students and send the entire grant — up to $5,730 — to the student to cover books, living expenses and commuting. “Pell runners” disappear as soon as the check clears. It’s especially easy to scam online classes.

Three men posing as students pleaded guilty in February to stealing more than $1 million in financial aid received through City College of San Francisco, Chabot College in Hayward and Ohlone College in Fremont from 2007 and 2011.

. . .  A ringleader often recruits fake students who allow their Social Security numbers and other personal information to be used to enroll in courses and to apply for federal aid in exchange for a cut of the cash.

Colleges don’t have to repay the stolen money, but loans to scammers — which aren’t going to be repaid — will increase their student default rate.

Fraud rings steal as much as $1 billion a year, estimates the U.S. Department of Education’s Office of the Inspector General.

In the case involving City College of San Francisco, Chabot and Ohlone, the three men created 104 financial aid accounts for fake students, according to a federal indictment filed in the U.S. District Court in Oakland in August 2013.

When students default, colleges pay

If too many students default on their loans, colleges risk losing access to federal student aid, writes Heather Boerner in Community College Journal.  As open-access institutions, community colleges enroll many low-income, first-generation and underprepared students.  So community colleges are developing default management plans.

If students can’t get Pell Grants, “You might as well close your doors,” says Anthony Zeiss, president of Central Piedmont Community College (CPCC) in North Carolina.

Kathy Blau, director of financial aid at Garden City Community College (GCCC) in Kansas, starts the year with a game of financial Jeopardy. Students know Justin Beiber’s ex-girlfriend, but not their credit score, she says. Then she asks how student loan debt can be discharged.

Bankruptcy? Nope. Only permanent disability, death or loan forgiveness through public service apply. And if you don’t pay, the government can garnish your wages.

“That usually hushes the room a little,” she says.

Only about 17 percent of community college students borrow money to attend college, but they’re more likely to default than borrowers who start at four-year colleges and universities. Twenty percent of community college borrowers default estimates the Education Department, compared with 14.7 percent of all student loan borrowers, and that number is rising.

Default isn’t the only problem, says Zeiss at CPCC. “If a student leaves before the end of the semester, the college has to reimburse the Department of Education for the loan.”

CPCC and other North Carolina colleges left the federal Direct Loan program in March to avoid federal penalties for defaults. CPCC hopes to replace federal loans with grants from its foundation’s endowment fund.

“Default rates aren’t destiny,” says Debbie Cochrane, research director at The Institute for College Access and Success (TICAS). “There’s a lot you can do to bring them down.” A new report by the Association of Community College Trustees and TICAS, Protecting Colleges and Students, looks at how nine colleges are reducing defaults.

Bad credit? Proposal eases PLUS loan rules

People who’ve fallen up to $2,085 behind on their debts will be able to take out federal PLUS loans under a proposed regulation relaxing credit requirements reports Inside Higher Ed. In addition, the Education Department will analyze only two years of a prospective borrower’s credit history, down from five years.

In 2011, the Education Department tightened standards for the PLUS loan program, triggering tens of thousands of loan denials due to bad credit.  Leaders at historically black colleges and universities and their allies lobbied hard for looser credit rules, arguing that minority families were affected the most.

Low-income parents can take out Parent PLUS loans without showing their ability to repay the debt. Income-based repayment is not an option.

“The loans are both remarkably easy to get and nearly impossible to get out from under for families who’ve overreached,” reports the Chronicle of Higher Education and ProPublica in The Parent Loan Trap. There’s no check on the borrower’s income, employment status or other debt. There’s no loan cap.

Many of the colleges where students rely the most on Parent PLUS loans specialize in art and music.

Consumer advocates worry that low-income families are taking on debts they can’t repay.  “This loan is not a safe product for low-income borrowers,” said Rachel Fishman, a New America Foundation policy analyst.

Some middle-income parents are deferring retirement to repay their PLUS loans or going into default, the New York Times reported in 2012. Children can’t help out in many cases: Some have dropped out and others have taken low-paying jobs.

The default rate for Parent PLUS loans has tripled in recent years, according to national data. However, remains below the default rates for other federal student loans, reports Inside Higher Ed.

Default penalties worry community colleges

Community colleges could be penalized for high default rates on student loans — even if few students are borrowing, reports Inside Higher Ed. Advocates are seeking changes in the student loan law.

Colleges face tough sanctions — including loss of eligibility for all federal student aid programs — if the default rate exceeds 30 percent for three consecutive years.  That means 30 percent of federal borrowers default within three years of entering repayment, explains Inside Higher Ed. The penalties could be imposed starting in September.

Congress was going after for-profit colleges, many of which have high default rates. But 15 community colleges are at risk with two years of 30+ percent defaults.

The sector’s overall default rate is up to 21 percent, according to the American Association of Community Colleges (AACC). And while only 19 percent of community college students take out federal loans, colleges can still face sanctions if they cross the 30 percent threshold.

Frank Phillips College in the Texas panhandle posted default rates of 34 percent in 2009 and 31 percent in 2010. That represents 58 defaulters out of 186 current and former students who owed on federal loans during the three-year window for 2010. It would take four more students paying off their loans to get the rural college out of hot water. But it looks like the rate for 2011 will exceed 30 percent.

The college hired a default management consultant. Counselors make sure borrowers know about repayment, deferment or forbearance options. But it’s still tough for graduates to find jobs in the weak local economy.

The default rate jumped to 31 percent in 2010 at Lane Community College, in Oregon. It had been 20 percent the previous year. “The jobs weren’t quite there yet, even in nursing,” said Mary Spilde, Lane’s president.

The college is requiring more counseling for borrowers, but can’t deny loans to high-risk students. “We have very limited abilities to say no to students,” Spilde said. “But at the end of the day we’re held responsible.”

Colleges with few borrowers can appeal the penalties. ACCT proposes a “student default risk index” that would kick in before the third year in a report produced with the Institute for College Access and Success (TICAS). The report also calls for letting colleges appeal sooner, automatic enrollment in income-based repayment for delinquent borrowers and improved financial aid counseling.

North Carolina colleges are opting out of the federal student loan program, or considering it, to avoid high default rates, reports the News & Record.

How colleges can prevent default

Protecting Colleges and Students looks at how nine community colleges are helping student borrowers avoid default. The Association of Community College Trustees (ACCT) and The Institute for College Access & Success (TICAS) collaborated on the report.

CDR Report Cover Small for WebNot surprisingly, borrowers who left college without earning at least 15 credits were much more likely to default than more successful classmates at the nine colleges.

The default rate for low-income students varied. For example, Pell Grant recipients — typically with family incomes below $40,000 — were four percentage points more likely to default than non-recipients at one college, while the gap was 20 percentage points at another college.

Only 17 percent of community college students use federal loans, but more than a third of graduates “needed loans to get to graduation,” said J. Noah Brown, president of ACCT.

The report recommends that the U.S. Department of Education provide guidance on colleges’ options for managing student debt, make the National Student Loan Data System more user-friendly, improve counseling tools and streamline loan servicing.

Community colleges should  analyze who borrows and who defaults to inform their default-reduction strategies, the report recommends. In addition, colleges should provide counseling and information to borrowers when they need it and participate in the federal loan program.

Completion, default rates can be misleading

Commonly used college quality measures, such as graduation rates and loan defaults, are inadequate and sometimes misleading, writes Ben Miller, a senior policy analyst for the New America Foundation, on EdCentral.

Completion statistics for community colleges and other two-year-or-less institutions are especially inaccurate, he writes. It’s not just that the federal data misses part-timers and transfers. Completion data also confuses success rates in short-term certificate programs with longer-term associate degrees.

. . . many certificate programs run for no more than a year. These programs thus present fewer opportunities for students to drop out. That’s why colleges that predominantly grant certificates tend to have quite high completion rates and also the reason that for-profit institutions often appear to have better graduation rates than the largely associate-degree-granting community colleges.

A low completion rate is a sign of low quality, but a high completion rate may signify a quick, easy program with very little return on students’ time and money.

Cohort default rates also can be misleading, especially for community colleges with very few borrowers, writes Miller.

For example, Gadsden State Community College in Alabama has a 20 percent default rate but that’s based on five borrowers out of an enrollment of over 8,967. This makes it impossible to draw any conclusions about a college based upon less than 0.05 percent of the college.

On the other side, a low cohort default rate might be just as much an indication of successful loan management than success. The cohort default rate only measures whether students default within a certain time window. Students who default after that period or who are extremely delinquent but never default are not counted in the rate. The usage of income-based payment plans can also distort cohort default rates, since a borrower could be earning such a low income from their program that they have to make little to no payments, making it more difficult to default.

Passage rates on licensure or certification exams, such as in nursing, do measure learning outcomes. However some programs — especially in teaching — ensure a 100 percent pass rate by denying diplomas to students who haven’t passed the exam.

Nearly 1 million lack access to federal loans

Nearly one million community college students nationwide — about 8.5 percent of the total — can’t take out federal student loans because their college doesn’t participate in the program, according to a report by The Institute For College Access and Success (TICAS).

Denied access to “the safest and most affordable way to borrow for college,” some students turn to “more costly and risky forms of borrowing such as credit cards or private loans,” reports At What Cost?  Others reduce their “chances of graduating by working longer hours or cutting back on classes.”

“Most community college students still don’t use loans to pay for their education, but for those who need to borrow, federal student loans can make the difference between graduating and having to drop out,” said Debbie Cochrane, TICAS’s research director and the report’s lead author. “Only 17% of community college students take out loans, but 37% of community college associate’s degree graduates have federal loans.”

Native-American, African-American, and Latino community college students were the most likely to lack access, reports TICAS.

The report takes a closer look at California, Georgia, and North Carolina.

Community colleges can avoid defaults by helping students borrow wisely, argues TICAS, citing Albany Technical College in Georgia.

“Barring access to federal student loans doesn’t keep students from borrowing—it just keeps them from borrowing federal loans, which are the safest option,” said Cochrane.

Community college students could lose access to Pell Grants if their college has a high default rate, said the American Association of Community Colleges in astatement. “Some community colleges are faced with a loss of eligibility later this year.”

If a college participates in the federal loan program, financial aid officers can’t limit loans to students who are unlikely to be able to make loan payments.

If colleges could control overborrowing and not risk Pell eligibility, they’d be more willing to offer federal loans, AACC’s David Baime told Inside Higher Ed.  “We strongly believe that the penalty of losing the Pell eligibility for nonpayment of loans doesn’t make much sense and we wish that policy would be changed,” he said. “The threat of that loss is tremendous, and it’s a very serious concern for colleges.”

Community colleges, along with other types of institutions of higher education, have been pressing Congress to give them the power to limit the amount their students can borrow in federal loans, as a tool to safeguard against overborrowing.

This year, colleges and universities face sanctions for high default rates. A community college in rural Texas could lose eligibility for federal student aid.