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.
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.
“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.
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.
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.
Not 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.
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 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.
Rate colleges on “social responsibility,” said the departing chair of the National Association of Student Financial Aid Administrators at the group’s annual conference. Instead of President Obama’s proposed ratings system, colleges should be recognized for educating low-income students, said Craig Munier, who directs financial aid at the University of Nebraska at Lincoln.
The plan, which is modeled on the LEED ratings of green buildings, would assign institutions ratings of silver, gold, or platinum based on a calculation that would take the percentage of a college’s undergraduate students who are eligible for Pell Grants, multiply the number by a ratio of credit hours earned to credit hours attempted, and divide it by the institution’s cohort-default rate.
Part of the goal, Mr. Munier said, “is to create a little public embarrassment” for institutions that are not fulfilling their duty to educate needy students. He jokingly called the plan “Craig’s LEED certification on social responsibility.”
Panelist Marcus D. Szymanoski, manager of regulatory affairs at DeVry University, argued for multiple metrics that would recognize that different students have different priorities.
Community colleges are struggling to pay back their student loans, writes Andrew Kelly in Forbes. While two-year public colleges charge low tuition, the default rate is high.
Only about 20 percent of community college students borrow, and 70 percent borrow less than $6,000. But low graduation rates put even small borrowers at risk of owing more than they can repay.
“Unfortunately, less debt does not equal fewer defaults,” writes Kelly. “And default’s consequences, like wage garnishment and severe credit damage, can hurt borrowers even more than a bloated loan balance.”
Policymakers should turn their attention from total debt to students’ ability to repay, Kelly argues. Income-based repayment plans “try to do exactly this, but they are far too generous to graduate students,” who often have high debts and high incomes.
The “front-end problem” is that “student loan programs encourage attendance at any program, at any college, and at any price.”
That means we subsidize a lot of failure. According to my analysis of the most recent federal data, about 37 percent of loan disbursements in the Stafford and Parent PLUS programs (loans for undergraduates) in 2012-2013 went to colleges with six-year graduation rates that were 40 percent or lower. That’s a lot of loans to people whose chances of finishing a degree are worse than flipping a coin.
What we need are policies that push students toward more effective and affordable options on the front end: better consumer information, income-share agreements, and risk-sharing that gives colleges skin in the game.
The Student Loan Ranger has advice for community college students on how to avoid the debt trap.
Every year, $15 billion goes to “college dropout factories” and “diploma mills,” according to Tough Love, a new Education Trust report. These are four-year colleges and universities in the bottom 5 percent nationally in graduation rates and student loan repayment rates. In addition, some institutions — including some state universities — admit few low- and moderate-income students eligible for Pell Grants. Tough Love proposes linking federal aid, tax benefits and charitable deductions to minimum standards for access and success:
Pell, full-time freshman enrollment: 17 percent
Six-year, full-time freshman graduation rate: 15 percent
Student loan repayment rate (three-year cohort default rate: 28 percent)
Colleges would have three to four years to meet the standards, the report proposes.
“The federal government writes a $180 billion check annually to thousands of colleges and universities using taxpayer dollars to fund schools from the highest performing to the lowest, with virtually no consideration of institutional performance on access, success, or student loan repayment measures,” said Michael Dannenberg, director of higher education and education finance policy and a co-author of the report. “Schools falling beneath the bottom fifth percentile on these measures represent the ‘worst of the worst,’” said Mary Nguyen Barry, higher education policy analyst and co-author. “Establishing goals without consequences . . . won’t protect students from a lifetime of mounds of debt, a meaningless degree, or no degree at all.”
Many for-profit colleges enroll a high percentage of low-income, non-white and adult students. They tend to have low graduation rates and high default rates. However, also in the bottom 5 percent are a number of historically black colleges as well as “minority-serving” institutions with heavy Latino and Native American enrollments. Linking aid to student success would be politically difficult.
Elite universities and private colleges that can’t afford much financial aid tend to admit few Pell-eligible students. These “engines of inequality” have a lot of political clout too.
The Gainful Employment Rule Is Coming For Everyone, warns Edububble. For now, the for-profit colleges are being forced to “generate a real return for their students,” but it won’t stop there, he writes.
Once the world starts getting the bill for Income-Based Repayment, this will be the only choice for the Republic. Come after the source of the pain and that means all of those twits studying cross-disciplinary BioTheater and other overpriced courses like English or even Bio.
. . . There are too many defaults and the government is just going to have to shut down the free money fountain.
The gainful-employment rule applies to career programs at public and private nonprofit colleges, as well as to for-profits. If too many students in a career program default on loans or run up a high level of debt relative to their earnings, that program’s students would lose access to federal student aid. Community colleges, which have a rising number of borrowers and high default rates, are plenty worried about it already.
The U.S. Education Department’s revised proposal is “flawed, arbitrary, and biased,” and will shut millions of students out of college, contends the Association of Private Sector Colleges and Universities, which represents the for-profit sector, reports the Chronicle of Higher Education.
A 100-age report by economists at Charles River Associates, funded by the for-profit trade group, attacked the regulations for using the level of students’ earnings rather than their earnings gains to measure a program’s effectiveness.
While the Education Department estimates 31 percent of students would be affected, potentially losing access to student aid, the report predicts as many as 44 percent would be enrolled in programs that fail the federal test.
Coupled with income-based repayment, the proposed rules would protect programs whose graduates have very low earnings, writes Ben Miller on EdCentral. “Allowing programs to pass solely based on the annual debt-to-earnings measure makes it possible for a program with sub-poverty wages to still avoid failing the metrics.”