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.

Fixing federal aid: What’s feasible?

Without federal student aid — loans, Pell Grants, tax credits — higher education would cost less and be less elitist, said economist Richard Vedder in a Nov. 15 speech in San Diego. While fewer people would enroll in college, those who do would be more likely to earn a degree and less likely to end up as sales clerks and bartenders. Colleges would hire fewer administrators.

Vedder recommends seven steps he thinks are “politically feasible.”

First, return the program to its roots: helping poor persons attend college. Right now, over 17 percent of students from families with incomes from $60,000 to $80,000 a year get Pell Grants—these individuals have above median incomes. Over a few years we should tighten eligibility significantly, reducing the number of Pell recipients by perhaps 50 percent.  Similarly, PLUS loans to parents of high income kids should end. Tuition tax credits benefit families whose kids would go to college in the absence of the credit, mostly from above average incomes. Go to a single grant program and a single loan program.

Second, impose academic performance standards to continue receiving grants. Reward students who graduate in less than four years, and cut off aid for, say, students who are in their sixth year of full-time attendance.

Third, he’d get the federal government out of student loans and let private lenders “strengthen the tie between interest rates charged students and market rates.”

Fourth, make participating colleges have some skin in the game. If colleges accept students and promise them Pell grants or guaranteed loans, make them share in the burden of high levels of defaults on loans, or the failure associated with Pell recipients not graduating. This would lead to a needed reduction in lending to persons who lack the aptitude, background, or discipline for college level learning.

Fifth, he’d gear federal aid to the cost of a basic college education from a relatively low cost state university.  Increases would be linked to the inflation rate to discourage colleges from raising tuition to capture increased aid.

federal aid

In step six, Pell Grants would become a voucher for very low-income students tied to academic progress. “Top students could be paid extra for superior academic performance,” Vedder suggests.

Finally, he’d “encourage private investors to begin human capital equity funds.” Investors would pay college costs in return for a portion of the graduate’s future earnings for a set time period, Vedder writes. “A graduate from M.I.T. majoring in electrical engineering might have to pay 8 percent of his income for 12 years, while a graduate in anthropology from Central Michigan University might have to pay 15 percent for 20 years.” These market signals would be useful for students.

Directing aid to low-income students — and away from the middle class — doesn’t sound all that politically feasible to me. Setting performance standards also would generate a lot of resistance.

Link financial aid advisors to retention

Financial aid counselors should “rethink their role in student retention” to help first-generation students, writes Sara Goldrick-Rab on Education Optimists. Helping students succeed should be a “cross-campus effort.”

“Students who have overcome enormous challenges” to get to college often struggle academically, she writes. They must make Satisfactory Academic Progress (SAP) — usually a C average — to retain financial aid.

However, many first-generation students don’t know how to raise their grades and “are ill-equipped to sort out good advice from bad advice,” writes Goldrick-Rab.

They have little external support, experience more family crises, work longer hours, and are often more averse to taking on loans. While they might want to seek out help from others, that help is often offered only during daytime hours when their schedules are packed.  In addition, when told they they should take on loans, they feel alienated and misunderstood.

Financial aid officers, often the first to know a student is in trouble, should sound an early warning. This would trigger proactive efforts to offer comprehensive advising that “integrates academic, financial, and family support.”

El Camino College (California) publishes a report on students who lose aid due to failure to make SAP. More colleges should be “open and honest” about the challenges, Goldrick-Rab concludes.

57% of students get federal aid

For the first time, a majority of undergraduates — 57 percent — are receiving Pell Grants and other federal student aid, reports Libby A. Nelson on Politico. In addition, 41 percent are taking out student loans, up from 35 percent four years ago.

The National Postsecondary Student Aid Study was released days before President Obama starts a bus tour dedicated to talking about holding down college costs.

“Federal grants and loans help students realize the American dream,” said U.S. Education Secretary Arne Duncan, who noted that Pell Grants are going to twice as many college students.

But “increasing federal student aid alone will not control the cost of college,” he added, calling on state policymakers and colleges and universities to hold the line on rising college tuition. “Together we can take collective action to help make college more accessible, affordable, and attainable for middle class Americans across the country.”

Increasing student aid enables colleges to increase tuition, economists argue. “Colleges often deliberately raise their prices when aid is available, in essence ‘capturing’ the aid,” wrote Robert Martin and Andrew Gillen in 2011.

Pell Grant spending has skyrocketed, notes Politico.

About 41 percent of all students received the grant in 2011-12, a 14 percentage point increase. Congress expanded the grant program several times between 2007 and 2009. As the economy faltered and incomes fell, spending on Pell grew from $12.8 billion in 2007 to $35.6 billion in 2011 before falling slightly last year.

For-profit colleges enroll many low-income, minority and adult students who are reliant on federal aid.

More than three-quarters of students at for-profit colleges granting associate or bachelor’s degrees received federal student aid. And an additional 10 percent of students at for-profit colleges granting bachelor’s degrees received veterans’ benefits — a higher proportion than at public or private nonprofit colleges.

Including state aid and college scholarships, 71 percent of students receive help paying for college. Colleges use some scholarship money to help needy students, but just as much goes to academically strong students from affluent families, the report found.

Under pressure from historically black colleges, the Obama administration made it easier for parents with shaky credit histories to take out Parent PLUS loans, notes EduBubble.

Kelly Field at the Chronicle of Higher Education calls this a “victory.” And it is, for the colleges. But what about the students sucking down the outrageous amounts of debt? What about their parents?

These high-interest loans are not a good deal — especially for parents who’ve had financial problems in the past and have kids going to colleges with low graduation rates.

At 514 colleges, defaults exceed graduation rates

Default rates are higher than graduation rates at 514 colleges and universities nationwide, according to an analysis by Education Sector and USA Today. Nearly half of the “red flag” institutions are operated by for-profit colleges and about one-third are community colleges.

 “These colleges should set off a red flag in the minds of prospective student borrowers — and their parents,” says Andrew Gillen, research director for Education Sector, a non-profit, non-partisan think-tank on education policy that gathered the federal data. “Many students at these colleges will no doubt take out loans, graduate and get good jobs. But the high default rates and lower graduation rates suggest that many will not.”

In Debt and In the Dark, a new Ed Sector report, identified colleges where the percentage of borrowers who started repaying loans in 2009 and had defaulted by 2012 was higher than the schools’ graduation rates. At 256 of these, at least 30 percent of students take out loans.

Some 117 for-profit institutions — most offering four-year degrees — made the list. ITT Educational Services, which has 145 technical institutes nationwide, operated 45 of them. In addition, the analysis found 88 community colleges where default rates were higher than graduation rates, though most students don’t borrow and those who do take out small loans.

At New River Community and Technical College in Beckley, W.Va., administrators attribute the 5% graduation rate and 25.7% default rate to several factors, including high unemployment and the residual effect of a period of years when loan amounts were inflated because an incorrect formula for awarding aid was used. That attracted a number of students who had “no intention of completing their education,” says Barbara Elliott, director of public relations. Even for those who did earn a degree, “the payments were so high that they may have had trouble making them.”

The Education Sector report argues that default data would be more useful if it provided information about defaulters, such as whether they also received federal aid for low-income students and which fields they were studying. That would help students determine the likelihood they would default if they borrowed, Gillen says.

Default data should provide more information, including whether which types of students are prone to default and their field of study, argues In Debt and In the Dark. “Given the importance of defaults, and the recent jump in their numbers, it makes sense for the government to provide more detailed information on defaults, not just as an accountability lever but as a basic consumer right,” writes Gillen.

Look at outcomes for all colleges

Federal aid is subsidizing colleges with low graduation, loan repayment and employment rates, writes Judah Bellon on Minding the Campus. Instead of singling out for-profit higher education, regulators should scrutinize the outcomes of all colleges and universities that rely on federal loans and grants.

For-profit colleges enroll more black, Hispanic, low-income and older students than public and nonprofit institutions. Their no-frills programs attract working students who need a flexible schedule, writes Bellon. Technical training is the strong suit of for-profit colleges, which adjust quickly to employer demand.  For-profit students are more likely to complete certificates and associate degrees than community college students.

However, for-profit students are much less likely to complete four-year degrees and much more likely to default on student loans. That inspired the U.S. Department of Education’s attempt to enforce “gainful employment” rules limiting aid to programs whose graduates don’t earn enough to pay back their loans.

Regulate the bad applies, writes Bellon. But don’t single out for-profit higher education. If students are failing to graduate for jobs or unable to pay back their loans, it doesn’t matter if they attended a for-profit, private nonprofit or public institution.

Does college pay? Site shows risks, rewards

Whether college pays — in dollars — depends on where you go and what you study. College Risk Report, a web site created by 29-year-old Jared Moore, asks the collegebound to enter their prospective college or university and their major. It estimates how long it would take to pay off a bachelor’s degree and compares that to the payoff for an associate degree at an “average” community college or a high school diploma.

Forbes asked the site to analyze the time needed to pay off loans for an art degree from a small liberal arts college, Marymount Manhattan.

Earning a four-year degree in art would pay less over a lifetime than getting a two-year degree or “simply being an artist right out of high school,” notes Forbes.  An engineering degree from a state university has a faster payoff and is worth much more than two-year degree.

The site now reports on the cost and value of the “average” community college but hopes to add data for specific colleges and associate degrees.

Frugal students opt for 2-year colleges

In tough times, frugal students are starting at community colleges in Southern New Hampshire and Massachusetts’ Merrimack Valley, reports the Eagle-Tribune in North Andover, MA.

Kaila Nicholson of Kingston wants to join a SWAT team. Dayanna Martes of Lawrence is studying business. Aja Metcalf of Salem is majoring in exercise science.

The Northern Essex Community College students are looking forward to the day when they can start their new careers — without being burdened with thousands of dollars in student loan debt.

Students expect to save at least $20,000 in tuition, room and board by starting their path to a bachelor’s degree at a local community college.

Martes was offered an $18,000 scholarship to Newbury College, but calculated living at home and attending NECC was more affordable.

Nicholson, who is studying criminal justice, said she’s now paying $5,000 a year, compared to $30,000 a year at Southern New Hampshire University, where she attended for one semester.  NECC is smaller and provides more individual attention, she said. “I think it’s a good school and the teachers here are really good,” Nicholson said. “And it’s cheaper.”

Ever since the recession began several years ago, community college officials in New Hampshire and Massachusetts say they are seeing significant increases in enrollment as students and their families struggle to foot the rising costs of higher education.

News coverage of rising college costs has scared students and parents, said NECC spokesman Ernie Greenslade.

New Hampshire graduates owed an average of $32,450, the largest debt load in the nation, according to The Institute for College Access & Success. Massachusetts ranked 14th at $27,181.

Easy money, hard to repay

College borrowers with $75,000-plus in debt say they didn’t understand what they were doing, according to a new report, Lost Without a Map: A Survey about Students’ Experiences Navigating the Financial Aid Process.

“High-debt borrowers often do not have a clear idea about the consequences of the loans they take out, with many experiencing misunderstanding or surprise regarding repayment terms and interest rates,” says the report, by the firm NERA Economic Consulting and the youth advocacy group Young Invincibles.

Only 55 percent said they’d received financial counseling before taking out federal loans, even though colleges are require to provide counseling.

When financial aid falls short, colleges encourage parents to take out federal Parent Plus loans, reports ProPublica in The Parent Loan Trap.

As the cost of college has spiraled ever upward and median family income has fallen, the loan program, called Parent Plus, has become indispensable for increasing numbers of parents desperate to make their children’s college plans work. Last year the government disbursed $10.6 billion in Parent Plus loans to just under a million families. Even adjusted for inflation, that’s $6.3 billion more than it disbursed back in 2000, and to nearly twice as many borrowers.

. . . The loans are both remarkably easy to get and nearly impossible to get out from under for families who’ve overreached. When a parent applies for a Plus loan, the government checks credit history, but it doesn’t assess whether the borrower has the ability to repay the loan. It doesn’t check income. It doesn’t check employment status. It doesn’t check how much other debt — like a mortgage, or other student-loan debt — the borrower is already on the hook for.

If the parent can’t pay the loan, the government can seize tax refunds and garnish wages or Social Security checks. With a few exceptions, Parent Plus loans aren’t eligible for deferment or income-based repayment plans open to student borrowers.

Harkin bill: No aid for ‘worthless’ degrees

Sen. Tom Harkin’s Protecting Students from Worthless Degrees Act, introduced last week, would crack down on one of for-profit colleges’ worse abuses, writes Stephen Burd of New America Foundation on Higher Ed Watch.  No federal financial aid, including veterans benefits, would go to programs that lack the accreditation needed for students to take licensing exams needed for jobs in their fields of study.

During a two-year investigation of for-profit higher education that led to a critical report, committee staff heard from students who’d discovered their certificates or degrees didn’t open the door to jobs. In some cases, students were told the college was accredited, but not told their program was not.

For example, the Senate committee heard testimony from Yasmine Issa, a single mother of twins who completed a training program in ultrasound technology at Career Education Corporation’s Sanford-Brown University in 2008 only to discover from potential employers that the program had not been accredited. . . .  Issa, who paid $32,000 for the program ($15,000 of which came from federal student loans), wasn’t eligible to sit for the licensing exam or to find work as a sonographer.

Students at Bridgepoint Education’s Ashford University complained their online education degrees didn’t qualify them to teach in their home states. Students at Kaplan Higher Education’s online Corcord Law School learned that only one state, California, lets graduates of unaccredited law schools take the bar exam. (California lets anyone take the bar, including those who studied on their own. About 15 percent of unaccredited law school graduates pass, according to my attorney daughter.)

Some for-profit college companies disclose the lack of accreditation “deep in their Web sites or in the fine print within pages of enrollment agreements, while framing the disclosure in terms that prevent students from recognizing the gravity of this issue,”  the report charged.

. . . prospective students who click on the description of the unaccredited veterinary technology program that Sanford-Brown’s Portland, OR campus offers are told that “graduates who have diligently attended class and their clinical, studied, and practiced their skills should have the skills to seek entry-level employment as veterinary technicians.” What’s left unsaid, according to the report, is that students who enroll in this program at the Portland campus are likely to be left stranded because Oregon, like many other states, only allows graduates of accredited programs to take the licensing exam to become certified veterinary technicians.

The law shouldn’t be needed, Burd writes. Last year, the Education Department adopted rules that threaten severe penalties to programs that deliberately mislead students on accreditation.  “But the Education Department doesn’t appear to be too eager to enforce these rules.”