Rules Loom, Report Guides Colleges on Reducing Loan Defaults
Come September, community college officials from around the country will be on the lookout for a specific statistical analysis.
It won’t be fall enrollment figures or how much it’s up or down from a year earlier. It won’t be graduation rates or whether allocations from the state are rising or falling.
The eagerly-awaited number will come from the U.S. Department of Education. It’s the cohort default rate — or CDR — a measure of the percentage of students who are not repaying their student loans.
The number has been closely watched since it debuted in the late 1980s, but never more so than this year. That’s because in 2014, for the first time, the CDR will track the share of student loan borrowers who default on their student loans within three years of entering repayment. Previously, the Education Department used a two-year window.
The change has the potential to cause the CDR at community colleges and other institutions to spike, with potentially dire consequences for both students and for colleges.
When a college’s CDR is too high, it may face severe sanctions that include losing eligibility for Title IV federal aid programs, both loans and Pell Grants. The most recent national three-year CDR, tracking defaults between 2010 and 2012, was 14.7 percent.
For community colleges, the CDR for the same period was 20.9 percent.
Looked at another way, more than 600,000 federal student loan borrowers who entered repayment in 2010 defaulted on their loans by 2012. It takes at least nine months of non-payment to default on a student loan.
Some observers contend rising default rates are inevitable. With increases in college costs far outpacing family incomes or grant aid, more students are using federal loans to cover college costs. Because of a still sluggish economy and the difficulty among recent graduates in finding a job, the percentage of borrowers who default on their student loans is also on the rise.
But a recent analysis by the Association of Community College Trustees (ACCT) and The Institute for College Access and Success (TICAS) argues that high default rates are not inevitable, but can be managed and reduced through sound policy choices.
The report, titled “Protecting Colleges and Students,” analyzed data about who borrowed and who defaulted at nine community colleges across the country. It found that nothing is more important in reducing default rates than college completion.
“Research consistently finds completion to be the most significant predictor of default: borrowers who complete their program are far less likely to default on their loans than those who do not complete. Across the colleges in our sample, program completers defaulted at a rate of just 9 percent. Those who did not complete defaulted at a rate of 27 percent. Borrowers who completed fewer than 15 credits also defaulted at more than twice the rate of those who completed more credits,” the report said.
Community colleges enroll about 40 percent of all college undergraduates. Just 17 percent of community college students take out student loans, but the number is increasing. Even though tuition and fees at community colleges are the lowest of any sector of higher education, the total cost of attending a community college — including textbooks, room and board, personal expenses and transportation — can exceed $15,000 a year, the report said.
“Student loans are vital to the academic persistence and success of many community college students,” said J. Noah Brown, president and CEO of ACCT. “Even though most of our students don’t borrow in any given year, more than a third of those who complete their degree needed loans to get to graduation.”
Defaulting on a loan can have serious consequences for students, the report says.
“Defaulted loans are reported to credit bureaus, causing borrowers to sustain longterm damage to their credit rating. A defaulter may also face difficulty in securing a mortgage or car loan, may have their wages garnished, and their federal income tax refunds and other federal benefits seized. Until the default is resolved, collection efforts continue and the defaulter will be ineligible for additional federal student aid.”
Colleges face sanctions of losing access to Title IV student aid if one of two thresholds is surpassed:
• CDR at or above 30 percent in a single year requires colleges to establish a “default prevention task force” and to develop and enforce plans to reduce student defaults. A college with three consecutive CDRs of 30 percent or higher loses eligibility for federal financial aid, including Pell grants, subject to appeal.
• CDR above 40 percent in any one year can lead to a loss of eligibility to take part in the federal student loan program, subject to appeal.
The potential for such severe sanctions already has prompted some colleges to decline participation in the federal student loan program, leaving a growing number of students vulnerable to being unable to pay for college.
In a separate but related report, TICAS found that nearly a million community college students cannot get federal student loans because their school chooses not to offer them. Without access to federal student loans, students may not be able to stay enrolled without turning to more costly and risky forms of borrowing such as credit cards or private loans, or reducing their chances of graduating by working longer hours or cutting back on classes, the report said.
Community colleges that do not participate in the federal loan program typically cite concerns about high defaults, TICAS found.
Colleges are now searching for ways to reduce loan defaults. Each college must chart its own course in addressing the default dilemma, said Lauren Asher, president of TICAS.
“Defaults are not destiny for any group of borrowers,” she said. “When colleges look closely at who is defaulting on their campus, it’s clear that the solutions aren’t one-size-fits-all.”
The report includes several recommendations and strategies for combating high default rates. They include:
• Making default reduction a campuswide endeavor, rather then confining such efforts to the financial aid office. It makes sense to embrace a campus-wide effort, given the relationship between default and student success and the importance of federal aid eligibility to the institution as a whole.
• Carefully analyze who borrows and who defaults. Data analysis can uncover the unique characteristics and behaviors of a college’s population, and help target _services toward borrowers who need them most.
• Provide counseling and information to borrowers when they need it. Collegespecific data analyses should drive borrower outreach strategies. Specific tactics could include collecting and regularly updating contact information and references from borrowers; and reaching out to default-prone borrowers when they leave campus.
Many colleges already are taking steps to reduce defaults, but more can be done, Brown said.
“Community colleges are understandably concerned about student loan default, and should be applauded for seeking ways to help their students stay in repayment,” he said. “While each college needs its own roadmap to reduce defaults for its unique population, this report provides a compass to point college leadership in the right direction.”
The full report can be downloaded at www.acct.org or www.ticas.org.