Report: Community Colleges That Don’t Participate in Federal Loan Programs May Put Students At Risk

By Brittany Hackett, Communications Staff

Nearly one million community college students in the U.S. are unable to receive federal student loans because their institutions choose not to participate in the federal programs, leaving many students “between a rock and a hard place” when trying to finance their education, according to a new report from The Institute for College Access and Success (TICAS).

In 2013-14, 8.5 percent of community college students were enrolled in institutions that do not participate in the federal loan programs, representing about one million students in 30 states. More than 10 percent of community college students in 11 states lacked access to federal loans, with more than 20 percent lacking access in seven states. 

Access to the federal loans among community college students varied by race and ethnicity, with 10.5 percent of Latinos, 12.4 percent of African Americans and 20.1 percent of Native Americans lacking access. In comparison, only 7.5 percent of White and 4.5 percent of Asian-Pacific Islander students lacked access to the same funds. Community college students enrolled in schools in non-urban areas were also more than twice as likely to lack access to the federal loan programs as their counterparts in urban areas.

Many community colleges that opt out of the federal student loan programs cite an inability to prevent students from overborrowing and concerns about loan defaults. Students who attend these institutions are forced to turn to other, potentially less secure, forms of borrowing like private loans and credit cards, according to the report. In addition, they may need to work longer hours to pay for their education and expenses or reduce their course load each term, thereby reducing their likelihood of completion. 

“[C]ommunity colleges are right to be concerned about whether students are borrowing and defaulting unnecessarily, but they are wrong to believe that their only option is to stop offering loans,” the report states, adding that “developing thoughtful and appropriate loan practices … will help current and former borrowers alike make wise borrowing decisions and avoid default – as well as protect students’ access to aid.”

In the report, TICAS outlines several recommendations the Department of Education can take to improve students’ access to federal student loans and reduce default rates at the community college level, including: 

  • Publishing colleges’ borrowing rates alongside colleges’ cohort default rates (CDRs) to help put CDRs in the correct context;
  • Allowing colleges to certify that their borrowing rates are sufficiently low to allow for a Participation Rate Index appeal; and
  • Allowing colleges to appeal sanctions in any year where their CDR exceeds allowable thresholds.

In addition, community colleges should continue or begin offering federal student loans and counsel students on the benefits of federal student loans compared to private loans. “Responsible default management plans and entrance and exit counseling, combined with flexible repayment options and loan forgiveness programs, make federal loans relatively safe for both schools and students,” the report states.

NASFAA has examined this issue as well in a number of contexts. One reasons colleges have cited for not participating in the loan programs is the link between high default rates and eligibility to participate in the Federal Pell Grant Program. Many students are able to finance their studies at community colleges with only Pell Grant funds or through a combination of Pell Grant and employment. For those students, borrowing loans may be a convenient source of extra funds but not a necessary one. Nevertheless, students who truly need to borrow are penalized by federal law that provides inadvertent disincentives for their institutions to participate. 

To help address this issue and those presented by the TICAS report, NASFAA’s Higher Education Act reauthorization recommendations include disassociating institutional eligibility to participate in Pell Grant from loan default rates, and allowing schools to limit borrowing by academic program and categories of students, without having to invoke case-by-case professional judgment.

Are you interested in more information on this topic? Join NASFAA on Wednesday, July 23, 2014 from 2:00 to 3:00 PM EDT, for a complimentary webinar to discuss institutional default rates and participation in the Direct Loan program. The webinar, "Tough Choices: Tackling Loan Indebtedness at Low-Cost Institutions," will feature one institution that chose to leave the loan program and one institution that was considering doing so, but decided to stay in the program. In addition, NASFAA’s staff will highlight potential policy solutions and related advocacy work. Register today to save your seat! NOTE: The current upgrades and maintenance of NASFAA's website will not impact registration for this webinar. 


Publication Date: 7/16/2014

Gary S | 7/21/2014 11:1:29 AM

Community Colleges are low cost institutions. Some also provide online alternatives. Either of these circumstances alone represents a target rich environment for both individual and organized abuse and fraud. Add the two together and abuse and fraud are difficult to control. The best defense is either not to participate in the loan program or to screen applicants thoroughly. The problem with the latter is that it acts as a natural deterrent and works against open enrollment and ease of access for disadvantaged students. While there are exceptions to everything, I suspect that making the college entrance process more difficult would inhibit college attendance for the target audience. There are solutions but the federal government and the Department of Education don't appear to be willing to provide colleges the institutional flexibility necessary to properly manage programs to reduce default rates. Professional judgement on a one by one student basis is administratively impossilbe when working with hundreds of students, let alone thousands. Whether it be on cost of attendance for online or local commuters or the nature of specific programs or other common conditions, there are never enough resources. Financial Aid and Financial Aid Administrators have become the dumping ground for all of societies ills. Over the past few years, we have become fraud inspectors and detectives and expert witnesses to add to their dozen other hats. The profession does not get funded sufficiently, particularly at the community college level to be all things to all people. Then when insane rules are created around otherwise simple functions like R2T4, the professions' hands are tied to a desk doing illogical math. The crowning jewel however is in the way institutions are held liable for making bad loans because they are required to do so by otherwise well-intentioned regulations. There is insufficient recourse for challenging default rates when someone commits identity theft; someo

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