Report Urges Community Colleges to Participate in the Federal Student Loan Program

Roughly 900,000 students at community colleges in 31 states -- nearly one in 10 community college students -- can't take advantage of federal student loans because their schools choose not to participate in the federal loan programs, according to a new report by the Project on Student Debt. After analyzing default rates, student borrowing trends, and the disparate impact of non-participation on minority students, the report's authors conclude that "the best, most equitable way for community colleges to serve their students is to also offer federal loans along with appropriate financial aid counseling."

The report, Getting with the Program: Community College Students Need Access to Federal Loans, examines the availability of federal student loans at community colleges, the concerns that lead colleges to opt out of the federal loan programs, and the effects these colleges’ choices can have on students.

The lack of access to federal student loans can hamper these students' ability to graduate because they may have to cut back on classes, work long hours, or leave school altogether, the report concludes. These students may also be forced to borrower riskier, and often more expensive, private student loans or credit cards. The report notes that 91 percent of private loan borrowers at community colleges did not take out all they could have in federal Stafford loans in 2007-08.

The Project on Student Debt found that most Community and technical colleges that do not participate in the federal loan programs say that they don't participate to avoid problems associated with defaults -- both for the school and the student -- and to prevent or protect their students from borrowing. The report addresses these issues and argues that access to federal student loans can protect students from more dangerous types of debt without putting community colleges at risk.

Regarding colleges' fears of default, the report notes that current community college default rates do not put them in imminent danger of sanctions due to high default rates.

"We have examined institutional cohort default rates, sanction regulations, and appeal options in detail, and no community college is at risk of being sanctioned based on 2007 rates," the report states.

Community colleges that have a high default rate will likely be able to successfully appeal that rate because so few students borrow at these colleges, according to the report. Because a few individual defaults can create a high default rate for institutions with few borrowers, these colleges can be exempted from sanctions by appealing to the Department of Education based on the "participation rate index."

The Project on Student Debt notes that recent federal student loan protections (the Income-Based Repayment program, the Public Service Loan Forgiveness program and lower interest rates) make it easier for students with federal loans to avoid default.

The report also contends that not participating in the federal loan program does not prevent students from borrowing. Students who need to borrow will use credit cards or take out private student loans, risky and expensive choices that often circumvent the financial aid process and the counseling that comes with it, the report states.

Instead of trying to keep students from borrowing by not providing federal loans, institutions should provide counseling and use "professional judgement" to deny federal loans to specific "high-risk" students.

The Project on Student Debt makes the following recommendations:

Non-participating colleges should reconsider their loan policies and their impacts on students. A responsible default management plan and entrance and exit counseling, combined with flexible repayment options and loan forgiveness possibilities, make federal loans relatively safe for both schools and students.
The U.S. Department of Education should publish an asterisk along with official cohort default rates when only a small share of an institution's eligible students borrow federal student loans. While these institutions are not punished for deceptively high rates, the appearance of a high rate can raise unnecessary concern.
Through the negotiated rulemaking process, the Department should update the participation rate index for one-year cohort default rate sanctions to allow any institutions at which fewer than 21 percent of eligible students borrow to appeal potential sanctions. Keeping appeals for the two default-related sanction types consistent, along the lines approved by Congress, will make it simpler for colleges to use the participation rate index appeal as a safeguard against undue sanctions.
The Department should provide guidance to financial aid officers at community colleges clarifying the rules for cohort default rate appeals, and encouraging them to offer federal loans as a way of protecting their students from using credit cards and risky private loans.
The Department should publish information about federal student loan participation by institution on a regular basis, at least every three years.

Posted 10/08/09 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web site questions or comments to Web@NASFAA.org.