Report Examines Effect Opting Out of Federal Loan Programs Has on Community College Students

Quick Takeaways:

  • Pell-eligible students at over 50 statewide community colleges system (SCCS) were just over seven percentage points more likely to borrow than Pell-eligible students who enrolled after the institution opted out of the federal student loan programs.
  • Colleges that become ineligible to offer students federal financial aid see a four percent decrease in enrollment.
  • Providing Pell-eligible students with the opportunity to borrow has positive effects on the number of credits students attempt in their first year.

By Charlotte Etier, Senior Research Analyst

A working paper entitled Denying Loan Access: The Student-Level Consequences When Community Colleges Opt Out of the Stafford Loan Program, released last week by Mark Wiederspan from the University of Michigan Center for the Study of Higher and Postsecondary Education, analyzed records from over 50 institutions in the statewide community colleges system (SCCS) to determine the impact it has on students when schools elect not to participate in the federal student loan program-- a decision institutions with high loan default rates sometimes make in order to avoid losing eligibility to award other federal funding, like the Pell Grant.

The study found that, compared to Pell-eligible students who enrolled after an institution opted out of the federal loan programs, Pell-eligible students who enrolled in a community college while it offered federal loans:

  • Were just over seven percentage points more likely to borrow to help fund their education
  • Had an overall increased borrowing amount of $368 per year
  • Attempted 19 additional credits in their first year of enrollment
  • Attempted and completed more math and science courses

Further evidence from schools that opted out of proving federal loans indicated they were failing to offset the loss of the loans with a grant that matched dollar for dollar what the loan would have provided.

Larger differences were seen when analyzing borrowing and loan amounts for particular subgroups, including:

  • Non-traditional students, whose access to federal loans is associated with a 10-percentage point increase in borrowing and increased loan amount of $546; and 
  • Black students, whose participation in federal loan programs increased loan amounts by $514.

The paper also found no evidence that loan borrowing statistically improves degree completion and transfer to a 4-year institution.

The data examined in this paper contains a significantly high number of community colleges that have opted out of the federal Stafford loan program. In this sample, 35 percent of SCCS institutions offered federal loans during the 2009-2010 award year versus 70 percent of all two-year institutions during the same period. The participation of all two-year institutions in the Stafford loan program remained constant at 70 percent from 2001-2002 through 2009-2010, versus the SCCS sample, which saw a 25 percent decline in participation during the same period.

Using research from The Institute for College Access & Success (TICAS), the paper offers three explanations of why community colleges may choose to opt out of federal loan programs, including:

  1. Repercussions they face under the cohort default rate sanctions; 
  2. Low tuition rates at these institutions and the existence of other federal and state aid programs that cover a large portion of students’ expenses; and 
  3. Administrators at some institutions believe that providing students with the option of borrowing opens students to the possibility of over-borrowing and taking on debt that is beyond their means.

The paper further examines the negative implications related to having default rates above sanctioned thresholds and indicates colleges who become ineligible to offer students federal financial aid experience decreases in enrollment by four percent, and 18 percent at for-profit institutions.

The author indicates findings from this paper suggest providing Pell-eligible students with the opportunity to borrow has a positive effect on the number of credits students attempt in their first year, increases the number of credits completed, degree completion, and transfer to a four-year institution, even if not statistically significant, and that policymakers should revisit accountability rules so metrics on loan use and default rates do not create a disincentive for institutions to opt out of the program.


Publication Date: 7/8/2015

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