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Containing the Taint of Loan Defaults

Containing the Taint of Loan Defaults
August 29, 2008

In a report last spring bemoaning the fact that about a quarter of community colleges chose not to participate in the federal student loan programs, the Project on Student Debt cited two main reasons why that's the case: college officials' desire to shield students at their low-tuition institutions from the burden of debt, and concerns that large proportions of students might default on the loans, endangering the institutions’ eligibility for federal grant and other financial aid for all students.

The Project on Student Debt's report, which expressed concern that students at some two-year institutions may be turning to private loans and credit cards because their institutions choose not to seek federal loans, made clear that few if any two-year colleges would ever actually be susceptible to losing federal financial aid for their students' cohort default rates. That's because government policies exempt from such penalties institutions at which relatively small proportions of students take out federal loans. Since community college tuitions are relatively low and large numbers of their students qualify for Pell Grants and other federal grants, most two-year institutions could avoid any penalties for having high default rates.

Despite that fact, many two-year colleges are wary nonetheless that high default rates could be used against them in other ways -- particularly by local newspaper reporters, says Debbie Frankle Cochrane, a research analyst at the Project on Student Debt. "Even though there's really nothing to be afraid of, in terms of losing aid, default rates are also used by local reporters for measuring how well a school is meeting the needs of its students," says Cochrane. A community college might get dinged for having a high default rate based on a relative handful of borrowers, she said, "and a lot of colleges are afraid of the bad publicity."

To combat that problem, the student debt group's parent organization, the Institute for College Access and Success, and the American Association of Community Colleges have, in separate letters advocating slightly different approaches, urged the U.S. Education Department to alter the way it calculates and reports cohort default rates so that two-year institutions with high rates but relatively few federal borrowers are clearly identified. "[W]hen the cohort default rates are publicly released, they grab newspaper headlines and often cast institutions in a harsh light," George R. Boggs, president and CEO of the community college association, said in his August 26 letter to Secretary Margaret Spellings. "[L]ittle distinction is made between institutions where loans are a rarity and those where virtually all students borrow."

Such a distinction would be easy to create, the groups say. "When the department releases the cohort default rates next month and in future years, simply denote those colleges that have low proportions of students who borrow," Robert Shireman, president of the Institute for College Access and Success, wrote in his group's letter to Spellings. "This could be accomplished by marking the default rates of these colleges with an asterisk, or by publishing a separate list of colleges that fall below the participation rate threshold" in the law.

Although they don't say so directly, the change requested by two groups seems designed to distinguish two-year colleges from other colleges with high default rates where significant numbers of students borrow. Those include some historically black and other minority-serving institutions, which tend to educate large numbers of low-income students, and especially for-profit career colleges, for whom the default rate standard was initially established in the early 1990s, as a loose proxy for the quality of the institutions.

Harris N. Miller, president of the Career College Association, said he did not see the letters as "an attack on our sector." But he questioned whether the "tweak" that the groups were suggesting in how default rates are presented was really the best way to fix what he called the larger problem: the government's dependence on the cohort default rate "as a means of judging institutional quality." (Boggs's letter to Spellings notes that "[m]any of our members do not believe that default rates are ever an indicator of institutional quality or performance.")

Miller's group successfully fought an amendment to House legislation to renew the Higher Education Act that would probably have subjected many more colleges (including some community colleges) to penalties for having high default rates, and Miller said in an e-mail that the career college association was "extremely disappointed (shocked, really)" that the community college association had not joined it in opposition. "An asterisk, which is what they are requesting, does not get their institutions or their students much. Getting rid of a wrong headed metric does," he added.

Officials at several community colleges that do not participate in the federal loan program said Thursday that they were not familiar enough with the two groups' proposals to comment on whether the change they were proposing would entice them to start seeking federal loans for their students. But Jerri P. Haigler, assistant to the president for community relations and public affairs at Central Piedmont Community College, in North Carolina, said concerns about default rates had little to do with her institution's longstanding policy of not participating in loan programs. "We just prefer not to encourage our students to take on debt," she said simply.

Cindy Keller, coordinator of financial aid at Virginia's Patrick Henry Community College, said concerns about default rates had been among the factors that led the two-year institution to abandon the federal loan program in the 1989-90 academic year. But "there really hasn’t been a demand for student loans at PHCC due to the cost of attendance being relatively low and the availability of grants (federal, state, and institutional) for our studentsm" she said in an e-mail message. The change that the AACC and the Project on Student Debt are suggesting, she said, "would not be an influencing factor for us to re-enter the Title IV loan program."

A spokeswoman for the Education Department, Samara Yudof, said the department had received the letters from the community college and student debt groups and is reviewing their proposals.

 

 

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