Student Debt

The U.S. Department of Education recently released new data on college costs, outcomes, and debt in conjunction with their College Scorecard – a helpful tool for students and families and a treasure trove of data for analysts. 

We took a look at the data to find some of the schools where debt problems are particularly severe: the schools at which the majority of students borrows, and a minority of borrowers is paying down their debt three years into repayment. We identified 605 schools that met these criteria. For-profit colleges make up more than three-quarters (79%) of the 605 schools. Of the remaining 125 colleges that meet these criteria, 67 are nonprofit colleges and 58 are public colleges. 

These data are detailed in the table below, and a list of the 605 schools is available here

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Today the Administration announced a multifaceted plan to protect and support student loan borrowers. The announcement includes commitments to improve loan counseling, institute clear servicing standards and disclosures, and to help more borrowers enroll in income-driven repayment plans.

Students should have the best information in the right format to make critical decisions about how to pay for college. Loan counseling can play an integral role in helping student loan borrowers make wise decisions and avoid delinquency and default. The Department of Education’s online loan counseling tools serve 6.5 million students a year, and the Administration’s plan to make improvements based on input from borrowers and other stakeholders will help more students make the choices that are right for them. For TICAS’ recommendations to improve loan counseling that do not require legislation, click here.

Student loan servicers are paid more than $800 million a year to help borrowers access the repayment options, protections, and benefits that come with federal loans. Yet even so, a record 7.9 million borrowers are in default, and there are more than two million federal student loan borrowers over 90 days delinquent. Servicing failures, exacerbated by a lack of standards and misaligned incentives, are widespread. Once implemented and enforced, the standards outlined by the Administration – as well as the commitment to seek input on them – will make a huge difference for borrowers.

Providing borrowers in repayment with better information at the right time is a clear-cut next step. The Consumer Financial Protection Bureau’s Payback Playbook would share personalized information with borrowers to improve their understanding of repayment options, a positive move in the right direction. For TICAS’ recommendations on student loan servicing, click here.

Strengthening servicing standards by fully implementing the Administration’s new Student Loan Borrower Rights would improve servicing for borrowers in the following ways: (1) ensure servicers provide accurate and actionable information; (2) establish a clear set of expectations for minimum requirements for communication and services with borrowers; and (3) hold servicers accountable to borrowers and taxpayers. And, when servicers fail to do the right thing, the Department’s forthcoming complaint system can help ensure that borrowers’ concerns are addressed and resolved. We have recommended that the complaint system be public and searchable, connected to the complaint systems used by other federal and state agencies, and made clearer and easier to use.

Lastly, a key part of ensuring that fewer borrowers default on their loans is boosting borrower awareness of repayment plans that tie monthly payments to income. Our Project on Student Debt developed the policy framework and led the campaign that resulted in enactment of the Income-Based Repayment (IBR) plan, which has been available to borrowers since 2009. The Administration announced a new goal today to enroll two million more borrowers into income-driven plans like IBR. Although income-driven repayment is not the best choice for every borrower, clearly many more borrowers could benefit from tying their monthly payments to an affordable share of their income and knowing that they will not be repaying their student loans for the rest of their lives. The Debt Challenge, the Administration’s campaign to promote employer outreach and boost awareness of repayment options, will help even more borrowers make better informed repayment decisions. We will do our part to get the word out by contacting more than 100,000 subscribers to our website, IBRinfo.org, and sharing information with our Twitter followers and Facebook friends to remind them about income-driven repayment plans.

As the Administration moves forward on taking action to help borrowers manage student debt, we look forward to seeing these steps, tools, and standards put in place so that fewer borrowers end up delinquent or in default.

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Starting today, all borrowers with federal Direct student loans have access to a new repayment plan with monthly payments limited to 10% of your discretionary income. You can enroll regardless of when you borrowed. If you’re having trouble affording your monthly payments – or just want the assurance of payments based on your income – check out the Revised Pay As You Earn (REPAYE) plan and see if it’s right for you.

REPAYE and other “income-driven” plans can help keep monthly payments manageable, but may not be the best fit for everyone. Depending on how your income changes over time, you may pay more in total than you would under some other repayment plans, such as the 10-year standard plan.

Here is some key information for borrowers considering REPAYE:

  • How much will I pay each month? Your monthly payment will be 10% of your “discretionary income” (that’s your income minus 150% of the poverty level for your family size). If your income is very low, payments can be as little as $0 until your income rises. To see what your payment would be in REPAYE and other plans, you can use the U.S. Department of Education’s easy online Repayment Estimator.
     
  • How long will I be making payments? Up to 20 years if you borrowed only for undergraduate education, or up to 25 years if you took out any federal loans for graduate school. If you reach the time limit and have not yet fully repaid the loan, the remaining balance will be forgiven (but under current IRS rules, it will be treated as taxable income). If you work full-time for the government or a nonprofit organization, you may be eligible to have your loans forgiven after 10 years of payments, tax-free. Find out more about Public Service Loan Forgiveness here.
     
  • Which types of loans are eligible? REPAYE is available for all federal Direct student loans that are not in default. If you have other types of federal loans (such as FFEL* or Perkins Loans), you can consolidate them into a Direct Consolidation Loan, which would then be eligible for REPAYE. Click here and here for information about the pros and cons of consolidating. Neither Parent PLUS loans nor consolidation loans that include Parent PLUS loans are eligible for REPAYE.**
     
  • How do I sign up? Apply online at StudentLoans.gov (look for the “Income-Driven Repayment Plan Request”), where you may be able to electronically transfer your tax information into the application form. Alternatively, you can request a paper application from your loan servicer. No matter how you apply, you can check a box asking for the plan with the lowest initial payment you qualify for. These plans are always available for free – you never have to pay a fee to enroll.
     
  • What if I am already in an income-driven repayment plan? You can change federal loan repayment plans at any time. If you’re already in Income-Based Repayment (IBR) or Income-Contingent Repayment (ICR), switching into REPAYE may lower your monthly payments and shorten the total time you have to repay. However, if you switch plans, any unpaid interest will capitalize (i.e., be added to your loan principal), causing interest to accrue on a higher loan balance. Also, if you have to consolidate your FFEL loans to make them eligible for REPAYE, any IBR payments you made before consolidating will not count toward your maximum repayment period in REPAYE. 

For a high-level view of how REPAYE compares to the four other income-driven plans, we created a summary chart. To estimate your monthly payments and eligibility for REPAYE and other plans, visit the Department of Education’s online Repayment Estimator. For more detail about how REPAYE is different from other income-driven plans, see the Department’s blog post. You can find out more about all the income-driven plans at the Department’s website and our website for borrowers, IBRinfo.org

What is next for income-driven repayment? While REPAYE is good news for many borrowers, it is confusing to have five different income-driven plans for federal student loans.  There is broad and bipartisan support for Congress to streamline them into one improved income-driven plan. REPAYE is a good starting point for developing that new plan, but there are still important ways to improve it, including limiting payments to 20 years for all borrowers, as we and thousands of others have urged, and eliminating the taxation of forgiven debt.                                                          

* Most federal loans issued before July 1, 2010 were made through the Federal Family Education Loan (FFEL) program. If you’re not sure which type of federal loans you have, log in and check your record on StudentAid.gov. If you don’t want to consolidate your FFEL loans into a Direct Consolidation Loan, you may be able to enroll in a different plan called Income-Based Repayment (IBR). However, your monthly payments may be higher and you may end up paying for a longer period of time than you would under REPAYE.

** The only income-driven plan available for Parent PLUS loans is the Income-Contingent Repayment (ICR) plan, and the Parent PLUS loan must first be consolidated into a Direct Consolidation Loan to become eligible for ICR. For more information about ICR, click here

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Today, the Department of Education announced a new income-driven repayment plan called Revised Pay As You Earn (REPAYE), which is expected to become available in December of this year. Under this new plan, all borrowers with federal Direct student loans will be able to cap their monthly payments at 10% of discretionary income, regardless of when they borrowed or their debt-to-income ratio.

REPAYE will become the fifth income-driven plan available to federal loan borrowers, and it can be hard to tell which plan does what and is available to whom. To help, we put together a high-level summary of the income-driven plans, including REPAYE.

See chart below and click here for a printable version with footnotes.


To find out more about REPAYE and the other student aid changes announced today, check out our press release here.  

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Once again, the country is facing the possibility of Congress failing to raise the debt limit and the federal government defaulting on its obligations. When we faced this situation in 2013, we blogged about the impact it might have on federal student loans, so we thought we’d look again now.

No one really knows for sure what impact the government defaulting would have. However, when the government came close to defaulting in 2011, J.P. Morgan issued a report entitled “The Domino Effect of a US Treasury Technical Default.” It concluded that “any delay in making a coupon or principal payment by the Treasury — even for a very short period of time — would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the US economy.” The report estimates that a default would likely lead to a 20 percent decline in foreign demand for Treasuries over a one-year period, increasing the yields on 10-year Treasury notes by 50 basis points.

So how much would a 50 basis point increase in Treasury yields cost college students and their families in higher interest payments on their student loans? For a college freshman who starts school in fall 2016, takes out the annual maximum in subsidized and unsubsidized Stafford loans, and graduates in four years, it will increase the cost of college by about $1,000. That’s a 10% increase in interest payments over 10 years on the $27,000 she borrowed. If the government’s defaulting were to increase rates by 100 basis points, it would increase this student’s costs by $2,000 — a 20% increase in interest payments. For a graduate student who starts a two-year program next year, borrows the annual maximum in unsubsidized Stafford loans, and finishes in 2018, a 50 basis point increase would cost him about $5,000 more and a 100 basis point increase would cost him over $10,000 more in interest payments over a 25-year repayment period. (See the tables below for more details.)

In addition, J.P. Morgan and others expect that a default would slow economic growth, lowering family incomes and making it even harder for those already struggling to pay for college.

 

 

 

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With so many Americans concerned about college costs and student loan debt, there are more and more proposals to improve college affordability and reduce or even eliminate students’ need for loans. Yet most of the proposals are not very detailed at this point, and the details matter.

One critical detail is which costs are covered. To make a real difference for low-income students, any debt-free college plan must take the full cost of going to college into account, including textbooks, transportation, and living costs like food and housing. These non-tuition costs make up the majority of the full cost of attending a public two- or four-year college (61%-79%), yet their importance is too frequently overlooked. Students may only need to pay the tuition bill to enroll in college, but to succeed in school and graduate they need to be able to cover the other costs, too. Students who can’t get to campus or can’t get the required books won’t benefit from their classes. Students who have to work long hours to pay for rent or child care don’t have enough time to study.

Students can use grants like the federal Pell Grant to help pay for either tuition or non-tuition costs. But many lower income students have to take out loans because available grants don’t cover their total costs. In fact, national data show that lower income students (those with incomes at or below the median) who attend public colleges “tuition free” are currently much more likely to borrow than higher income students who pay for some or all of their tuition bill. This underscores why plans to eliminate debt cannot just focus on tuition.

 

This is worth repeating: low-income students who are already attending college “tuition free” are more likely to need loans. To understand why, we have to look at students’ total net costs (cost of attendance after grant aid) as a share of family income.

Data show that the net costs of attending public two-year and four-year colleges account for a much larger share of income for lower income families than for higher income families. As a result, more lower income students have to borrow to get their degree. For instance, as shown below, community college students with family incomes under $30,000 are expected to dedicate 22% of their income toward paying for college. Unsurprisingly, graduates in this income range are more likely to leave school with debt than students from families who can better absorb net college costs. 


This is why ensuring a debt-free college option requires more than covering tuition costs.  It requires providing additional grant aid for lower income students who may already be going to college “tuition free,” and as we have discussed before, it requires a state “maintenance of effort” provision to ensure states hold up their end of the bargain.  

 

Calculations by TICAS on data from the U.S. Department of Education, National Postsecondary Student Aid Study, 2011-12. Median income is based on family incomes for students enrolled in college in 2011-12. Students are classified as attending tuition-free if their tuition net of grant aid is zero, and as paying tuition if their tuition net of grant aid is greater than zero.

U.S. Department of Education calculations of 2012-13 net price for first-time, full time undergraduate recipients of federal Title IV financial aid, from http://nces.ed.gov/pubs2014/2014105.pdf, based on figures reported by colleges to the Department via the Integrated Postsecondary Education Data System. To calculate the shares of income needed to pay the net price, we used the upper bound of the income range (i.e., $30,000 for the $0-30,000 group) when available, and $145,000 for the income range of $110,001 and above which is approximately the median income for students in this group. Graduates’ debt figures from U.S. Department of Education, NPSAS, and include undergraduate students who completed a degree or certificate in 2011-12. Both net price and debt calculations are the most recent available of their kind. 

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Yesterday, Corinthian Colleges abruptly closed its remaining 30 campuses in California, Arizona, Hawaii, New York, and Oregon, where 16,000 students were enrolled. While nothing can give these students back the time they spent at Corinthian, they deserve a fresh start.

The good news is that the Higher Education Act (HEA) provides for the discharge of students’ federal loans if a school closes before students finish their programs. In fact, the HEA says “the Secretary shall discharge” students’ loans, and the Education Department’s regulations specify that the Secretary will mail each borrower a discharge application and an explanation of the qualifications and procedures for obtaining a discharge.

The bad news is that the HEA does nothing similar to restore students’ eligibility for Pell Grants, which needy students can receive for no more than six academic years. Because the law doesn’t reset the clock on a student’s eligibility for Pell Grants when a school shuts down, low-income students may not be eligible for enough aid to complete a program anywhere else.

For example, the students enrolled in the pharmacy technician certificate program at Corinthian’s Everest College in West Los Angeles – which cost more than $11,000, and had a 25% job placement rate and a 35% student loan default rate – will be able to get their federal loans discharged, but they won’t get their Pell Grant eligibility restored to what it was before they enrolled at Everest. As a result, they may not have enough Pell Grant eligibility left to complete the much lower cost pharmacy tech program at the nearby community college. 

For the more than 12,000 Pell Grant recipients estimated to be enrolled at the Corinthian campuses that suddenly closed yesterday, this is an oversight needing swift correction.

How did Pell Grants get left out of the closed-school provisions? Prior to 2008, students could receive Pell Grants for as long as they were making satisfactory academic progress towards a degree or certificate. So if a school closed before a student could finish, the student didn’t need to worry about their Pell Grant eligibility running out. 

However, in 2008 Congress limited future Pell Grant eligibility to nine years.  Then, in 2011 Congress lowered this lifetime limit to six years and applied the new limit immediately and retroactively to all students, including those just a semester away from completing their degrees.

Unfortunately, Congress didn’t amend the HEA to restore students’ eligibility for Pell Grants when a school closes before they can finish. This was likely an oversight, not a conscious policy decision. As a result, the lowest income students at Corinthian campuses may not have enough Pell Grant eligibility left to complete a program at another school. 

It’s time to fix this harmful omission. In the last Congress, Representative Janice Hahn introduced the Protecting Students from Failing Institutions Act (HR 4860) to restore Pell Grant eligibility for students at campuses that close. We recommend going a step further: Pell Grant eligibility should be restored for any student who has their federal student loans discharged, either because their school closed or because of school fraud. Current and former Corinthian students deserve a true fresh start and the chance to get a meaningful degree or certificate at another school.  

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When too many borrowers default on their student loans, colleges can lose eligibility for federal aid. Colleges with a cohort default rate (CDR) above 40% lose eligibility to offer federal loans, and colleges with three consecutive CDRs at or above 30% lose eligibility to offer both loans and federal Pell Grants.

While some question the wisdom of tying colleges’ eligibility for federal grants to the outcomes of students who borrow federal loans, the link between Pell Grants and CDRs is incredibly important. That’s because federal taxpayers invest tens of billions of dollars in Pell Grants, and CDRs are the primary means of assessing whether colleges are a good investment for federal aid. Colleges can already avoid sanctions through challenges and appeals when relatively few of their students borrow.

To avoid losing access to Pell Grants, the most common form of financial aid for community college students, many schools are examining what they can do to help students avoid default. However, other colleges are citing fears of such sanctions for their decision to stop offering federal loans altogether - even schools that are at very low risk of sanctions. Cutting off access to federal student loans in this way is a problem because it forces students who can’t otherwise afford to stay in school to turn to much riskier types of borrowing, or to reduce their odds of completion by cutting back on classes, working long hours, or dropping out altogether.

Concerns about CDR sanctions have led some to argue that colleges’ eligibility for federal grants should not be tied to an outcome measure for federal loans, and that delinking grants from CDR sanctions might stop colleges from pulling out of the federal loan program. But if the goal is to ensure students are well served and have access to federal loans when they need them, then the logic behind arguments to delink Pell and CDR sanctions falls short on multiple fronts.

  • It wrongly presumes that default rates are entirely out of colleges’ control. In reality, colleges have a number of tools to prevent defaults and keep CDRs within acceptable levels. Given the severe consequences for each individual student who defaults, it’s imperative that colleges use every tool in their toolbox to keep borrowers on track. But as the New York Times recently editorialized, “[W]hat is likely to persuade colleges to deploy these tools in the first place is the threat of losing federal aid if they do not.” Indeed, the threat of losing eligibility for Pell Grants is focusing colleges on what more than can do to keep their students out of default.
  • With no incentive for colleges to keep students out of default, they will invest less in default prevention. This is not a statement about the character of student services professionals at community colleges, but rather about the obstacles they will face when trying to convince college leaders how scarce (and decreasing) resources should be spent. And when loan defaults increase as a result, the college will lose eligibility to offer loans.  So while colleges may be less likely to pull out of the loan program proactively if Pell and CDR sanctions are delinked, they will be more likely to be forced out of the loan program based on their default rate. The threat of losing federal loan eligibility is not going to be enough of an incentive for colleges to focus on keeping defaults down if they’re already considering opting out of the loan program. The end results? First, more community college students in default, and then far more without any access to federal student loans.

The upshot: delinking Pell and CDR sanctions will not help students.  Most community college students do not borrow federal loans. But students who do need to borrow should have access to federal loans, and it’s entirely appropriate to hold colleges deemed worthy of taxpayer investment by the federal government accountable.

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As the Department of Education works on a final rule to stop federal funding for career education programs that over-promise and under-deliver, it needs to close loopholes to prevent unscrupulous colleges from gaming the system.

Under the draft regulation, career education programs would be judged by two different tests: how the debt of their graduates compares to later earnings, and how many of the programs’ borrowers default on their loans.  Programs that consistently exceed allowable thresholds of debt-to-earnings or rates of default would lose eligibility for federal aid.  While many in the for-profit college industry complain that the tests are too stringent, the data show the exact opposite and that the rule needs to be strengthened.

Exhibit A for a tougher rule is the fact that 20 percent of the 114 parasitic career education programs – those where more students default than graduate – would pass the proposed tests. And exhibit B would appear to be Education America Inc.’s Remington College, a formerly for-profit chain that began operating as a nonprofit in 2011.

Data released by the Department in conjunction with the rulemaking show three large certificate programs that have a collective repayment rate of 12 percent – meaning only 12 percent of borrowers are paying down their debt. The three are large medical/clinical assistant certificate programs at what appear to be Remington’s Texas, Ohio and Alabama campuses. (Some of the data files released by the Department do not include college names so only the Department can confirm which college’s programs these are.  However, looking across multiple data files, including a file with college names, strongly suggests these three low-repayment programs are the Remington programs.)

To make matters worse, these three programs would not fail under the Department’s draft regulation– the one that industry complains about being too strict.  Despite the extremely low repayment rate, the aggregate cohort default rate for the three Remington programs is only 14 percent, far below the threshold of 30 percent. Such a low rate of borrower default from programs where hardly any borrowers are paying down their loans suggests the college may be manipulating their default rates by putting former students in forbearance during the window when default rates are being measured – regardless of whether it is in the borrowers’ best interest to do so. In fact, a Remington College executive said as much in 2009, noting that “we’ve known all along what [the Department] finally figured out,” that borrowers receiving forbearance and deferment were later defaulting on their loans once it stopped tracking defaults after two years. The Department then changed its default monitoring to a broader three-year metric. “They [the Department] decided we were getting off too easy,” the Remington executive noted. (Note that colleges can and do manipulate three-year default rates, but it takes more work to do so than for two-year rates.)

Programs where most students borrow and the vast majority of borrowers cannot repay their loans should not keep enrolling students receiving federal aid. The Department could close this loophole in the gainful employment rule by instituting a repayment rate in addition to the other tests. It must also prohibit unscrupulous schools from manipulating their program default rates or their repayments rates by making small payments on behalf of former students.

Read more about these issues and recommendations in our comments on the Department’s draft gainful employment rule. -Debbie Cochrane

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