Loan Participation

In the last three months, the U.S. Department of Education has struck out on clarifying what cohort default rates (CDRs) mean for students and colleges, prompting some colleges to stop offering federal student loans. The Department needs to provide better guidance to colleges on how to lower their CDRs while providing timely assurances to colleges with low borrowing rates so they do not needlessly pull out of the loan program, denying their students the safest way to borrow. A new proposal to use program-level CDRs only increases the urgent need for action by the Department.

Strike One: A Murky Scorecard

In September, the Department released new CDRs for the nation's colleges. But once again, it failed to provide the information necessary to interpret what the rates mean.

CDRs are the primary measure of college accountability. They measure the share of colleges’ federal student loan borrowers who default soon after entering repayment, an important measure of student outcomes. For colleges where most or all students borrow, CDRs can tell you a lot: high CDRs are a clear sign that students who attended that college are not faring well, and suggest that the college may not be a good investment for students or taxpayers. But for colleges where only a handful of students borrow, CDRs give fewer clues about how the colleges’ students are doing.

The problem is that the Department once again did not pair CDRs with colleges’ borrowing rates, as we have long asked them to do. That means that students from a particular college may appear very likely to default when, in fact, they are very unlikely to default because they are very unlikely to have to borrow at all. This is not helpful to students, journalists, or college leaders.

Strike Two: A Confusing Rulebook

Federal law acknowledges the importance of the borrowing rate in evaluating CDRs: colleges with high CDRs may lose eligibility for federal grants and loans, but colleges with few borrowers can avoid sanctions under what’s called a ‘participation rate index (PRI) appeal.’

Nonetheless, misunderstandings about CDRs and the PRI have sparked unnecessary fears in some colleges – particularly community colleges – that they will be sanctioned, leading some institutions to pull out of the federal loan program entirely. This is most obvious (but certainly not only true) in California, where borrowing rates at the vast majority of community colleges are in the single digits – well within the range eligible to appeal CDR sanctions.

Without access to federal loans, students who need to borrow to attend college must either drop out or turn to more expensive and riskier forms of debt, including private loans or credit cards. Yet community colleges in California continue to stop offering loans, citing fears of CDR sanctions as their rationale. We have long encouraged the Department to issue public guidance to colleges describing the appeals options available to them, and underscoring the importance of federal loan access for students, but to date it has not done so.

Strike Three: Silent Umpires

The type of sanction community colleges fear most is the loss of federal Pell Grants, which can occur after three consecutive CDRs at or above 30 percent. Colleges subject to this sanction lose Pell Grant eligibility immediately, but they can appeal the sanction if their borrowing rate in any one of the three consecutive cohorts is sufficiently low.

However, the Department will not confirm that the colleges’ borrowing rates are low enough to appeal sanctions until the college’s third consecutive high CDR, which is very late in the game. It is so late, in fact, that at that point there is no other way for the college to avoid sanctions, should its appeal be rejected, since it cannot influence default rates for years past. By year three, the college faces sanctions within mere months. With the stakes so high, it is no wonder that some colleges opt to stop offering loans long before a third consecutive high CDR. Simply put, colleges need to understand their risks and options on an annual basis so that they can work to reduce defaults and continue to offer federal loans.

The Department could easily inform colleges whether their CDRs will count towards sanctions, as we have recommended. Unfortunately, the Department has declined to do so, claiming that it would impose an “unmanageable workload” on its staff. However, the annual burden on the Department would be minimal, as few schools with borrowing rates low enough to qualify for the PRI have CDRs that would trigger sanctions in the first place. The Department also argued that colleges have sufficient time to avoid losing Pell Grant eligibility, since they can currently appeal when their third high CDR is in draft, rather than final, form. But this misses the point and ignores what we already know: without the right assurances from the Department earlier in the process, colleges will stop offering federal loans after their first or second year with high default rates.

The Next At Bat: Gainful Employment

While the Department has struck out when it comes to CDRs, it is still in the game, and the ongoing gainful employment discussions – which continue next week – underscore the need for them to act.

The Department’s latest gainful employment proposal would expand CDRs to measure program-level default rates (pCDRs) for career education programs, and cut off eligibility for programs where default rates are too high.  Existing protections – like the PRI appeal option – would carry over from CDRs to pCDRs, but that is little consolation for colleges given the current confusion and concern about PRI appeals. Most career education programs are located at community colleges, where borrowing rates are low and fears of sanctions are high. The Department needs to improve the PRI process to prevent more of these colleges from exiting the loan program – a trend that risks pushing more students to drop out or take out private loans, and reducing affordable career education program options instead of ensuring them.

- Debbie Cochrane and Matthew La Rocque

Posted in

| Tagged

For college students who need to borrow, at any type of school, federal student loans are the safest and most affordable choice. Unfortunately, some community colleges across the country continue to deny their students access to federal loans. This leaves students with options that range from bad to worse: they could stay enrolled and on track by using riskier and more expensive forms of debt, or they could work excessive hours, cut back on school, or drop out.

In just the past two weeks, media outlets have confirmed that three more colleges in two states have decided to stop offering federal loans. In North Carolina, Southeastern Community College became the latest of many in the state to do so in recent years. In California, a decision by the Yuba Community College District means that neither Yuba College nor Woodland Community College will offer loans for 2013-14. The rationale provided for decisions in both states is that the colleges’ default rates – the share of their federal loan borrowers who are unable to repay – may rise so high that the schools could be sanctioned by the U.S. Department of Education (the Department) as a result.

In all cases, high default rates mean that the college should do more to help their borrowers avoid default. But schools where only small shares of students borrow, including many community colleges, are afforded special protection against sanctions. This protection is based on colleges’ ‘participation rate index’ or PRI, a measure that combines colleges’ default rates with their borrowing rates. Unfortunately, too few community college administrators are aware of the protection or the relevant regulations – even those at the schools most likely to benefit.

Take the recent example of the Yuba District. With fewer than 5% of Yuba’s students taking out loans, the college would almost certainly qualify for this protection – called a “PRI appeal” -- should its default rate rise to levels that would otherwise trigger sanctions. Still, the Yuba Community College District Chancellor could either not find the PRI rules or understand how they applied to his district (excerpted from Sacramento Bee):

“Chancellor Douglas B. Houston said the district unsuccessfully combed U.S. Department of Education regulations in search of assurances that the district could successfully appeal. He said the risk was too great not to act.”

This is a shame. The Department – which encourages federal loan access – must do more to make sure that the right people see and understand these rules. We at TICAS have done what we can, responding to frequent questions from colleges and even creating a PRI worksheet (updated for FY 2010 three-year rates) so they can see how it would work for them. But colleges need to be reminded by the Department that providing access to federal loans is important, and that certain protections from default-rate sanctions are available. Colleges need to understand that while helping students avoid default should always be a priority, concerns about sanctions must be kept in perspective. And colleges need to know that the Department is committed to developing a PRI appeals process that works for schools – providing the assurances colleges need, when they need them – to alleviate the fears that lead colleges to stop offering loans unnecessarily. We hope the Department has taken note of the rash of schools abandoning the federal loan program and takes action before the next release of college default rates in September.

Posted in

| Tagged

Subscribe to RSS - Loan Participation