Two-Year Colleges Face Student Loan Default Challenge

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by Charles Dervarics

Buried within the federal government’s new report on student loans is a statistic causing concern for some community colleges: Loan defaults in that sector have increased to nearly 10 percent. 

 

The official loan-default rate in the sector is 9.9 percent, up from 8.4 percent a year ago, the Department of Education reports. This rate is significantly above the nationwide default rate of 6.7 percent among all institutions of higher education.

 

The statistics also point to a longtime dilemma facing two-year colleges: With low tuitions, few of their students typically apply for loans. But even a handful of borrowers who do not repay loans can give the college a high default rate, something that can trigger federal sanctions.

 

“This is one of the reasons why some community colleges have opted out of the student loan system,” says Mark Kantrowitz, publisher of finaid.org, which analyzes student aid programs. He says about 200 community colleges have dropped out of loan programs, since default-related sanctions could cost their students access to need-based financial aid.

 

Under the system, a college can lose access to loans as well as Pell Grants if their default rates are above 25 percent for three consecutive years.

 

Even with low community college tuitions, students at these institutions remain eligible to take out loans of more than $9,000 per year. “Community colleges have no control over this,” Kantrowitz said.

 

The Education Department, in releasing its report, acknowledged the unique situation of these institutions. The department noted that “some schools, especially some community colleges, may have rates that seem high but that represent a very low number of students.”

 

But within the sector, two-year college leaders continue to seek answers. At Lincoln Land Community College in Springfield, Ill., the official default rate increased from 8.3 to 14.2 percent.

 

“I hope this is a fluke,” said Lee Bursi, Lincoln Land’s assistant vice president for financial aid. He attributed much of the increase to the depressed economy. Loan applications at the campus are up by about 50 percent, he told Diverse, and financial aid applications also have increased significantly.

 

The college is looking at the latest data to identify trends among specific subgroups of students, he said. Lincoln Land also may step up its one-to-one student counseling, with more frequent sessions. On whether the college would join others that have left the student loan program, Bursi said those chances were slim. “That’s a pretty drastic move,” he said.

 

A new issue brief from a California research organization echoes that view. The study from the Project on Student Debt says that about 900,000 students—or one in 10 community college students—cannot get a federal student loan because their schools do not participate in loan programs.

 

In seven states, more than 20 percent of community college students cannot access federal loans, the new brief stated. These include six states in the southern U.S. where African American and Native American students are twice as likely as other students to lack this option.

 

Rising costs at two-year colleges make loans a necessity for many students, said the issue brief, Getting with the Program: Community College Students Need Access to Federal Loans. It says the average cost of attendance at a two-year community college is $14,054, about 60 percent of the figure for four-year public colleges.

 

A senior U.S. Education Department official said the findings of the issue brief are sobering. “I would urge community college leaders and administrators to read this report carefully and consider their institutions’ stance on this issue,” said Martha Kanter, undersecretary of education.

 

Rather than encouraging colleges to drop out of federal loan programs, the American Association of Community Colleges (AACC) has asked Congress to give financial aid administrators more leeway to lower student borrowing in some cases. Commenting on the new federal report, AACC said Congress “continues to refuse to give campuses discretion to lower the loan amounts that students may borrow. AACC strongly supports such discretion.”

 

Education Secretary Arne Duncan said the lagging economy is likely a major factor behind default rate increases, which affect other sectors of higher education as well. At historically Black Harris-Stowe State University in St. Louis, the default rate increased from 8.7 to 12.1 percent. At North Carolina A&T University, the rate increased from 8.9 to 10.2 percent.

 

“Colleges that enroll a disproportionate number of low-income students are more likely to have high default rates,” Kantrowitz said.

 

Still, the area of higher education with the highest default rate is the for-profit proprietary sector. According to the Education Department, such schools have an average default rate of 11 percent, up from 9.7 percent from last year’s report. Two proprietary schools also had default rates high enough to trigger potential sanctions. Despite the overall uptick in defaulters, no two- or four-year college has a high enough rate to face sanctions.

 

The latest default rates are for borrowers whose first payments were due between October 2006 and September 2007 and who defaulted before Sept. 30, 2008.

 

Direct Loan and Federal Family Education Loan Default Rates by Sector

(data for most recent years available)

Type of Institution

Fiscal Year 2005

Fiscal Year 2006

Fiscal Year 2007

All Public

4.2%

4.7%

5.9%

    2-3 Year Institutions*

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