New Data Contradict House HEA Proposal on Loan Limits

Last month, Chairwoman of the House Education and Workforce Committee Rep. Virginia Foxx (R-NC) put forth a bill to revamp the sorely outdated Higher Education Act (HEA). Among several major changes to the system of federal financial aid, the PROSPER Act would give college administrators greater authority to limit the amount students borrow to cover the cost of attendance. That’s long been an ask from community college administrators, who worry both that students may be taking on more debt than necessary and that they may be implicated under federal accountability measures like cohort default rates that include borrowing decisions outside their control. They hope that by limiting federal loans for certain groups of students, they can better protect students from future trouble and avoid federal sanctions. But recent research into the specific interventions that colleges may pursue to prevent default and new data about the rate at which certain key student subgroups default on their loans should give policymakers pause. 

The main federal accountability tool that college administrators fear, the cohort default rate (CDR), measures how many borrowers default on their loans within three years of entering repayment. If a college’s CDR exceeds 30 percent for three consecutive years, or 40 percent in a single year, it could lose access to federal financial aid. At open-access community colleges in particular--which offer low tuition, accept all comers, and often struggle to graduate students--federal loans are sometimes viewed by administrators as an unnecessary and risky proposition. Under current law, however, financial aid administrators have very little direct say over the amount that students can borrow to cover tuition and the costs estimated for books, supplies and other living expenses. Because of the relative ease with which students are able take on federal debt, college leaders worry that students do not understand the potential ramifications of their decision and could regret it later down the road.

Access to loans is strictly protected by the federal government, and any attempt to make the borrowing process more difficult for students could be deemed an unlawful barrier to accessing an entitlement. Even small requirements could unduly inhibit access for many low-income and minority students, who often attend community colleges and rely on these funds to pay for school. And while the Department of Education took a stab at understanding how more institutional authority to directly limit loans might affect students by offering waivers to a small set of schools under its  “experimental sites” authority, it did not yield any worthwhile conclusions, proving there is far more to learn before making this policy the law of the land.

Despite its shortcomings, the experiment did at least provide a helpful glimpse into how schools might go about implementing this policy if given the opportunity. There were seven overarching categories of students for which the 24 colleges in the Department’s experiment limited access to federal unsubsidized loans (Table 1). With a few exceptions, the four categories outlined in the PROSPER Act mirror those pursued by colleges in the Department’s experiment. Under the bill, if a student is attending part-time, pursuing a particular credential level, or depending on the year of the program in which the student is enrolled, colleges would have flexibility in determining how much they can borrow.* The bill would also authorize colleges to use regional data from the Bureau of Labor Statistics to demonstrate that the typical career outcomes for a program of study do not pay enough to justify a student taking on high debt levels and to then limit the amount he borrows. In the Department’s experiment, eight of the 24 colleges limited loans for first-time students and three limited loans for particular degree programs.  

Evaluating the Risk

New data about student loan defaulters suggest that offering loans to these categories of students might not pose as clear of a risk to colleges as once imagined. But limiting access to student loans for these groups presents the clear risk of restricting college access. In October, the Department of Education released new data from its nationally representative Beginning Postsecondary Student Survey, which allows us to dig deeper into the profile of a typical student who defaults on his loan. Community colleges have been the most vocal in their desire for a greater control over student borrowing, and the default data shows why that might be the case: Over a third of community college students who first enrolled in some postsecondary education during the 2003-04 school year have gone on to default on their loans within the past twelve years. But despite the high risk that student loans generally pose for those in the community college sector, few of the student subgroups that were specifically identified as targets for lower loan limits, both by Congress and those colleges participating in the Department’s experiment, stood out as significant risks.

First-time or low-credit students

One of the four groups listed in the PROSPER Act for whom colleges could deny federal aid going forward--and the most common group under the Department’s experiment--is first-time students, either those who have been on campus for a short time or who have completed relatively few college credits.

It is true that most borrowers who default on their debt have not completed a degree, and many defaulters at community colleges--46 percent--have fewer than 15 academic credits under their belts. But that doesn’t mean that all, or even most, students who are beginning their college career will default. A policy that restricts access for first-time students could pose serious issues. Despite low tuition at community colleges, books, supplies and living expenses can quickly add up. Low- and middle-income students may be forced to turn to private lenders or credit cards with high interest rates to make ends meet.

Limiting loans based on program of study or major

Another common method that colleges used to limit loans for students in the Department’s experiment (and that was proposed as a criterion in the PROSPER Act) involves setting loan limits by program of study or major. Several financial aid administrators noted over the course of the experiment that early childhood education and vocational majors, for example, posed a significant threat given their below-average wages post-graduation. But federal data do not necessarily support the theory that they are more likely to struggle in repayment. While these survey data do not allow early childhood education majors to be broken out specifically, those in the broad category of education majors at community colleges are some of the least likely to default.  And contrary to conventional wisdom, life science and business majors had among the highest rates of student loan default. Using BLS data, the occupations with which these two areas of study would be associated--medical professionals, business analysts etc.--provide some of the highest earnings. While program of study may generally indicate how much graduates stand to earn, the more important factor in avoiding default is getting students to graduate, regardless of the major they select. 

Limiting loans for part-time students

The third category that the PROSPER Act establishes for limiting student loans below statutory amounts is for those students attending part-time. In general, prorating student loans for those who attend less than full-time has garnered broad support. Under current law, if a student is attending half-time, he is eligible for only a partial Pell Grant but can still borrow the full amount in student loans. That policy makes little sense and should be corrected; students attending part-time should only be eligible for a part-time loan.

However, opening the door for colleges to exclude part-time students from borrowing completely may be a step too far. To be sure, many part-time students are working full-time while going to school so they may need less financial aid to cover living expenses. But there are still significant costs associated with enrolling in college even part-time that may not be covered with grant aid alone. What’s more, those who attend exclusively part-time or who alternate between full-time and part-time at community colleges actually default on their loans at a lower rate than those who attend exclusively full-time.

As such, while prorating loans would be good policy to conserve federal funding and encourage students to borrow prudently, giving colleges the flexibility to deny all loans to part-time students would provide little benefit. Instead, Congress should prorate loans across the board and to the number of credit hours that a part-time student is attempting. This may also address the related concern of those with few college credits taking on large sums of debt. Since part-time students are accruing credits more slowly than their full-time peers, prorating the amount they can borrow may effectively limit the amount of debt that those with low credit accumulation are able to take on. 

Based on recent data, the groups of students proposed in the PROSPER Act for which colleges could lower student debt limits miss the mark. Before Congress gives administrators the authority to limit loans for certain groups of students, it must consider whether such a policy will put college out of reach for low-income students and whether it will really help schools be better gatekeepers of federal aid.