More than Tuition: Experimenting with Loan Limits
Blog Post
May 23, 2016
Over the last three decades, policy makers have been grappling with whether or not colleges should have the authority to reduce the amount of debt that they allow students to take on. In the late 1980s, as a result of rampant abuses in the for-profit trade school sector, Congress made cohort default rates a primary tool to exclude low-performing institutions from accessing federal funding. But this policy had a major unintended consequence: federal loans began to pose a high risk to open-enrollment colleges and the students who attend them -- a risk that some financial aid administrators want more authority to control. These discussions are now coming to a head.
In February, Chairman of the Health Education Labor and Pensions (HELP) Committee, Senator Lamar Alexander (R-TN), said that he plans to introduce legislation reauthorizing the Higher Education Act that would allow colleges to adjust federal loan limits for certain groups of students on their campuses. He is considering giving schools the authority to limit debt for students based on a wide variety of factors, such as their chosen course of study, their enrollment intensity, whether they study fully or partly online, or whether they live with their parents.
Currently, when putting together financial aid packages, colleges are not allowed to exceed or reduce a student’s maximum loan eligibility, which is $5,500-$7,500 per year for a dependent undergraduate depending on how far that individual has progressed in school. But using authority that Congress has given it to allow colleges to conduct experiments with federal aid, the U.S. Department of Education has granted special permission to nearly 30 institutions across the country to reduce loan limits for certain students. As Senator Alexander and other policy makers consider giving all schools more authority to lower loan limits, they should pay close attention to what these institutions have actually done in this regard as part of the Education Department’s Experimental Sites Initiative--something we at New America also will be examining soon.
Up until now, policy makers have favored keeping loan limits uniform for all undergraduates to prevent college administrators from discriminating against certain groups of students in their role as gatekeepers of federal student aid. With the aim of providing low-interest credit to those who might not otherwise qualify under the terms of private lending, Congress made federal student loans an entitlement that all can access regardless of credit history, income, or any other personal factors. Consumer advocates worry that giving colleges more authority could threaten universal access to student loans.
Loans are meant to cover whatever gap remains between the amount a student must pay for college (cost of attendance) and any other grant or scholarship aid received. Therefore, a student’s only current borrowing restriction is the difference between the gap and the federal loan limit. But a college’s cost of attendance (COA) often doesn’t accurately estimate a student’s expenses while in school. Some financial aid administrators worry that students do not need to take on as much debt as they might think. Many students simply borrow the full amount for which they are eligible, instead of the amount that they actually need.
At first glance, one solution to the problem of overborrowing may be for administrators to carefully lower their estimates of a student’s living costs when they calculate their institutions’ cost of attendance. Unfortunately, it’s not that simple. Since other federal aid is also tied to COA, lowering these estimates may adversely impact low-income students’ eligibility for the maximum Pell Grant. Consequently, many institutions feel powerless to help students make prudent borrowing decisions.
This is especially true for community colleges and other open enrollment institutions, which have a difficult time seeing their students through to graduation. With little say over who walks through their doors and with a commitment to educate all comers, these institutions work with students who are not always prepared for college level coursework. In 2015, only about 39 percent of community college students graduated within six years. Students who leave college without a degree often find it challenging to land a job that puts them in a position to comfortably pay off their debt. For those community college students who took out federal student loans in 2012, 19 percent have already defaulted within the last three years. Furthermore, while nearly one-fifth of all federal student loan borrowers attended a community college in 2012, they accounted for 29 percent of all student loan defaults.
Defaulting on federal loans is obviously harmful to students who face wage garnishment and damaged credit. But defaults also pose a major risk to open-enrollment institutions since Congress has tied colleges’ eligibility to administer federal financial aid to default rates. Schools at which over 30 percent of borrowers default on their loans within three years risk losing all federal financial aid, including Pell Grants and loans.
Some public colleges that are afraid of the consequences of having high default rates--mainly the possibility of losing eligibility to participate in the Pell Grant program--have responded in a drastic way, including opting out of the federal loan program altogether. While only 7 percent of colleges did not offer federal loans to their students in 2012, 16 percent of community colleges and 25 percent of public less-than-two-year institutions chose not to do so that year.
Since the public two-year sector tends to serve mostly low-income students and students of color, those who face the most barriers accessing higher education have been disproportionately affected by their institutions’ decision to abandon the federal loan program. Nearly nine percent of community college students are enrolled at schools at which no federal loans are offered, but schools with a large percentage of African American students are more likely to opt out. Over 12 percent of African American community college students attend a school where no federal loans are available.
These colleges may feel that they have no other choice except to stop participating in the federal loan program. But their decision could spell disaster for students who genuinely can’t afford to go to college without taking out federal loans.
Congress may soon give these colleges another option to reduce federal loan borrowing at their institutions. But first, fundamental questions about the appropriate role of institutional flexibility must be tempered with valid concerns about protecting students from unfair prejudice. Ensuring the right balance between student equity and institutional authority to limit loans could prevent more schools from opting out altogether, making it easier for students to fill the gap.
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