Tuesday, May 24, 2016


Limiting Loans?

Apparently, Sen. Lamar Alexander plans to introduce amendments to the Higher Education Act that, if passed, would allow colleges to set lower loan limits for certain students.  The idea is to reduce the default rate.

Setting aside whether it would pass or not, I’m having a hard time seeing this helping.  At most, it might sacrifice a forest for a tree, improving one indicator by freezing out thousands of students.  And that’s the optimistic scenario.

Unlike most of his colleges, Senator Alexander actually has experience in higher education.  I hope he remembers enough from that time to recognize what I’m saying here.

The primary driver of defaults is…


Dropping out.  It’s NOT high balances.  Students with balances of $50,000 are statistically likelier to pay them off than students with balances of $5,000.  That’s because, with scattered exceptions, the ones with the high balances are graduates.  By and large, graduates earn enough to pay back their loans.  (I’m confining my argument to undergraduate degrees.  Grad school is another issue entirely.)  Despite occasional news stories, the issue isn’t that students are living high on the hog in college.  The issue is that too many students aren’t finishing college.

Why aren’t they?

Several reasons, but they tend to reinforce each other.  Some of it boils down to poor academic preparation.  Some is personal life distraction.  But a lot of it is economic.  Students who work thirty or forty hours a week for pay -- when they can get that many hours -- often find that they struggle to keep up the pace.  Loans are a way -- not the best way, but a way -- to reduce the amount of work for pay they have to do so they can study.

The resource issues play out in a host of ways.  Cars that don’t start or that need expensive repairs, precarious housing, meal-skipping, and refusals to buy books are some of the more common ones.  Last semester a professor here used OER resources instead of commercial textbooks in two sections of a class she has taught many times before, and noticed that the pass rate went up by ten points.  The major difference was that when the book was free, everyone got it from the beginning.  That meant they didn’t fall behind.

If we want to avoid defaults, reducing access to loans is likely to lead to students working even more hours for pay.  That will lead to more dropouts, and therefore to more defaults.  Instead, we should reduce the _need_ to borrow.  Students don’t borrow recreationally.  They borrow because they need the money.  Reduce the need, and you can reduce the borrowing.

That could be accomplished through increased aid to colleges so they could hold down or reduce tuition.  It could work through better pay for work-study jobs on campus, which have been shown to improve student success.  It could work through a conscious national push for OER, to reduce textbook costs.  It could work through streamlined developmental sequences, to reduce time to completion.  

But reducing access to loans isn’t the answer.  It’s attacking the symptom.  Attack the need to borrow, by reducing costs and improving completion rates.  Do that, and the loans will take care of themselves.

I need to disagree with you on this one. I work at a medium-sized public, regionally accredited technical college. Several years ago, we opted into the federal Direct Loan program. Less than three years later, we had to remove ourselves from the program, and could no longer offer the option of direct loans to our students. The rule that forbids limiting loan amounts is why.

The most it's possible to spend at our school in one semester in tuition and fees is about $1600. Add in books, and you might get a bit over $2000, but it depends on the program of study. Usually semester balances are under $2000.

While we were in the direct loan program, though, students were eligible for $9500 in their first year, and $10,500 in their second year. Students are able to borrow as much as they'd like up to that limit, AND, it is their choice on how to allocate that. They can opt to take the whole amount in a single term.

We had many students take a maximum loan amount in one term. Many of these students were also Pell eligible and able to get about another 1900 - 2000 per term from Pell.

Students with credit balances in the $7,000 - $10000 range became common.

The college was only able to hold the credit balance until the 28th day of the term, after which it is required to be release. The problem, though, is that if the student stops attending before the 60% mark, the school is forced to return a prorated amount of the Title IV funds (Pell & Direct loans).

After the second year of the program, the school ended up needing to return over $500,000 due to students coming in and disappearing after getting the credit balance check. This was a direct loss to the school, as it's not as if the money was still on campus paying for services such as housing or dining. It was mostly returned credit balances.

Had we been able to limit the amount of the loan to smaller amounts, it would have reduced the amount of R2T4 payments. Additionally, it would have made us a much less attractive option for people to get a quick check.

I know it sounds like some sort of troll-y conservative doom speak to focus on fraud and abuse, but this really did represent the substantial majority of our R2T4 payment situation. It took about 2 or 3 terms for word to get around, and after that the 28 day walk offs began to go way up.

For low cost access institutions, limiting loan amounts makes a boat load of sense. Or, at minimum, allowing schools to hold the balance until the 60% mark passes would just be common sense.

Where I go (a large urban community college), the refunds aren't paid out to students till approx halfway through the term, usually in mid-October for the autumn term & late February for the winter/spring term. AFAIK, students can't drop after about the 2nd week of classes but can still withdraw up to about 5 weeks before finals (they would be fully charged for that term in the latter case).
About two weeks into the semester, each professor is required to report to the Registrar which students have shown up to the class at least once. At the point, financial aid money is released to students as long as they've showed up at least once to each class.

So yes, theoretically, a student can show up for two weeks, get paid, and then disappear leaving us on the hook for some of the funding. I don't know how often this happens, but probably much more than I am aware of.

And if I recall correctly, we used to verify attendance a little later (third or fourth week), but it was moved up for some reason or another -- I think it was either to help the financial aid office get a head start on all the paperwork or to accommodate the students (since having that one or two thousand dollars available makes a big difference for many of them).
Jess -

If your school is holding refunds from Title IV funds past the 28th day of the term, they are in violation. The practice will not survive a Title IV audit. Some of the other schools in our system found this out the hard way, and were placed on heightened cash flow monitoring - that's not fun.

Anon who enquired about my comment: 28th class day or 28th calendar day? If it is calendar day, then it is clearly past 28 days as nothing refund-related happens (including notices of how much we will be getting) until at least a full calendar month after the 1st day of classes. Apparently they have 2 dates, with the 'expected' date showing the 1st Thu or Fri of Oct in the autumn then students getting the 'refund' money in the bank account a week later. I have had leftover grant funds come many months late (as in getting autumn money the following Feb/Mar and spring money coming in Mar/Apr). I would hope my big 30'000+-student CC is operating within the law & perhaps it just all shows up late on the student Web site end due to paperwork/data entry swamping.
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@Jess - It's the 28th calendar day, per the Title IV guidelines.

And if there's one thing I've learned from working in this area for 14 years, it's that you'd be amazed at what the various financial aid offices at schools, both large and small, don't know about the actual rules.

One of the issues is that Federal audits are super slow to happen. Our last one was over 10 years ago. We learned some hard lessons though, as a few schools in our state system had their audits 2 years back. The 20 some odd schools in our system are separate and individually accredited, but we standardize a whole lot between us. After those 3 schools had negative audits, we learned we were doing some things wrong system wide.

I wonder if anyone knows what to do if one hits their federal aggregate loans limits (57500 at this time) before they finish school, for whatever reason. This may be a problem for me around my junior/senior semesters because of switching majors & my 1st institution years back being on the expensive side, + capitalised interest. Is one locked out so to speak if they hit the limit? I can't imagine I am the only one with this problem, as I bet it happens especially a lot for out-of-state students even with only one major that they stuck to, though I am in-state. What should one usually do besides continue to hunt for scholarships?

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