The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Information on this website may not be current. This website may contain links to other third-party websites. Such links are only for the convenience of the reader, user or browser; we do not recommend or endorse the contents of any third-party sites. Readers of this website should contact their attorney, accountant or credit counselor to obtain advice with respect to their particular situation. No reader, user, or browser of this site should act or not act on the basis of information on this site. Always seek personal legal, financial or credit advice for your relevant jurisdiction. Only your individual attorney or advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, contributors, contributing firms, or their respective employers.
Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them. Compensation is not a factor in the substantive evaluation of any product.
More and more community colleges — arguably the most economical point of entry to higher education — are opting out of the federal student loan program. At last count, roughly 1 million students in 30 states are now scrambling for alternative financing.
According to a report by the Institute for College Access and Success, the schools are increasingly concerned about their cohort default rates, or CDRs — a calculation that divides the total number of students whose government loans entered repayment in a particular year (the so-called cohort year) and who defaulted on those loans later on, by the total number of borrowers who began to repay their education-related debts in that same cohort year.
CDRs are a big deal for all higher education institutions these days. That’s because schools with 30% default rates for three consecutive years — or those with greater than 40% in any one year — stand to lose their access to the various federal aid programs. The reason 2014 is of particular importance is because in 2008, Congress changed the look-back period to three years from two, beginning with loans that entered repayment mode in 2011.
As you might expect, those institutions that will no longer participate in the federal programs (including for Pell Grants) have taken to rationalizing that decision. Per the ICAS report, “…community college representatives typically cite their perceived inability to keep students from borrowing unnecessarily or to influence whether those borrowers repay their loans.”
Is that really the case? Are these schools truly insulated from the methods and management of the financing their “customers” require to be able to afford the “product” they’re selling? More pointedly, is it right for these institutions to take what amounts to a buyer-beware approach for a product as important as education?
The simple truth is that students are more likely to take on education-related debt when they and their families can’t cover costs that are debatably within the schools’ ability to control. Sure, the institutions would have to make difficult choices to control expenses, but those decisions are theirs to make, just as it is within the students’ and their families’ capacity to decide whether the product the schools are selling is worth the price.
That’s where a close look at educational outcomes comes into play, particularly the number of students who graduate and the quality of their post-college employment. The findings, however, are troubling.
According to a 2011 Harvard University study, the No. 1 reason approximately 50% of all college students fail to complete their studies is financial. And a 2013 Bentley University white paper notes that “…35% of business leaders give recent college graduates they have hired a ‘C’ or lower in being prepared for the job,” while “…66% of recent college graduates say unpreparedness is a real problem among their own cohort.”
It would be easy to say that if higher education were more affordable and professionally effective, repayment rates would improve. But that’s not all that’s driving student-loan default rates.
Given the significant amount of indebtedness that recent graduates have undertaken (more than 70% owe an average $33,000 upon graduation) and where borrowers of more than one-third of all loans that are currently in repayment mode are struggling to keep up, it’s hard to understand why these loans continue to be structured with 10-year durations. Debts that are the size of small mortgages should have longer repayment terms. The government knows that, but for some reason offers extended durations only to borrowers who are in distress.
What I find even more troubling is that the CDR is based upon debts that have not been paid for nine months or more. This is, in and of itself, mindboggling to anyone with loan-servicing experience. Borrowers who miss a couple or three payments can more easily be rehabilitated than those who are permitted — I use that word deliberately — to miss more. Clearly, the loan servicing companies are as much to blame for student loan default rates as anyone.
Meantime, where does this poorly conceived and narrowly rationalized decision on the part of the community colleges leave students who are now without access to the government’s low-cost education-financing programs? In the higher priced, less-accommodating hands of the financial services industry.
Get ready for even higher default rates.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.
Image: Gloda
August 26, 2020
Student Loans
August 4, 2020
Student Loans
July 31, 2020
Student Loans