Should colleges keep students from taking federal loans?

Funds from the federal government for college flow liberally, but there are limits. Not all students can obtain federal loans for college because some community colleges do not participate in the federal lending program.

In North Carolina, more than two-thirds of the state’s 58 community colleges have opted out of the federal loan program. According to the North Carolina Community College System office, only 18 of the 58 member schools will participate in the loan program this fall, down from 21 in 2009.

A national group, the Institute for College Access & Success (TICAS), has just issued a report, through its Project on Student Debt, criticizing the policy that allows community colleges to deny loans to students.

In “At What Cost? How Community Colleges That Do Not Offer Federal Loans Put Students at Risk,” researchers Debbie Cochrane and Laura Szabo-Kubitz write that colleges “do their students a great disservice by opting out of the federal student loan program.” It highlights North Carolina as one of the worst offenders, along with California and Georgia.

TICAS, based in Oakland, California, is a nonprofit organization that focuses on financial aid and college affordability. Best known for the Project on Student Debt, its tally of rising student loans, TICAS takes pride in having provided the model for the now-established policy of income-based repayment of federal loans. TICAS also claimed, at least as recently as last week, to have influenced the North Carolina legislature in 2010 to mandate that community colleges offer federal loans. (TICAS updated its website recently, after media attention to two July reports.) Since then, however, the state has repealed that law.

Why would colleges not allow their students to obtain federal loans? The answer is straightforward. The U.S. Department of Education is tightening the screws on colleges that produce too many students who default on their federal loans after finishing or dropping their studies.

Schools that have so-called “cohort default rates” of 30 percent or higher for three consecutive years not only lose the privilege of offering federal loans, but also lose access to Pell grants.

This is the first year that the federal government will mete out sanctions based on a three-year default window, extended from two years. Since defaults increase in the years following college, the previous requirement was not that severe. Now it will be.

In North Carolina, two of the most recent institutions to bow out of the program are Johnston Community College, in Smithfield, and Central Piedmont Community College, in Charlotte. About 60 percent of both Central Piedmont and Johnston students receive Pell grants. Only about 11 percent of students at Central Piedmont take out federal loans, and the figure is 22 percent at Johnston. (Nationwide, according to TICAS, 17 percent of community college students borrowed.)

“For decades, Pell grants have helped financially challenged students attend college,” Jeff Lowrance, a public relations officer at Central Piedmont, told the Charlotte Business Journal. He added, “CPCC, like many other colleges, simply cannot risk the availability of Pell grants to our students.”

Dr. Tony Zeiss, Central Piedmont’s president, said in a phone interview with the Pope Center that the school did not participate in the loan program for 12 years before the state mandate, and did so in 2010 only because of the mandate. (Central Piedmont is one of the two largest community colleges in the state.)

“First of all, in most cases, it’s not good for students,” he said. “In your effort to help some students, you cannot jeopardize a much larger group of students.”

Zeiss added that the program is not good for the college either, costing between $500,000 and $600,000 to participate. In an email, he said that $300,000 of that is the base cost to the school, and that in the 2012-13 school year, the college was forced to pay the federal government $253,000 after students dropped out.

Zeiss said Central Piedmont has instituted a scholarship program in place of the federal loan program, although he acknowledged that it would not reach as many students.

Once a North Carolina community college has opted out of federal loans, it is practically stuck with that choice. If a board of trustees votes to opt back in to the program, the school may not opt out again. Once a college has made its bed, it must lie in it.

The American Association of Community Colleges (AACC), a national community college advocacy group, has backed up Piedmont and Johnston. A recent press release criticized the TICAS report for downplaying the connection between student loan defaults and Pell grant eligibility.

The politics surrounding the policy have been surprisingly spirited in North Carolina. The Democratic General Assembly passed the mandate back in 2010. The following year, the legislature—which in the meantime had become a Republican majority—voted to repeal the law, but Governor Bev Perdue, a Democrat, vetoed it.

Lacking the numbers to override the veto, legislators passed local bills that allowed some colleges to opt out; the governor could not veto those. Finally, HB 7 in 2012 allowed all colleges to opt out.

The passion of the Democrats over this issue likely stems from the notion, pushed from President Obama on down, that policymakers should eradicate barriers to college access at all costs. However, the failure to consider the impact on Pell grants must be weighed against the access provided by loans.

The Project on Student Debt report does not delve much into the impact on Pell grants. The stated mission of TICAS is to increase the availability and affordability of college. But “At What Cost?” ignores the impact of the loss of Pell grants upon college access, and it minimizes the difficulty colleges face as they consider whether to participate in the federal loan program.

In other areas, “At What Cost?” offers several ideas for changing federal government policy in the arena of community college lending.

One is to streamline the appeal process so that colleges like Central Piedmont and Johnston can find out whether or not they are in danger of sanction early on, instead of waiting three years until they have already been punished.

Another is to consider prorating federal loans by attendance status, so that part-time students cannot take out the same loans as full-time students. The authors argue that this would make them more likely to complete a degree and thus less likely to default.

They also call for the Department of Education to coach financial aid officers, and to take a more active role in encouraging colleges to offer federal loans.

Overall, though the report calls for some action from colleges, most of its plan for reform centers on federal government policy. Particularly, it calls for policy changes that will encourage more use of the federal loan program—and less reliance on other options to pay for college.