Limiting (Some) Loans

WASHINGTON -- Under a financial aid “experiment” announced Thursday, some community colleges and for-profit institutions will be able to fulfill a long-held desire: limiting the amount their students can borrow in federal loans.

But the program, one of eight “experimental sites” in the Education Department’s program to test the effectiveness of different ways of distributing federal financial aid, might not please either sector. It is limited to unsubsidized loans and will not affect the subsidized loans for low-income students that many community college students take out. And the experimental guidelines strongly urge for-profit colleges that seek to reduce loan payments to their students to reduce tuition by the same amount. This is designed to prevent the colleges from using the student loan reduction to boost the proportion of their revenue that comes from private sources rather than the federal government, to help them comply with the so-called 90-10 rule (more on that later).

The Education Department announced in Thursday’s Federal Register  that it is seeking participants in eight financial aid experiments as part of its Experimental Sites Initiative. The program, intended to test financial aid innovations, was beloved by financial aid officers but cut off by the Bush administration during its final days in office. In 2009, the department requested proposals for future experiments.

Colleges accepted as experimental sites can try out changes to financial aid programs usually not otherwise permitted by the Higher Education Act. In return, they must document the results through specific metrics, including (in some cases) employment rates and data, completion rates and academic performance measures. Each experiment must have a control group.

Along with the loan proposal, the department is testing programs that would allow students who already hold a bachelor’s degree to receive a Pell Grant for vocational training, and make students in short-term job training programs eligible for the grants as well. Others would adjust loan disbursement for students studying abroad; and allow “unequal disbursement” of federal student loans, so that students can receive more of the money up front if financial aid officers deem it necessary. Two proposals would expand eligibility for students with intellectual disabilities, and their parents.

Some of the proposals seem to acknowledge the economic climate, offering additional ways for unemployed workers to get federal money for job training. Others, including limiting borrowing amounts, have been on colleges’ wish lists for years. But whether the proposals will result in long-term adjustments to financial aid programs is unclear: the last round of experiments, many of which were phased out after the program was canceled in 2009, was praised for reducing administrative burden at colleges and universities, but led to little legislative change.

Of the experiments, limiting borrowing is likely to get the most attention and could have the greatest long-term effect. “This is going to be potentially one of the things that could impact students the most if it’s a successful experiment,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators. “This is something that a lot of schools have talked about for a long time.”

Under the experiment, colleges would be able to reduce the maximum unsubsidized loans for which students are eligible by at least $2,000, either across the board or for certain categories of students, such as students who are enrolled part time, living at home, or need extensive remedial classes before they can accumulate credits toward a degree.

The experiment is intended to limit overborrowing by students at community colleges and other low-cost institutions, who sometimes are approved to borrow many times more than they need for tuition, fees and other program expenses. Some colleges argue that allowing students to borrow that much leads to increased default rates, and as a result, some community colleges do not participate in federal loan programs, the department wrote in its Federal Register notice.

“Allowing students to borrow up to their cost of attendance sometimes is counterproductive, especially when they’re battling increasingly high default rates,” Draeger said. “The idea is that maybe they can help students temper the amount of debt they’re going into for college and it will have positive outcomes for the college.”

But for community colleges, limiting the experiment to unsubsidized loans -- students can still borrow the full amount for subsidized loans (up to $3,500 in the first year, $4,500 in the second and $5,500 in the third year and beyond) will severely curtail its effectiveness, said David Baime, senior vice president for government relations and research at the American Association of Community Colleges. For subsidized loans, typically for lower-income students, the government pays the interest while borrowers are enrolled in college. Unsubsidized loans have no such benefit.

“That limitation, I think, limits the extent to which our institutions are going to be excited about participating in it, unfortunately,” Baime said, adding that community college students take out unsubsidized loans at a lower rate than students in other sectors, given the colleges' comparatively low tuitions. “After asking for this authority to reduce loan maximums across the board, to have an experimental site that doesn’t include subsidized loans is kind of disappointing to us.”

For-profit colleges, where students do tend to take out unsubsidized loans, had also asked for the authority to limit borrowing. Some for-profit colleges argue that the 90-10 rule, which requires that no more than 90 percent of proprietary institutions’ revenue come from federal sources, forces them to keep tuition higher than federal borrowing limits.

Under the experiment, for-profit colleges that want to reduce maximum unsubsidized loans will have to reduce tuition by at least an equivalent amount. (While such institutions can participate in the experiment to prevent overborrowing, the government nudges them toward the tuition-lowering option: “For-profit colleges interested in reducing their students' over-borrowing are encouraged to apply to participate in this experiment under both this issue and under issue 3,” which requires the decrease in tuition prices.)

Participation in the experiments is limited to colleges with a strong track record in federal financial aid programs: institutions must have a cohort default rate of no higher than 25 percent, and for-profit colleges must get no more than 85 percent of their income from federal financial aid programs. Colleges whose default rates or income ratios have been worsening, approaching the 25 percent or 85 percent limits, are also ineligible.

The experiment will be evaluated on whether the students whose borrowing is limited still manage to complete academic programs at a comparable rate to students with unlimited borrowing, as well as whether the change limits access for low-income students. The department will also verify that for-profit colleges reduced their tuition if they cited tuition prices as a rationale, and that students did not turn to private loans to supplement the lower federal loan limits.

Other experiments, including allowing students with a bachelor’s degree to receive Pell Grants for job training and giving Pell Grants to students in short-term job training programs, are more obviously aimed at helping reduce the impact of the recession, Draeger said.

Two programs would allow students studying abroad to receive their loans in one single disbursement, rather than two, or an early disbursement of their loan, in order to pay travel costs, enrollment fees or other upfront expenses for foreign study. Another would allow direct loans to be disbursed in unequal amounts, so students could receive more money at the beginning of the year to make a housing deposit, buy a laptop or pay other startup costs.

Colleges have until Dec. 12 to apply for the experiments. Financial aid officers will welcome the program’s resurrection, in part because the changes, if they make it through the experimental stage, would still be options rather than mandates, Draeger said. “Any time you can give a financial aid office an additional option, I think that’s a good thing,” he said.