Student loans are becoming an increasing form of financial aid for students. This is due to the decreasing value of grants and the increasing costs of education and living expenses. Community college financial aid administrators struggle to keep a fine line between the increasing student loan debt and managing the federal cohort default rate in order to continue to remain eligible to participate in the federal student aid programs. This article attempts to explain the loan programs and why student debt is increasing.

Obtaining and Managing Student Loans

Student loans are easy to obtain. Students apply for financial aid using the Free Application for Federal Student Aid (FAFSA). Once the student completes the financial aid process, the school sends the student an award letter listing their financial aid awards.

Students who want loans must go through another process at the college which involves attending a federally mandated Entrance Loan Counseling workshop which lasts about 1 to 2 hours. This is the opportunity to help discourage student loan borrowing, however, once the loan is processed and the student signs the Master Promissory Note, the funds are on its way to the student. There is no credit check or debt to income ratio as common in commercial loans. Students are also required to attend an Exit Loan Counseling workshop before they leave school, however if they do not attend, the materials are sent to the student borrower.

One of the ways students can reduce their indebtedness is by attending a community college and limiting their student loan borrowing. Most community colleges do not package fully to the student’s financial need with student loans because we do not encourage borrowing. Community colleges have a lower cost of education because our enrollment fees are $26 per unit. Students who are California residents can qualify for the Board of Governors Fee Waiver which waives the enrollment fee. By limiting their borrowing at a community college, they will also be saving their loan eligibility for when they transfer to a four-year university. Other strategies include applying for scholarships and reducing their living expenses by sharing housing and taking mass-transit.

Types of Student Loans

Let’s look at the loan types. Most colleges participate in the federal Stafford Loan program. There is the Subsidized Stafford Loan in which the federal government pays the interest that accrues while the student is in school, during deferment periods, and during the six month grace period after the student leaves school. The student is not responsible for interest until the loan enters repayment. There is the Unsubsidized Stafford Loan where all interest that accrues is the student’s responsibility. If the student chooses not to pay the interest while they are in school, the interest is then capitalized onto the principle amount at the time the loan enters repayment. The interest rate is variable, adjusted once a year, and capped at 8.25 %. The current rate from July 1, 2005 to June 30, 2006 is 4.70% during in-school, grace and deferment periods and 5.30% during repayment.

A few of our colleges participate in the federal Perkins Loan program where the college acts as the lender and is responsible for collection activities. Colleges get a small portion of funds from the federal government, and the majority of the funding is made through previously collected loans. The maximum annual amount is $4,000, and the maximum undergraduate limit is $20,000. The interest rate is fixed at 5%. The Perkins Loan program may be eliminated during the upcoming reauthorization of Higher Education Act which authorizes the federal financial aid programs.

There are other loans available to students. Parents of dependent students can borrow federal PLUS loans, and the annual limit is the cost of education minus financial aid. The annual variable interest rate is currently at 6.10% and capped at 9%. In addition, students can obtain private alternative educational loans. These loans operate more like consumer loans with higher interest rates and credit history reviews, and some do not require the school to approve them.

Loan Limits and Eligibility

Let’s look at the maximum Stafford Loan limits. Dependent students are those which required parental information on the FAFSA. A dependent first-year student can receive up to $2,625 per year, and $3,500 per year as a second-year student. An independent first-year student can receive up to $6,625 per year and $7,500 per year as a second-year student. Dependent undergraduates can receive a maximum of $23,000, and independent undergraduates can receive a maximum of $46,000.

Students need to be enrolled at least half-time to receive these loans. Students can easily qualify for the maximum annual amounts because the costs of education including room and board are rising, and the amounts of federal grants are not keeping pace with increased costs. An independent student who borrows the maximum amount for three years can reach $21,625 in debt. Many community colleges are now seeing students reach these levels. If they continue to borrow at a community college, they can accumulate a large debt and leave very little remaining loan eligibility if they should transfer to a four-year university, where the cost of education is much higher and it is common to package with student loans to meet the student’s financial need.

Loan Administration Issues

Colleges participating in the federal student loan programs must make the loans available to eligible students. Financial aid administrators can deny or reduce loans, but must do so on a case-by-case basis and cannot be part of a pattern that denies access due to race, gender, color, religion, or income. Schools must notify the borrower in writing the reason for the decision, and keep supporting documentation in the students’ file. Few administrators fully take advantage of this provision for fear of legal action from denied borrowers.

Financial aid administrators must constantly worry about their federal loan cohort default rate, which is calculated by the number of borrowers entering repayment divided by the number of students who default. This is challenging because of the large numbers of non-traditional students we serve due to our mission of open access. Schools with a 25% or higher cohort default rate in any of the three most recent years or if the most recent cohort default rate is greater than 40% will lose eligibility to participate in all federal financial aid programs. Schools are using various tools made available by lenders and guarantors to help prevent students from defaulting by periodically sending them correspondence to remind them of their loan obligations, and through Entrance and Exit Loan Counseling workshops.