Colleges learning lessons on student loan defaults

Posted Tuesday, Aug. 27, 2013  comments  Print Reprints

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Student loan debt has reached all-time highs.

In a recent speech at Knox College in Illinois, President Obama expressed solidarity with borrowers struggling to repay their loans, saying, “Everybody’s touched by this, including your president, who had a whole bunch of loans he had to pay off.”

More than $105 billion in federal loans were extended in the last fiscal year, and more than $1 trillion in loans are outstanding.

Worse, default rates have doubled in the past few years, to more than 13 percent.

That’s bad news not just for borrowers but for educational institutions, too. Institutes of higher learning have as much an interest in preventing defaults as students, since their continued eligibility for federal financial aid rests on borrowers’ ability to repay their loans.

Administrators must act on that interest by encouraging students to graduate in a timely manner — and by helping them to understand and meet the terms of their loan repayment plans.

The financial state of higher education is grim. A report last year from the consulting firm Bain and Company looked at 1,700 colleges and found that one-third were on an “unsustainable financial path.”

In June, following the closure of Saint Paul’s College, a historically black college in Lawrenceville, Va., credit rating agency Moody’s predicted that more colleges would shut down.

Moody’s cited “rising debt burdens among students” as a reason it expected more colleges to close.

Some college sectors are experiencing student loan default rates as high as 22.9 percent.

If more than 30 percent of an institution’s loans default in a given year, the school is put under review by the federal Department of Education.

If the problem isn’t fixed within three years, the school can lose what’s known as Title IV funding.

Without that funding, schools can’t participate in many federal student loan programs — nor can they accept federal Pell Grants for low-income students. This year, nearly 10 million students are set to receive such grants.

Fortunately, recent history offers several instructive examples of colleges and universities overcoming high default rates.

In the late 1990s, seven historically black colleges in Texas found themselves in financial peril. They joined forces to form a collective “default management consortium.” Over the next several years, each significantly reduced its default rate.

Their success can be attributed to two factors.

First, each college created a task force that included faculty, staff, and administrators to oversee its progress. Second, each implemented a default-management plan that included borrower education, communication and data analysis.

Borrower education should be at the center of any college’s plan to curb defaults. Some schools are offering courses that include in-person counseling and instruction in financial literacy while students are still in school.

Some leading higher-ed administrators are also enlisting faculty to help them determine which students may need assistance with their loans.

Students who don’t graduate are four times more likely to default than graduates. If a professor notices that one of her pupils is struggling, she can activate an “early-warning system” to help the student get the academic assistance he needs to graduate on time.

Finally, schools can assist former students — graduates and non-graduates alike — with their loans by proactively offering career services that help alums advance within their chosen fields.

Graduates who are successful in their careers are more likely to fulfill their student loan obligations.

Other students may benefit from alternative payment plans — including income-based or income-contingent programs, such as “Pay As Your Earn.” Under some plans, students may even be eligible for loan forgiveness — which can benefit both school and borrower.

This systemic problem requires systemic solutions. America’s burgeoning student-loan crisis can’t be solved simply by focusing on borrowers.

Those of us in the higher education community must work actively to mitigate defaults, too. Our future depends on it.

Sue McMillin is president and CEO of the non-profit Texas Guaranteed Student Loan Corp.

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