Why the link between CDRs and Pell Grants is good for students

When too many borrowers default on their student loans, colleges can lose eligibility for federal aid. Colleges with a cohort default rate (CDR) above 40% lose eligibility to offer federal loans, and colleges with three consecutive CDRs at or above 30% lose eligibility to offer both loans and federal Pell Grants.

While some question the wisdom of tying colleges’ eligibility for federal grants to the outcomes of students who borrow federal loans, the link between Pell Grants and CDRs is incredibly important. That’s because federal taxpayers invest tens of billions of dollars in Pell Grants, and CDRs are the primary means of assessing whether colleges are a good investment for federal aid. Colleges can already avoid sanctions through challenges and appeals when relatively few of their students borrow.

To avoid losing access to Pell Grants, the most common form of financial aid for community college students, many schools are examining what they can do to help students avoid default. However, other colleges are citing fears of such sanctions for their decision to stop offering federal loans altogether – even schools that are at very low risk of sanctions. Cutting off access to federal student loans in this way is a problem because it forces students who can’t otherwise afford to stay in school to turn to much riskier types of borrowing, or to reduce their odds of completion by cutting back on classes, working long hours, or dropping out altogether.

Concerns about CDR sanctions have led some to argue that colleges’ eligibility for federal grants should not be tied to an outcome measure for federal loans, and that delinking grants from CDR sanctions might stop colleges from pulling out of the federal loan program. But if the goal is to ensure students are well served and have access to federal loans when they need them, then the logic behind arguments to delink Pell and CDR sanctions falls short on multiple fronts.

  • It wrongly presumes that default rates are entirely out of colleges’ control. In reality, colleges have a number of tools to prevent defaults and keep CDRs within acceptable levels. Given the severe consequences for each individual student who defaults, it’s imperative that colleges use every tool in their toolbox to keep borrowers on track. But as the New York Times recently editorialized, “[W]hat is likely to persuade colleges to deploy these tools in the first place is the threat of losing federal aid if they do not.” Indeed, the threat of losing eligibility for Pell Grants is focusing colleges on what more than can do to keep their students out of default.
  • With no incentive for colleges to keep students out of default, they will invest less in default prevention. This is not a statement about the character of student services professionals at community colleges, but rather about the obstacles they will face when trying to convince college leaders how scarce (and decreasing) resources should be spent. And when loan defaults increase as a result, the college will lose eligibility to offer loans.  So while colleges may be less likely to pull out of the loan program proactively if Pell and CDR sanctions are delinked, they will be more likely to be forced out of the loan program based on their default rate. The threat of losing federal loan eligibility is not going to be enough of an incentive for colleges to focus on keeping defaults down if they’re already considering opting out of the loan program. The end results? First, more community college students in default, and then far more without any access to federal student loans.

The upshot: delinking Pell and CDR sanctions will not help students.  Most community college students do not borrow federal loans. But students who do need to borrow should have access to federal loans, and it’s entirely appropriate to hold colleges deemed worthy of taxpayer investment by the federal government accountable.

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Capitol Hill Briefing – Strategies to Prevent Student Default at Community Colleges: An Overview for Policymakers

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How a Strong Gainful Employment Rule Would Have Helped Corinthian Students

In May, we wrote about the 114 career education programs from which more students default than graduate (it’s actually even worse than that since they have more defaulters in one year than graduates over two years). With Corinthian Colleges now preparing to sell or close all of its campuses, it is worth noting that Corinthian runs 25 of the 114 programs with more defaulters than graduates.

These programs are shockingly bad. Everest College Phoenix Associates’ programs in Securities Services Administration and Management, and in Business, Management and Marketing both had more than three times as many defaulters as graduates. Everest University in Tampa has an Associate’s degree program in Computer and Information Sciences that also has three times as many defaulters as graduates.

An effective gainful employment regulation would help protect students and taxpayers from schools like Corinthian. By enforcing the law requiring career education programs to prepare students for gainful employment in a recognized occupation, a strong rule would hold programs to clear outcome standards and measure their performance against those standards regularly. It would force the worst performing programs to improve or lose eligibility for funding before burying countless students with debts that may haunt them for the rest of their lives.

We and more than 50 other organizations submitted written comments urging the Education Department to improve its draft gainful employment rule to better protect students and taxpayers, including by requiring schools to provide financial relief for students in programs that lose eligibility, limiting enrollment in poorly performing programs until they improve, and closing loopholes and raising standards. If a rule with the changes we called for had already been in effect, Corinthian would long ago have had to rapidly improve or close programs in a way that better protected students and taxpayers.

The final gainful employment rule will be too late to protect Corinthian students, but it is not too late to protect the millions of students enrolling in other schools’ career education programs and the taxpayers who subsidize them.

Click here for a sortable list of the 114 programs with more defaulters in one year than graduate over two years. To read the New York Times editorial on our May blog post, click here.

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California Budget Includes Long Overdue Financial Aid Increase

The California state budget signed last week will make an important down payment towards college affordability for the state’s most financially strapped students.  The agreement includes a long-overdue increase to the Cal Grant B access award, which helps California’s lowest income students pay for books, supplies, transportation, and other non-tuition costs of attending college. Under the new budget agreement, the award would increase from $1,473 to $1,648 – a much-needed step in the right direction after decades of stagnation and a recent cut.

The students who receive Cal Grant B access awards typically have family incomes well below the federal poverty line and attend all types of colleges.  Yet the purchasing power of this award has declined dramatically even as college has become less affordable for all students and families. Had the award kept pace with inflation since it was created in 1969, the original $900 award would be worth about $6,000 today. In 2012-13, low-income California college students had to put three times as much of their discretionary income towards net college costs (total costs after subtracting grants and scholarships) than did higher income students.

The increase to the Cal Grant B access award is welcome news to a statewide coalition – including civil rights, college access, and business groups, and every statewide student association – that has recommended increasing the Cal Grant B access award so that our state financial aid policies do not leave low-income students even further behind. Importantly, the budget also enables Cal Grant recipients who lose eligibility for renewal grants because their financial situation temporarily improves to later regain eligibility if their finances worsen, fixing an unintended consequence of the 2012 Budget Act.

To be clear, these financial aid changes are not a silver bullet for solving the college completion crisis and equity gaps that plague our state, or even the affordability challenges facing low-income students.  Even at the new level of $1,648, the Cal Grant B access award will still be worth far less than it was a generation ago: it will not even cover the estimated cost of books and supplies ($1,746) let alone other educational expenses. Furthermore, far too many Cal Grant eligible students will continue to be turned away because there simply aren’t enough grants for those who don’t enroll in college right after high school or miss the application deadline.  Still, the Cal Grant B increase is a crucial step in the right direction, and we applaud the California Legislature, Assembly and Senate leadership, and the Governor for making a smart investment in California’s future.

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Playing the Cal Grant Odds

California college students who meet Cal Grant eligibility requirements are guaranteed a Cal Grant if they’re recent high school graduates who meet the application deadline. But students who apply for a grant more than one year after finishing high school or who miss the application deadline face a starkly different reality. Just 22,500 Cal Grants for these students – called “competitive” Cal Grants – are authorized each year. And for 2013-14, there were 16 eligible applicants for every authorized award.

In other words, an eligible applicant’s chance of receiving a competitive Cal Grant is about 6 percent. Wondering how that stacks up against other notoriously long odds? We did some digging and found that it’s tougher for an eligible student to earn a competitive Cal Grant than:

• for a gambler to win in a Las Vegas casino (13 percent);1 or

• for a high school senior who applies to Ivy League colleges to actually get into one (9 percent);2 or

• for a college baseball player to get drafted by a Major League team (9 percent).3

Getting financial aid shouldn’t be harder than beating the odds in Vegas, getting into the Ivy League, or making the majors. The hundreds of thousands of eligible students denied Cal Grants have an average family income below $21,000 for a family size of three, and an average GPA of 3.0. The odds confronting these students are far too long, and the losers far too deserving, for policymakers to continue accepting the status quo. Parallel efforts are underway in the California State Assembly, via this year’s budget negotiations and Assembly Bill 1976 (Quirk-Silva), to increase the number of competitive grants available and ensure that all authorized grants are actually getting to students. Putting our money on high-achieving, low-income students isn’t just a safe bet – it’s an investment with great returns for California.

– Matthew La Rocque

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Across all games and tables in the Clark County Downtown Las Vegas area, the average win percentage is about 12.8 percent. For slot machines, the average win percentage is about 6.7 percent. State of Nevada. State Gaming Control Board. Gaming Revenue Report. December 31, 2012. http://gaming.nv.gov/modules/showdocument.aspx?documentid=7618.

Among applicants for the Class of 2018, the aggregate admissions rate across the eight Ivy League colleges was about 8.9 percent. Washington Post. March 28, 2014. http://www.washingtonpost.com/local/education/the-ivy-league-admission-rate-8-point-something-something-percent/2014/03/28/558400de-b67e-11e3-8cc3-d4bf596577eb_story.html.

About 9.4 percent of NCAA senior male baseball players will get drafted by a Major League Baseball (MLB) team. NCAA Research. Estimated Probability of Competing in Athletics Beyond the High School Interscholastic Level. 2013. http://www.ncaa.org/sites/default/files/Probability-of-going-pro-methodology_Update2013.pdf.

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Closing GE Loopholes: The Case for a Repayment Rate

As the Department of Education works on a final rule to stop federal funding for career education programs that over-promise and under-deliver, it needs to close loopholes to prevent unscrupulous colleges from gaming the system.

Under the draft regulation, career education programs would be judged by two different tests: how the debt of their graduates compares to later earnings, and how many of the programs’ borrowers default on their loans.  Programs that consistently exceed allowable thresholds of debt-to-earnings or rates of default would lose eligibility for federal aid.  While many in the for-profit college industry complain that the tests are too stringent, the data show the exact opposite and that the rule needs to be strengthened.

Exhibit A for a tougher rule is the fact that 20 percent of the 114 parasitic career education programs – those where more students default than graduate – would pass the proposed tests. And exhibit B would appear to be Education America Inc.’s Remington College, a formerly for-profit chain that began operating as a nonprofit in 2011.

Data released by the Department in conjunction with the rulemaking show three large certificate programs that have a collective repayment rate of 12 percent – meaning only 12 percent of borrowers are paying down their debt. The three are large medical/clinical assistant certificate programs at what appear to be Remington’s Texas, Ohio and Alabama campuses. (Some of the data files released by the Department do not include college names so only the Department can confirm which college’s programs these are.  However, looking across multiple data files, including a file with college names, strongly suggests these three low-repayment programs are the Remington programs.)

To make matters worse, these three programs would not fail under the Department’s draft regulation– the one that industry complains about being too strict.  Despite the extremely low repayment rate, the aggregate cohort default rate for the three Remington programs is only 14 percent, far below the threshold of 30 percent. Such a low rate of borrower default from programs where hardly any borrowers are paying down their loans suggests the college may be manipulating their default rates by putting former students in forbearance during the window when default rates are being measured – regardless of whether it is in the borrowers’ best interest to do so. In fact, a Remington College executive said as much in 2009, noting that “we’ve known all along what [the Department] finally figured out,” that borrowers receiving forbearance and deferment were later defaulting on their loans once it stopped tracking defaults after two years. The Department then changed its default monitoring to a broader three-year metric. “They [the Department] decided we were getting off too easy,” the Remington executive noted. (Note that colleges can and do manipulate three-year default rates, but it takes more work to do so than for two-year rates.)

Programs where most students borrow and the vast majority of borrowers cannot repay their loans should not keep enrolling students receiving federal aid. The Department could close this loophole in the gainful employment rule by instituting a repayment rate in addition to the other tests. It must also prohibit unscrupulous schools from manipulating their program default rates or their repayments rates by making small payments on behalf of former students.

Read more about these issues and recommendations in our comments on the Department’s draft gainful employment rule.

-Debbie Cochrane

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Helping the Lowest Income Students Will Have the Highest Returns: What the California Legislature Can Do Right Now to Strengthen Cal Grants

This week, the California State Assembly and Senate will hold budget subcommittee hearings on higher education, including Cal Grants – the state’s need-based financial aid program. The subcommittees are expected to vote on spending plans for the 2014-15 budget year. And unlike recent budget years, the Legislative Analyst’s Office projects a general fund surplus of “several hundred million dollars.”

Cal Grants help thousands of students get to and through college, but even so, college remains least affordable for California’s lowest income students, regardless of what type of college they attend. At UC, the lowest income families pay a whopping 64 percent of their discretionary income* to cover college costs, while the highest income families pay 21 percent. (For more, see our testimony from the Assembly Budget Subcommittee No. 2 on Education Finance and Senate Budget and Fiscal Review Committee, Subcommittee 1 on Education hearings this past March.)

 Cal Grant 5.20

*Discretionary income recognizes that some family resources must go toward basic needs.  Here, discretionary income is defined as income below 150 percent of the poverty level for a household of one.

 

We urge the legislature to improve college affordability for low-income students at all colleges by strengthening the Cal Grant program in two key ways:

(1)  Increase the size of the Cal Grant B access award, which helps students at all colleges limit their work hours and focus on their studies. At just $1,473, today’s access award is worth just one quarter of its original value and doesn’t even cover the average cost of books and supplies.

(2)  Serve more Cal Grant eligible students. Every year the state turns away hundreds of thousands of eligible applicants because there aren’t enough competitive Cal Grant awards: in 2013-14, there were 16 eligible applicants for every available award. Competitive award recipients tend to have higher GPAs and lower incomes than other Cal Grant recipients. Those turned away have an average family income below $21,000 and a family size of three.

These two improvements would go the farthest to improve access and success for low-income, underserved students at all types of colleges. These are the wisest financial aid investments California could make, and the time to make them is right now.

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Where More Default Than Graduate: Career Education Program Parasites

The Obama Administration is moving forward in defining what it means for career education programs to “prepare students for gainful employment in a recognized occupation.” This requirement – which applies to programs at public, nonprofit, and for-profit colleges – has long been in federal law, but, without a rule defining what it means, the Department has been powerless to enforce it.

The draft rule would measure career education programs’ outcomes in two ways. First, the debt burdens of program graduates who received federal aid would be compared to their later earnings. Second, students’ ability to repay their loans – including both graduates and noncompleters – would be measured through a program-level cohort default rate.  Programs where graduates’ earnings don’t justify typical levels of debt, and those where borrowers too frequently default on their loans, would lose eligibility for further federal grants and loans unless the programs improve.

The data released by the Department in conjunction with its proposed rule are alarming. They couldn’t make a better case for why the rule is desperately needed and must be strengthened to provide meaningful protections for students and taxpayers.

To illustrate:  Of the 4,420 programs in the dataset with complete data (meaning that both students’ debt burdens and default rates are calculated), there are 114 programs where the data show more defaulters than graduates.  In other words, students receiving federal aid to attend these programs are more likely to find themselves unable to repay their debt than they are to complete the credential they sought.  It’s also important to understand that this very much understates the problem at these programs.  That’s because, due to the way that debt burden and defaults are measured, these figures represent the defaults from one cohort year (those who entered repayment in 2009) compared to two years’ worth of completers (those who completed in either 2008 or 2009).

Here are a few facts about these 114 programs with more defaulters than graduates:

  • All 114 are at for-profit colleges, and most (82) are associate degree (AA) programs.
  • They include a sizable share of measurable programs in some fields. Seven of the 13 AA programs in ‘securities services administration/management’ have more defaulters than graduates.  Six of the 17 ‘accounting technology/technician and bookkeeping’ AA programs have more defaulters than graduates.  And the same is true for all three of the AA programs in ‘criminalistics and criminal science.’
  • Almost two dozen of them (23 of the 114) fully pass the proposed rule’s modest standards. Of the others, 14 are “in the zone” – a program limbo for those not good enough to pass and not bad enough to fail outright – and 77 fail.

The fact that 20% of the programs leaving more students in default than with credentials pass the Department’s proposed tests clearly shows that the tests aren’t strong enough. And even the 68% of programs that fail outright would remain eligible for federal funding under the proposed rule unless they failed again.

What is also crystal clear from the data is that the stakes for students are high:

  • Many of the programs are huge: 33 of the 114 programs had more than 1,000 students who entered repayment in a single year, and 6 of them had more than 5,000 borrowers who entered repayment in that year.
  • There are seven programs where the number of defaulters exceeded the number of completers by more than 1,000.  All seven are at the University of Phoenix.

These are parasitic programs, consuming resources to the detriment of students and taxpayers. Reasonable people may disagree on certain aspects of the Department’s proposal, but the need to strengthen the rule so programs like these must shape up should not be one of them.

Click here for a sortable list of the 114 programs with more defaulters in one year than graduate over two years. To read the New York Times editorial on our May blog post, click here.

- Debbie Cochrane

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Knowing is half the battle

Last December, we wrote about three ways the U.S. Department of Education could and should be supporting colleges –low-borrowing colleges in particular – in offering federal loans.

A recent letter from the Department addresses one of these requests head-on, and was particularly timely because it was sent just after colleges received their draft cohort default rates for borrowers entering repayment in 2011. The letter emphasizes the importance of student access to federal loans, and the participation rate index appeal for low-borrowing colleges:

Access to federal student financial aid, including low-cost Federal student loans, increases the likelihood that students will have the financial resources to successfully complete the postsecondary education needed to build a better future for themselves, their families, and their communities.

We encourage institutions to provide access to the full range of student financial aid options available that enable millions of students to enroll and succeed in college….

We believe that the availability of the Participation Rate Index Challenge and Participation Rate Index Appeal could mitigate some institutions’ consideration of withdrawing from the Direct Loan Program due to sanctions triggered by high cohort default rates.

This letter will help keep colleges in the federal loan program, but more is needed.  The Department should still publish borrowing rates alongside default rates and allow low-borrowing colleges to appeal their rates in any year, as we previously recommended.  And now that they have published this letter, they should promote it at conferences and meetings with colleges.

Nonetheless, the Department’s recent action to help colleges understand the importance of federal loans and available appeals is an important step in the right direction.  As G.I. Joe famously says, “Knowing is half the battle,” and now colleges will be more likely to know.

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California Budget Proposal Includes Narrow but Important Cal Grant Fix

The California Governor’s budget proposal includes much to like for higher education. Deepened investments in public colleges and universities, as well as a fund for innovation in higher education, will serve to keep tuitions steady and make it easier for students to transfer and graduate on time. Community college students will benefit from expanded educational planning services and a focus on closing achievement gaps.

The budget plan also includes one narrow but very important improvement to the state Cal Grant program, the largest need-based grant aid program in the nation. Students who become ineligible because their family income rises above Cal Grant thresholds will be able to reenter the program should their income drop again. This modification is very similar to a bill introduced by Assembly Member Quirk-Silva last year (AB 1287), supported by TICAS and every statewide student group.

The Governor acknowledges that college affordability is a “critical outcome,” and there is a broad and growing consensus on the need to strengthen the Cal Grant program so that our lowest income students aren’t left behind. We had hoped the plan would have included more steps to increase the availability of need-based financial aid, which makes college more affordable for low- and truly middle-income students. While the plan points out that Cal Grants and community college fee waivers help to keep college within reach for some low- and middle-income students, many students continue to be left out of those programs, and many of those who receive Cal Grants get awards worth just one-quarter of their original value.

As expected, the budget plan does reflect last summer’s agreement to create a new non-need-based Middle Class Scholarship, with $107 million allocated for 2014-15. We continue to believe that the Legislature should consider improvements to the Middle Class Scholarship program to align it with longstanding state and institutional aid programs and target available dollars to students with at least some financial need.

We look forward to working with the Governor and Legislature to ensure that all of the state’s higher education investments work in tandem to increase college access and success.

- Debbie Cochrane, Research Director

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