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Colleges help students avoid default

​A student receives advice from the financial aid center at Monroe Community College (New York).

​After Amy Matteo graduated from Clover Park Technical College (CPTC) in Washington in 2012 with a pharmacy degree, it took her eight months to find a job in her field. Then, after working for six months, she was laid off.

“I was just getting to the point where I started making payments on my student loan,” said Matteo, who had borrowed $20,000 for two years of college.

Annual tuition at CPTC is $7,056. Students are eligible for $9,500 in loans per academic year. Those funds can cover tuition, fees, books, supplies, room and board, transportation, car insurance and other personal expenses.

But Matteo began to fall behind on her mortgage payments, and let her student loan repayments slide so she could take care of her housing costs first. Soon, she was on the verge of defaulting on her student loan, as email reminders about missing her $245-a-month loan payments piled up.

At that point, officials from CPTC contacted Matteo and urged her to take advantage of SALT, a third-party financial literacy program the college had just joined. Through SALT, Matteo was able to put her loan payments on pause until she can find a job.

Default rates rising

Matteo is part of a trend, as the student loan default rate is rising at all levels of higher education.

According to data released this month by the National Association of Student Financial Aid Administrators (NASFAA), community colleges have an average two-year cohort default rate for 2011 of 15 percent. That’s the percentage of students whose first loan repayments came due between Oct. 1, 2010, and Sept. 30, 2011, and who defaulted by Sept. 30, 2012.

That compares to a 9.6 percent two-year default rate for all types of higher education institutions, up from 8.3 percent in 2011.  

Nearly 60 percent of two-year students get financial aid

The U.S. Education Department is in the process of transitioning from a two-year to a three-year cohort default rate. The three-year community college cohort default rate for 2010 (for borrowers whose first loan repayments were due between Oct. 1, 2009, and Sept. 30, 2010, and who defaulted by Sept. 30, 2012) was 20.9 percent for the 2010 cohort. That is an increase from the 18.3 percent three-year default rate for the 2009 cohort.  

The data indicates the nation is experiencing “a repayment crisis, as opposed to a debt crisis, when it comes to student loans,” said NASFAA President Justin Draeger.

The fact that the 600,000 students nationwide who defaulted in 2012 “could have used deferments, forbearances or income-contingent repayment plans to avoid the awful consequences of default—but didn’t—underscores the need to keep student loan indebtedness in check and provide borrowers with easy-to-reach resources,” Draeger said.

A disconnect

Many former community college students in default don’t understand that they have to repay loans even if they left school without a degree, added NASFAA Policy Director Megan McClean. And many of them don’t understand the implication of non-payment, such as a bad credit score, not being able to borrow more money for school or the prospect of having one’s wages garnished.

For colleges, a high default rate for a certain period of time could result in losing eligibility for Title IV funds. In addition, default rates are likely to figure into the new college rating system under development in the U.S. Department of Education.

Tuition increases appear to be slowing down

The overall default rate was generally between 4 and 5 percent from 1991 to 2005 and began steadily rising after 2006, McClean said. The nation is still seeing the impact of the economic downturn in 2008, when people were losing their jobs, defaulting on mortgages and going back to school to learn new skills. Although the economy has recovered to some extent, jobs aren’t as readily available as they were 10 years ago, she said.

Another contributing factor is that students are borrowing more and using loans to finance a greater part of their education, she said. While the default rate might seem high, “community college students are not defaulting on an exorbitant amount of debt,” she said. They are nowhere near the media horror stories about former students at high-end universities who are $100,000 in the hole. Still, even a small amount of debt can be debilitating.

Focusing on financial literacy 

CPTC signed on with the SALT program in September because it doesn’t have the resources to provide its own financial counseling to students and is concerned about rising default rates. The college’s two-year default rate for 2011 was 12.3 percent, up from 9.5 percent in 2010. The three-year default rate was 20.7 in 2011, the first year it was calculated.

SALT was developed by a nonprofit organization called American Student Assistance. More than 240 higher education institutions are using the program, including 94 community and technical colleges. (SALT is not an acronym; the name was chosen because salt was one of the world’s first currencies, said Allesandra Lanza.)

SALT  is very interactive, with online videos, apps and “money 101” courses to help with budgeting, as well as the basics on student loans, “speaking the language our students speak,” said CPTC spokesperson Tawny Dotson. It provides immediate access to information in a variety of formats—such as downloadable PDFs, email or phone calls. (See video at the end of this article.)

There is no charge to students who take advantage of SALT’s services, such as financial counseling and debt management. SALT can help them combine loan repayments from different services or change the repayment schedule but it can’t renegotiate interest rates.

AACC launches accountability system for two-year colleges

Clover Park Tech serves a mostly low-income population that’s been hurt by the economic downturn, said Wendy Joseph, financial aid director.

“Many of our students are first-time college students, and they are not very well educated in money matters,” she said.

In many cases, low-income students were more likely to use their student aid for non-education related expenses, she added. They paid their rent or credit card bills, for example, and then found themselves in the middle of the quarter with no money for utilities.

The college lends students a yearly allowance of $9,500 a year, split over four quarters, including the summer quarter, Joseph said.

Making the right choices

Monroe Community College (MCC) in New York also recently signed on with SALT to help students burdened by debt and to help bring down the college’s default rates.

For the 2010 cohort, MCC has a 20.2 percent three-year default rate and a 15.6 percent two-year default rate. Those rates have gone up a couple of percentage points, mirroring the trend across the country, said Jerome St. Croix, director of financial aid.

Under the government’s rules, “we are held accountable for the default rate so we want to make sure it stays low,” St. Croix said.

MCC contacted 7,000 former students in the repayment process, advising of them of the services available through SALT. For current students, SALT provides guidance on finding alternative sources of aid, such as grants and scholarships, and exploring whether they can cut out unnecessary expenses, such as cable TV, St. Croix said.

“We want them to make a conscious decision, so they know a loan is right for them after looking at other options first,” he said. “Ultimately, it’s their decision. We’re giving them better tools to make that decision."

The college is also encouraging students to review the expected income of the fields they want to enter and to determine and understand repayment obligations before taking out a loan.

“We want them to go into a career they’re interested in, but they should understand that a career in human services might be rewarding but pays less than other fields,” St. Croix said.

St. Croix suggested one reason why the default rates have risen has to do with how the government handles repayments. In some cases, students are dealing with two or more different loan service agencies—especially if they’ve been at more than one institution.

“They are getting conflicting information. That confuses them,” he said.

Online money courses

The North Carolina State Education Assistance Authority (NCSEAA) is planning to launch its own program next spring to help colleges nationwide provide financial literacy training and counseling to students and alumni. It is based on NCSEAA’s free online course modules on money management for community college students in North Carolina, said Executive Director Steve Brooks. Colleges will pay a fee to participate in the new program.

According to Brooks, about half the community colleges in North Carolina have dropped out of the direct loan program because of fears that colleges with high default rates will lose their eligibility for Pell grants. That means some students will resort to payday loans or decide against going to college at all, he said.

What colleges should be concerned with, Brooks said, is “helping students determine when it’s appropriate to borrow” and make sure they understand all the implications of going into debt.

That’s why NCSEAA contracted with Decision Partners to develop online courses and tests, which so far have been taken by more than 20,000 North Carolina community college students. As an added incentive for students, Decision Partners awards two $500 scholarships a year to randomly selected students who completed the Advanced Money Management module.

Personal contact

Keeping students out of default “really does require personal contact,” Brooks said. “When young people get a bill they can’t pay, they often assume it will go away if they ignore it.”

If a student tends to be 15 days late every month, it’s probably a case of her paycheck and loan payment being out of sync, and that has an adverse effect on her credit rating. A loan counselor can help change those due dates.

“In our experience, having someone who can intervene with students and help them find the best way forward can be a positive thing,” he said.

 A specialist discusses SALT services