Pilot Program to Address Runaway Loan Default Rates Among Texas Students
By Alejandra Cerna
This month, the Texas Higher Education Coordinating Board will begin to shape the Student Loan Default Prevention and Financial Aid Literacy Pilot Program which will formally kick off in January 2014. THECB is currently accepting comments on the proposed rules until December 1. The pilot program was established during the last legislative session in an effort to curb the rising student loan default rate for those attending Texas postsecondary institutions.
According to the latest figures—released last month by the U.S. Department of Education—Texas still has the 8th highest (3-year) student loan default rate, which jumped to 17.3 percent among the 2010 cohort —well above the national average (14.7 percent). In Texas, the most recent cohort is faring much worse than the 2009 cohort (16.1 percent). Default occurs after nine months of non-payment.
Increasingly, states are beginning to take action to stem student loan debt and defaults. Texas’ new default pilot program will prioritize “high-risk” institutions: those schools with rates over 20 percent or those with above-average increases in loan defaults. Currently, over one-third of institutions in the state fall into this category. For-profit institutions account for 50 percent of this group, and 38 percent are public 2-year colleges, while the remaining share are 4-year public and private non-profit institutions.
Students attending for-profit schools default at a higher rate (18.9 percent) than students at other types of institutions, reflecting a national trend of for-profit institutions driving the spike in the default rate. However, the large share of public 2-year colleges in the high-risk group indicates that even when lower-income students are selecting public institutions, they and their institutions may be lacking information on effective financial and career planning.
The new 3-year rate more accurately captures the arch of default rates among cohorts entering repayment. The new rate, first reported last year, will replace the 2-year rate in 2014 as the common measure of eligibility for postsecondary institutions receiving federal student aid funds. Institutions with a default rate of 30 percent over three years – or 40 percent in one year – risk losing federal funds. The consequences of default for students are severe and can include a ruined credit score, disqualification from taking on further student loans, and wage garnishment, among other lasting impacts.
Both institutions and students stand to benefit from a successful default prevention program, which will contract with partners to provide campus-based financial aid counseling, including:
- Understanding the consequences of borrowing money;
- Selecting high-return career paths;
- Making academic progress; and
- Avoiding delinquency and debt.
In designing the pilot program, Texas should use an integrated service delivery approach that enhances financial stability during and after college. The integrated approach packages support services in assetbuilding, accessing affordable financial products, screening for the Earned Income Tax Credit and benefits, and career advancement counseling.
In Texas, Houston is home to an integrated service delivery project run by three partner organizations: Houston Community College Northeast, the Houston Local Initiatives Support Corporation (LISC) and the United Way of Greater Houston. Similar approaches, such as the Center for Working Families model, have reduced barriers for low-income students by placing integrated hubs and navigators on community college campuses in ten states.
A loan default pilot program with integrated services should be combined with additional strategies that address the needs of working students with families:
- Create opportunities to better combine work and school obligations and build career experience via the Texas College Work-Study program.
- Effectively target state financial aid grants to low-income students. Grants can offset loan burdens, making repayment more manageable.
These strategies will increase the odds that students will graduate, pursue a career with increased income, and pay off their student loans while building assets. If we give students the right tools to invest in their future, Texas too will reap the rewards down the line.