Student Loan Policies Most Harmful For Disadvantaged Students

Issue Brief

President Obama this week continued to describe his Administration’s changes to federal student lending programs as essential steps in fighting rising college costs. But research continues to demonstrate that financially disadvantaged and minority students are most likely to miss opportunities as a result of the policy changes.

During an online town hall meeting this week, the President explained that by ending federally-guaranteed student lending through commercial banks, he had stopped a stream of subsidies to lenders that had been driving up tuition costs. But in noting the increase in federal Pell grants now being offered, he did not mention the growing numbers of students without access to federally-guaranteed student loans.

Some 10 million Americans are currently enrolled in the nation’s community college system, which President Obama described as a “huge, underutilized resource.” But according to a 2011 study published by the Institute for College Access and Success, access to government loans has gotten especially bad at community colleges in many states.

More than one million students attend community colleges that do not participate in the U.S. Department of Education’s Direct Loan program. A disproportionately large proportion of these are minority students, and African-Americans and native Americans are both twice as likely as white students to lack such access. These percentages were highest in Southeastern states, including North Carolina, Georgia and Virginia.

The report cites high default rates and concerns about excessive student borrowing as main reasons why community colleges have elected not to participate in the federal loan program.

Meanwhile, allies of the Presidents’ policies have criticized for-profit higher-education institutions for frequently having higher student loan default rates. This rationale has been widely cited as justification for targeting for-profit institutions with high student loan default rates for strict financial penalties. Proprietary higher ed institutions, including trade schools and online universities, do have higher student loan default rates. But they also serve significantly higher proportions of students with financial need. One new study analyzing default rates noted that when controlling for demographic factors, student’s financial situations are substantially better predictors of loan default than the type of institution they attend, and account for much of the difference in defaults.

Another recent criticism of for-profit institutions has been their practice of encouraging forbearance status and other strategies to prevent student loans from entering default status. But policies and contracts used by the Education Department’s Direct Loan program also encourage the use of these strategies, and even include financial incentives for their loan servicers to encourage them. An insightful analysis for Congressional leaders to pursue would examine how frequencies of forbearance and other default-prevention strategies differ.