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Tenn. Community College May Cut Federal Student Loans

Nashville State Community College is weighing the decision to eliminate federal student loans from its financial aid programs. The school is assessing the number of its students who have defaulted on their federal student loans.

By: Jeff Mictabor
Category: Finance:Loans
: Education:Financial-Aid
Posted: Mar 22, 2011
Updated: Mar 22, 2011
Views: 183


Nashville State Community College is weighing the decision to eliminate federal student loans from its financial aid programs.

The school is assessing the number of its students who have defaulted on their federal student loans and believes it may be in a better position to preserve other types of federal financial aid if it exits the student loan program. Schools whose students default at consistently high rates lose eligibility for all federal student aid — not just loans, but also federal grants and work-study funds.

About 25 percent of NSCC’s students currently take on federal college loans as part of their financial aid package. The school’s 2008 default rate on federal education loans was over 13 percent.

This default rate — the current standard calculation used by the U.S. Department of Education — measures how many students have defaulted on their federal college loans within two years of having begun repayment. Schools whose two-year default rate exceeds 25 percent lose access to federal student aid funds.

Under new federal regulations which are set to take effect next year, however, the student loan default rate will be measured over three years, with a new financial-aid eligibility threshold of 30 percent.

Measured over three years, NSCC’s default rate nearly doubles to 25 percent. If the school’s three-year default rate climbs just 5 percent more, NSCC could lose access to all federal student aid, including Pell Grants and work-study funding.

NSCC officials say they’re more interested in preserving federal grants and work-study options for their students and don’t want jeopardize these forms of student aid in order to keep a federal loan option available.

In Tennessee, more than one-fifth of the state’s public community colleges and vocational education schools already don’t participate in the federal student loan program for that very reason.

Tennessee already has one of the highest federal student loan default rates under the Department of Education’s current two-year calculation — hovering just under 9 percent. When the new three-year measure takes effect, most state college officials expect their default rates to rise significantly.

“What are we going to do? We have no control over who’s eligible to receive a [federal] loan, we have no control over the collection process, but we’re going to be held responsible,” NSCC’s president, George Van Allen, told The Tennessean. “Our option is to disengage ourselves from the loan program in order to protect the financial aid programs that benefit the majority of our students.”

The most common federal college loan for undergraduates, the federal Stafford loan, requires neither a credit check nor a co-signer and is awarded to students who meet basic eligibility requirements, such as U.S. citizenship or residency and a minimum courseload.

However, although schools don’t control which students meet federal loan eligibility guidelines, the financial aid office must sign off on any federal education loan by certifying it before those loan funds can be disbursed to a student. In that sense, the school can still control which students receive federal loan funds and how much.

Financial aid officials at NSCC say that one of the problems with offering federal school loans is that the funds can be used for ordinary expenses. Although tuition at NSCC averages just $1,500 per semester, students can borrow up to $5,500 in federal Stafford loans in their first year of studies.

The extra cash may be used to pay for books, fees, and living expenses, but it adds significantly to the student’s overall level of student loan debt. Counselors at NSCC say they advise students to borrow only what they need for educational expenses, but some students are so cash-starved that they ignore the warnings.

At the same time, the NSCC financial aid office always has the option to certify any Stafford loan or other federal school loan for less than the amount requested by the student.

The nonprofit advocacy group, The Project on Student Debt, estimates that the average Tennessean is carrying $20,678 in student loan debt and that 53 percent of the state’s residents have taken out a student loan at some point.

If NSCC moves forward in withdrawing from the federal student loan program, it will join several other community colleges nationwide that have done the same.

In neighboring North Carolina, 34 community colleges have opted out of the federal loan program, leaving more than 40 percent of the state’s community college students without access to federal student loans.

Although the North Carolina legislature passed a bill last year that would have forced the state’s community colleges to participate in the federal student loan program, the state House of Representatives recently passed a GOP-sponsored bill that rolls back the 2010 measure, allowing North Carolina’s community colleges to continue opting out of the federal loan program as they see fit.



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