For most post-secondary schools in the United States, federal student loans are a large portion of funding. New rules enacted last year set limits on the percentage of loans that can go into default. Some schools are considering rejecting federal loans all together, even though they are not hitting this limit.
The federal student aid program
The federal government provides several programs to help students finance their education. Federal grants do not need to be paid back – they are simply money given to students to help their education. Federal student loans, on the other hand, are low-interest installment loans backed by the government that students must pay back after they leave school. The federal student loan program guarantees billions of dollars in loans each year. The American Recovery and Reinvestment Act committed another $195 billion to purchase even more loans.
New rules on student loan defaults
In late 2010, the Government Accountability Office suggested new rules intended to target for-profit schools. Called the “gainful employment” rule, the amount of debt a student carries is measured against their income after graduation. If that ratio is consistently high, the government reconsiders the school’s eligibility for receiving loans. The rule is also tripped if a high proportion of students default on their loans after graduation. In short, any school that turn out graduates that cannot make enough money to pay back loans would no longer qualify for these personal loans.
Pulling out of the student loan program
Though the new rules are intended to cut for-profit schools out of the federal student loan program, other schools could get caught in the net. Small community colleges often cater to underserved communities — groups that take out a higher proportion of their income in student loan debt. Student loans cannot be written off by bankruptcy, and if the student eventually defaults, the school is responsible for at least a portion of the debt. Facing these realities, many small schools are considering pulling themselves out of the federal student loan program entirely.
What no federal loans could mean
For both for-profit and community colleges, pulling out of the federal student loan program could have wide-ranging effects. Students who wish to attend school would still qualify for higher-rate, more-difficult-to-qualify-for federal loans. This means students will have to find co-signers or outside funding for their average $23,000 in educational loan debt. For the average taxpayer, this means fewer people in college and fewer federal student loans.