More Flexibility on Loan Counseling

WASHINGTON -- College students who take out federal loans are required to receive counseling when they receive the loan and before they enter repayment, but not in between -- a source of frustration for financial aid administrators who say they are not able to advise students on whether they are overborrowing or will be able to pay back a loan in a timely manner.

The Obama administration signaled this week that it was developing a plan to allow some colleges and universities to require additional loan counseling of student borrowers on their campuses.

The idea is somewhat controversial among advocates for students because of concerns that creating additional burdens for low-income students could deter them from seeking the loans they need to pursue a college degree. It’s also a violation of federal law to limit an eligible student’s access to federal direct loans, except by using “professional judgment,” in which aid administrators have latitude to decide that special circumstances warrant more financial aid. The administration itself emphasized that fact in a letter to participating institutions last year.

But Ted Mitchell, the under secretary of education, told a crowd at the National Association of Student Financial Aid Administrators here this week that the department is considering giving a handful of institutions the power to require more loan counseling through the department's so-called experimental sites authority. The tool effectively allows agencies to bypass federal statutes on a limited basis for purposes of experimenting with new policies. The department recently announced that it would expand the Pell Grant program to college students behind bars using experimental sites, among multiple other uses.

“We’re keen to understand not only whether required loan counseling works but what kind of loan counseling is most effective, whether that’s periodic emails and text messages … or whether it’s something that’s more structured and more class based,” Mitchell said at the financial aid conference. A spokeswoman for the Department of Education confirmed that an experimental sites announcement was coming, but the department provided no further details beyond Mitchell’s remarks.

Certain types of institutions, including community colleges and for-profit institutions, have been especially vocal in their support of more flexibility to add loan counseling requirements at the campus level. Higher ed institutions can face sanctions for high student loan default rates, and overborrowing has become a concern in news coverage and at colleges and universities.

But a broader array of financial aid experts agreed the program could provide additional data to assess the effectiveness of loan counseling.

“The thing that we’re excited about with the department’s experiment is that this is going to be something that should be focused on data, on outcomes,” said Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators. “We should be able to run experiments and see if there are really positive outcomes from schools having more intervention in the amount students borrow.”

Colleges and universities face a particular challenge reaching students who don’t show up for exit counseling because they drop out and don’t finish their degrees. Financial administrators have the ability to offer additional voluntary counseling services to students but sometimes find themselves operating in a gray area in which they feel compelled to reach out to the Department of Education for guidance because of fears about compliance issues.

In a letter to higher ed institutions in April 2015, Lynn Mahaffie, the deputy assistant secretary for policy, planning and innovation, said that after completing entrance counseling, a student cannot be required to complete additional counseling as a condition of receiving a federal direct student loan.

Mitchell’s announcement got an endorsement from DeVry University, one of the country’s largest for-profits. It has already rolled out a number of initiatives that include financial plans for all new students and monitoring advising of high-debt borrowers, said Tom Babel, DeVry Group’s vice president for regulatory affairs. He said authorizing mandatory counseling would be a “game changer” for colleges’ debt management efforts.

David Baime, senior vice president for government relations and policy analysis for the American Association of Community Colleges, said the group’s member colleges want more tools to manage student loan programs.

“It’s an unhappy fact for us that we have the highest default rate of any sector of higher education -- even higher than the for-profit colleges at this point,” he said.

The association advocates providing even basic loan information to students on a regular basis as an effective method to lower default rates.

The Obama administration in particular has been aggressive in pursuing policy changes through experimental sites. And it’s come in for criticism from Republicans for flouting congressional authority with initiatives like Pell Grants to prisoners.

But giving college administrators tools to intervene more directly in students' loan decisions is an idea senior Republicans have spoken of approvingly, as Tennessee Senator Lamar Alexander, chairman of the Senate education committee, did in a February Q&A with The Washington Post. Although experimental sites don’t require congressional approval, it’s possible he would back the plan, pending more details.

Robert Kelchen, an assistant professor of higher education at Seton Hall University whose areas of focus include student financial aid, said the experimental sites approach is the right way to pursue additional loan counseling right now because existing research doesn’t show tremendous effects on student default rates.

“I’m skeptical that this will be a fairly effective intervention,” he said. “And that skepticism is mainly because this will probably be something online or, if it’s something in person, it would be fairly short and limited just because of resource constraints.”

The potential downside of such efforts, Kelchen said, is that many students who should be borrowing the full amount to pay for a college education end up not borrowing enough because institutions are too focused on overindebtedness.

Financial aid administrators and policy groups will watch in the coming weeks to see what kind of institutions are enrolled in the experimental sites program -- four-year, community college, public, private, for-profit -- and which borrowers are subject to additional restrictions. Observers will also look to see how additional loan counseling would differ from what students already receive at colleges and universities.

“We know very little about what works and what doesn’t work in student loan counseling,” said Debbie Cochrane, research director at the Institute for College Access and Success.

Cochrane said a lot will depend on the design of the program, but it’s hard to imagine that anyone who follows student borrowing wouldn’t be more interested in learning more about which steps work and which don’t in helping student borrowers make informed decisions.

“The fact that the department is looking to see what they can do and trying to craft a positive approach to studying it is a positive thing,” she said. “The next step will be looking at the details of their actual proposal.”