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Education Enigma: Why Does Community College Leave So Many in Debt?

Community colleges offer higher education at a lower cost, but some students still end up with debts they can’t repay. Find out why.
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Community colleges offer higher education at a lower cost, but some students still end up with debts they can’t repay.

As the Obama administration pushes a free community college proposal, a new report from the Association of Community College Trustees (ACCT) finds that borrowers at two-year colleges face many of the same challenges funding their educations as their peers in four-year schools, while demographic and economic differences can make it harder for them to break the cycle of debt.

One of the report’s primary findings is that students who don’t earn a credential are more likely to default. Almost 90 percent of student-loan defaulters didn’t earn a degree, diploma or certificate, and 60 percent of defaulters completed fewer than 15 credits, or roughly one full-time semester’s worth.

This year, student loan default rates at all types of institutions are down, according to Department of Education statistics. But the rate at two-year colleges – around 19 percent – remains well above the rate of nearly 12 percent across all institutions.

“There’s been a growing body of research showing a connection between college completion and repayment,” said Debbie Cochrane, research director at The Institute for College Access and Success. "The further students get along, the more they’ll succeed, the less they will struggle."

Fewer than 20 percent of community college students take out loans — compared to almost 70 percent at all nonprofit schools — and their debts, on average, are less than a third of the nearly $30,000 borrowers at four-year schools shoulder. But the ACCT report finds that students with the lowest loan amounts — less than $5,000 — made up more than 40 percent of the defaulters in the study, and 58 percent of students who earned no credits defaulted on their loans.

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The group looked at community colleges across the state of Iowa, saying that its demographics and infrastructure make it a good proxy for the community college system nationwide.

These students might not even realize they had taken out a loan or incurred a debt, said Jee Hang Lee, ACCT’s vice president for public policy and external relations, referring to the fact that community college students are likelier to be the first person in their family to attend college and may not understand how financial aid works. Some students, for example, aren't familiar enough with how the system works to make the distinction between grants and loans that must be paid back.

Mark Kantrowitz, senior vice president and publisher at, colleges and lenders need to do more to make sure these students understand their obligations.

“A potential contributing factor to high default rates among borrowers who drop out of college is a lack of adequate counseling,” he said.

Students who drop out tend to owe less than those who graduate because they haven’t been in school long enough to accumulate as much debt. But because they’re leaving without an income-elevating degree, they often have more trouble making payments, Kantrowitz said.

The Obama administration thinks eliminating the need for those loans would lead more students to obtain two-year degrees – at least.

In January, President Barack Obama proposed a plan to offer two years of free community college, building on state-level initiatives like the Tennessee Promise in that state. In July, two Democratic senators introduced the America’s College Promise Act, a legislative framework for making that happen.

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Its fate is far from certain in a Republican-led Congress, but the administration is continuing to press the case.

But some experts say the community college debt problem is as much about learning as it is about lending.

“The (ACCT) report makes clear that the odds of default are really highest for people who not only don’t complete their degrees but don’t make much progress once they’re there,” said Harry Holzer, a professor of public policy at Georgetown University.

The Obama administration’s push for free community college tuition, Holzer said, doesn’t address the early educational failures that saddle community colleges with students who don’t have the academic foundation they need.

“If we want to address this problem, do we want to address it using financial aid or do we want to ask why are there all these people going to community college and not getting a degree?” he said. “We have to figure out why so many people are making so little progress.”

Holzer said low-performing students can get stuck in remedial classes they might not need as community colleges pivot to produce more workforce-ready graduates, rather than just students who plan to go on to earn a bachelor’s degree at another school.

Cochrane, the research director at The Institute for College Access and Success, agrees that two-year schools need additional resources in order to help the students who need it most.

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“Community colleges have relatively little funding to serve some of the most challenging students in higher education,” she said. "The effects of the recession on funding levels for institutions has been well documented. In many ways, community colleges have been hardest hit."

One consequence of this belt-tightening is that funding at community colleges is scarce for providing oversight and counseling students about their debts and repayment options. Experts say both schools and loan servicers need to do a better job guiding students through the borrowing and repayment process.

The ACCT report says one problem is that some loan servicers do a poor job communicating with or even keeping track of the students whose debt they manage, meaning that even when alternative repayment options are available, borrowers might not know about them.

“Servicing is something that has a big impact on borrowers and that’s infrequently discussed in typical conversations,” said Colleen Campbell, the group’s senior policy analyst.

“A big proportion of those people could be helped by better servicing. If, for instance, they were flagged as being at a higher risk of default... you could require the servicer to reach out to them more proactively,” agreed Maura Dundon, senior policy counsel at the Center for Responsible Lending.

Federal regulators are considering new rules for loan servicing companies.

The Consumer Financial Protection Bureau released a report last month that found that students who have a tough time making payments face roadblocks getting loan modifications or other help. The agency said 70 percent of borrowers with federal direct loans could have been eligible for and gotten into an alternative like an income-based repayment plan if their loans had been serviced correctly, and faults a lack of industry-wide standards to which both borrowers and servicing companies could refer. The report concluded that reforms are needed, and the CFPB said it was considering industrywide rules.

“The quality of student servicing and the failures of student loan servicers in terms of getting borrowers in repayment plans they can afford and are entitled to, is extremely problematic,” said Seth Frotman, the CFPB’s acting student loan ombudsman.

“Servicers are paid to communicate with borrowers and get them in plans that they can afford,” he said. “The lack of a consistent set of industry-wide standards in the student loan servicing space has clearly caused consumer harm.”