September 30, 2014

Student loan defaults put Oregon community colleges in harm's way

They're breathing a sigh of relief at Klamath Community College.

The Klamath Falls institution escaped by the narrowest margin possible fatal sanctions by the U.S. Department of Education after the Oregon college managed to reduce its student loan default rate to 29.4 percent.

If Klamath had suffered a third consecutive year with student defaults in excess of 30 percent, it faced possible expulsion from the federal student loan program. "If that had happened, we're done, we close our doors," said Klamath President Roberto Gutierrez.

Student loan defaults have soared at many Oregon community colleges. Lane and Umpqua community colleges both exceeded 30 percent the last two years. If they can't reduce the rate to less than 30 percent next year, they too will face possible expulsion.

The plight of these schools reflects how central student debt has become to higher education. Not only does the money owed pose an enormous burden on a generation of students, it has become the crucial revenue source for many colleges.
Era of extreme debt
Students have borrowed at least $1.3 billion, $3.6 million a day, the last three years running, to attend Oregon colleges, part of a vast cost shift from society to individual students.
The Oregonian is publishing an occasional series examining rising student debt and the chokehold it has on students, the colleges they attend and the state’s overall economy. Today’s story examines the plight of Oregon’s community colleges. Future installments will look at graduate students and for-profit colleges.
Share your questions, comments and experiences with investigative reporter Jeff Manning at jmanning@oregonian.com or 503-294-7606.

But now, the same debt that constitutes 30 to 50 percent of these schools' income threatens their very existence.

The U.S. Education Department claims to have banned some 1,200 schools from its loan program over the years due to excessive loan defaults. Some insiders dismiss the notion the agency would bar a public community college from its student loan program. And indeed, there are signs the department, at the Obama administration's urging, will be lenient with high-default schools.

The default surge also raises the specter that at least some students have manipulated the federal loan program, with its minimal credit checks, to get the cash. It also raises questions about the safeguards in place to prevent abuse. Local community college officials say federal rules allow only the most perfunctory of underwriting while processing loan applications.

Much of this began when thousands of Oregonians rendered unemployed, or under-employed, by the recession flocked back to college to learn new skills between 2008 and 2011. To do so, they borrowed money in prodigious amounts.

Community college officials pride themselves that their institutions serve as a gateway to higher education for nontraditional students -- often older and often unable to afford, or qualify academically for, a four-year institution.
JPEG image.jpgMary SpildeJeff Manning | jmanning@oregonian.com

"They are the poorest. They are the unprepared," said Lane President Mary Spilde. "There's a lot going on in their lives. They have kids in daycare and a job. They don't have parents or family writing checks."

"For many of these students, community college is the last stop to change their lives," Klamath's Gutierrez said. "It used to be high school and 30 years in the mill. But that's over. If they don't make it with us here at the community college, they could be looking at 30 years of poverty."

The recession hit rural Oregon particularly hard. People flocked to their local community colleges.

Lane's student body jumped in size by nearly 40 percent peaking at 15,417 in 2010-11. Umpqua's enrollment increased 25 percent. Klamath, the smallest of the three, saw enrollment soar 58 percent in three years from 1,254 to 1,957.

According to the Education Department's student loan database, student borrowing at Klamath increased from $700,000 in the 2007-08 academic year to $8.8 million in 2010-11. In the same period, Umpqua student loans jumped from $5.1 million to $14.4 million. Lane students borrowed $78 million in 2010-11, more than double the $30.7 million in 2007-08.

Typical of student loans, the amounts were intended to cover the gap between a student's resources and the cost of attendance. In practice, that meant many of the loans were sufficient to cover tuition and fees as well as some share of the student's living expenses.

As the recession stubbornly persisted, administrators and faculty started noticing something odd: Attendance at some classes would drop by 15 to 20 percent in the days after quarterly financial aid checks were cut. Some administrators came to the conclusion, grudgingly, that some of their students weren't there for the education.
Dr Roberto Gutierrez photjpg.jpgRoberto Gutierrez

"A lot of them were coming here just to live off the financial aid," Gutierrez said. "I cut that off. This is not a social agency."

Spilde argues it's an oversimplification to say students took financial aid with no intention of finishing school.

"These students juggle multiple, competing demands: Caring for families, meeting the financial obligations of mature adults, and tending to their career prospects, all while working to improve their skills through education," Spilde wrote in an email. "Understandably, many students in this challenging position have inconsistent enrollment patterns that reflect these competing priorities."

Whatever the cause, loan defaults surged.

Some former students never made a single payment. Students who fail to make a payment in 270 days after they leave school are considered in default. Schools with three straight years of 30-percent-plus default rates can be barred from further participation in the federal student loan program.

In an era when schools rely so heavily on student loans for their revenue, getting bounced out of the federal loan program could amount to a death sentence.

The default rate for the 2011 cohort of students has exceeded 30 percent the last two years at Lane and Umpqua Umpqua's default rate stood at a state-high 38.5 percent and fell only slightly to 35.9 percent in 2013. Lane's rate for the latest year is 30.2 percent. The school is challenging that number claiming the Education Department used incorrect data.

Klamath, meanwhile, was flirting with a potentially disastrous third year above 30 percent.

All three schools launched a flurry of anti-default programs.

They've hired new staff to contact students and former students to remind them of their repayment obligations and to alert them to the federal government's many deferment, forbearance and income-based repayment plans. They also added mandatory counseling and financial literacy sessions to make sure they know the obligation that comes with student loans.
Olson, Joe_2011_UCC President_8617-017 r sm C.jpgJoe Olson

Umpqua hired a former student debt collector to track defaulted students, contact them and help them understand their options. "He's helping people with debt counseling," said Joe Olson, Umpqua president. "He's not a debt collector. This is the friendlier side of it."

It turns out there is a strong correlation between defaulting on a student loan and quitting school. Gutierrez said 99 percent of Klamath's defaulters did not get a degree or certificate. "It was very eye-opening data for us," he said. "They didn't get the degree, so they didn't get the job and the income necessary to repay the loan."

The default issue has further complicated already difficult times at the community colleges. Their long surge in enrollment is over, giving way to declines in both headcount and revenue. The declines have forced some schools to cut faculty and programs.

At Klamath, Gutierrez is slashing programs that he believes won't significantly create job opportunities for students. He scrapped a construction management program because its graduates were not getting paid enough.

"Twelve to thirteen dollars an hour for graduates? That's not enough," Gutierrez said. "These kids are taking out debt. We're becoming much more of a vocational tech school. I hate saying that, but we are."

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