Should Colleges Be Able to Limit Students’ Borrowing?

Coconino Community College, in Flagstaff, Ariz., has low tuition: just $87 a credit hour for in-state students. So in 2008, when the federal government raised the amount students could borrow in unsubsidized loans by $2,000 a year, the college’s financial-aid director wasn’t sure that was a good thing for his students.

There was no indication that Coconino students needed larger loans, says Bob Voytek, the aid director. And since the loans had no interest subsidy and came, at the time, with a 6.8-percent interest rate, the cost of extra borrowing would quickly add up.

Many students ask to borrow the maximum amount in federal loans without even knowing how much that is, Mr. Voytek says. And while colleges are penalized if too many of their former students default on their loans, aid administrators can limit what students borrow only on a case-by-case basis. Many aid officials believe they should have more discretion in restricting loans, and their national association has offered examples of how that could work.

Mr. Voytek agrees that aid administrators should have more latitude. And right now, he has more than usual. Coconino is participating in the Experimental Sites Initiative, a government program that relaxes requirements on how colleges administer federal aid in return for their help in compiling data on the effects of those changes.

In this experiment, a couple of dozen participating colleges are allowed to test various ways to restrict unsubsidized-loan borrowing. At Coconino, Mr. Voytek reduced by $2,000 what each student could borrow. “It’s like rolling everything back to 2008,” he says.

Another participant, Broward College, in southern Florida, prevented most of its students from taking out any unsubsidized loans at all. Exceptions were made for students in high-cost programs like aviation, for the small share of out-of-state students, and for some students who don’t qualify for other financial aid. “We went out with a bold step,” says Angelia Millender, vice president for student affairs and enrollment management.

While the experiment is still under way, both colleges have seen big reductions in their student-loan volumes—just as one would expect. Over time, the U.S. Department of Education will track whether students in the experiment “were able to enroll in, succeed, and complete their academic programs,” according to a notice in the Federal Register.

Both Mr. Voytek and Ms. Millender hope the experiment’s results will help make the case for greater authority by colleges to restrict loans. But not everyone is convinced they need it. Debbie Cochrane, research director at the Institute for College Access & Success, points to the financial-literacy efforts many colleges have made. “There’s so much that you can do,” she says, “to help students make smart borrowing decisions without affecting all the individual students who really and truly need the aid.”

Coconino has made a big push to improve loan counseling, and its former students’ default rate has dropped, Mr. Voytek says. Despite the extra counseling, the college received only three complaints when it cut the amount students could borrow. To Mr. Voytek, that suggests students are racking up debt without monitoring how much they’ve already borrowed.

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