Monday, March 16, 2009

A Loan Sticking Point Clarified and Accentuated

Recently, Mark Kantrowitz, Founder, Finaid Pages, documented solutions in the loan market for post secondary education.

Mary Lyn Hammer, CEO, Champion College Solutions, wrote into point out a detail in Mr. Kantrowitz's presentation:

During a session at last week’s IIR conference in Phoenix, a statement was made that schools could voluntarily withdraw from the Federal Student Loan Programs and remain in the Pell Grant and other Title IV Programs. This statement was inaccurate. The following is documentation for your review.

Voluntary Withdrawal from Loan Program and Retain Pell Eligibility

In the 1998 Higher Education Amendments, Title IV, Part A, Sec. 401 (f) (2) it states, “This subsection shall not apply to an institution that was not participating in the loan program authorized under part B or D on the date of enactment of the Higher Education Amendments of 1998, unless the institution subsequently participates in the loan programs.”

This is further defined in the Official Cohort Default Rate Guide as, “A school will not be subject to loss of Federal Pell Grant Program eligibility if a school officially withdrew (in writing) from the FFEL Program and/or Direct Loan Program on or before October 7, 1998 OR lost its eligibility to participate in the FFEL Program and/or Direct Loan Program on or before October 7, 1998 OR did not certify any FFEL Program and/or Direct Loan Program loans on or after July 7, 1998.”


The voluntary withdrawal option was statutory and only available if the school made no loans on or after July 7, 1998 and voluntarily withdrew from the Federal Student Loan Programs on or before October 7, 1998.

Mr. Kantrowitz responds:

As I said at the conference, if a school is close to the limits but not over, they can preserve Pell Grant eligibility by withdrawing from the federally(sp) loan programs. The voluntary withdrawal program was regardless of whether the school was over the cohort default rate limit. What I was discussing is schools that are close to but not over the limit, but so close that they are concerned that they might lose eligibility.

An example might help illustrate. Let's suppose that a college is at 14% now and will be at 28% after the change. Right now they don't have any problems vis a vis the 25% threshold, but after the change to a 3 year window they may be very close to the 30% threshold. If they were concerned that they might go over the limit in the future, they could choose to stop offering federal education loans. So long as they were under the 30% threshold for one of the next three years, they wouldn't be subject to sanctions and so could continue to offer the Pell Grant. I am assuming that the number of loans entering repayment would rapidly drop below the 30 loan minimum.

Or consider a school that is at 20% now. They know that they will be over the 30% threshold and have no way of getting under it. If they opt out now, by the time the threshold goes into effect they will no longer have enough loans entering repayment to affect eligibility.

So while there is no formal voluntary withdrawal program now, schools can still manipulate the cohort default rate definition to opt out to preserve Pell Grant eligibility.

Share this article with your social network, just click below to share now!

No comments: