Three-year default rates on federal student loans rising

Washington University
FY 2006-2008: 36 defaults, 1.1% default rate
FY 2007-2009: 17 defaults, 1.4% default rate
FY 2008-2010: 33 defaults, 2.2% default rate

Northwestern University
FY 2006-2008: 26 defaults, 0.5% default rate
FY 2007-2009: 16 defaults, 0.7% default rate
FY 2008-2010: 36 defaults, 1.5% default rate

Saint Louis University
FY 2006-2008: 90 defaults, 2.1% default rate
FY 2007-2009: 63 defaults, 3.1% default rate
FY 2008-2010: 67 defaults, 3.3% default rate

Washington University students defaulted more often on federal student loans they started repaying in fiscal 2008 than on those they started repaying a year earlier, echoing a nationwide rise in defaults brought on by the economic downturn.

Through fiscal 2010, nearly 2.2 percent of Washington University students defaulted on federal loans they started repaying in 2008, according to data from the U.S. Department of Education. That number was up from 1.4 percent in the three-year period through fiscal 2009 and 1.1 percent in the period through fiscal 2008.

The default rate for Washington University students was far lower than the average default rate for students at other private nonprofit schools, which was 7.6 percent in 2010’s data. But experts said the rise in the default rate, even at schools with relatively affluent student bodies, stems from the struggling economy and weak job market. It may be hitting those who can’t find work especially hard, experts said.

“[Washington University’s rate is] an incredibly low default rate, but I think from students’ perspective, that’s a real increase in the number of students who are defaulting and who are facing serious consequences,” said Debbie Cochrane, program director at the Institute for College Access and Success, a nonprofit, nonpartisan research and advocacy group.

For student-aid advocates, the default rise also underscores a thornier issue—whether rising default rates could discourage students who need loans from applying to more expensive colleges like Washington University. Advocates also say that it reflects an ever-increasing need to educate students about options like deferment for preventing defaults.

Mark Smith, director of the Washington University Career Center, said graduating students have weathered the weak economy well, meaning that for the most part, they are able to repay their loans. Only a small percentage of graduates have failed to find jobs, he said—a number that has remained steady, perhaps even improving somewhat, throughout the recession.

“The employment [percentage] is still very good,” he said. “That’s not to say some students don’t have problems, because they do, especially if they have very specific things they want to do.”

Bill Witbrodt, director of Student Financial Services, was out of town and was unavailable for an interview, according to University spokesmen.

The rise in defaults won’t jeopardize the University’s eligibility for Pell Grants and federal loans, Cochrane said. The default rate here was well below the federal threshold for cutting off the University’s access to federal grants and loans.

Nationwide, however, other institutions of higher learning weren’t nearly as fortunate when it came to their default rates.

The nationwide three-year default rate rose by about one-sixth, from 11.8 to 13.8 percent. Public and for-profit institutions have been hit hardest. The three-year default rate at public schools was 10.8 percent. The default rate at for-profit colleges, meanwhile, was 25 percent. Before this year, the three-year default rates have not been broken down based on institution type.

For-profits were hit especially hard, mainly because far more students at these institutions need loans, Cochrane said.

But Cochrane added: “It raises questions about the quality of the education the students received.”

In 2010, the number of three-year defaults at nonprofit Washington University was 33 out of more than 1,500 who were in repayment.

The federal student-loan overhaul law enacted in 2010 pushed commercial banks out of the federal student loan market. But the law, Cochrane said, didn’t make any changes that would have addressed rising defaults.

“The student-loan overhaul didn’t make any changes that would have impacted students’ ability to get their student loans in a timely way or be able to repay them,” Cochrane said.

At the same time, Cochrane said, federal loans offer benefits that private loans don’t. And, she said, many students who have federal loans don’t take advantage of the benefits.

That may be partially due to lack of knowledge about alternatives, said junior Betel Ezaz, vice president of WU/FUSED, a student advocacy group that aims to improve socioeconomic diversity in the student body. But even for those students who do know their options, cultural factors may make them feel uneasy about discussing the topic or seeking help, she said. “I think it’s about making people feel comfortable about going for help, knowing there are venues for restructuring their loans or repaying them,” Ezaz said.

Alternative options include income-based repayments, which Cochrane said allow students to make payments that are a reasonable size compared to their income.

“It guarantees that students’ loan payments won’t take over their entire paycheck,” she said.

Cochrane also mentioned deferment, which allows students to suspend payments if they’re still in school, facing economic hardship, unemployed, in the military or involved in other forms of national service. There’s also forbearance, which allows some students to postpone or reduce their payments if they have financial problems.

Smith said a large number of students from the University enter deferment on their loans because they go to graduate or medical school.

He added there is always a small percentage of students who will have job-seeking problems, putting them in danger of default.

“If you’re one of those 2 percent of students, it hits you very hard because you’re 100 percent unemployed,” he said.

He advised students needing help to talk to their lenders, as well as to consult the Career Center, which continues to help students post-graduation.

Ezaz said it’s important to reach out not only to current students, but also to prospective students. WU/FUSED has worked with the admissions office to include more information on financial-aid options in admissions material, she said.

“Basically, ‘Where in that process can we put that information?’” she said. “There is a threshold where you’re going to lose students who won’t apply because it’s too expensive.”

(Katie Sadow | Student Life)

Undergraduate tuition at Washington University will be $39,400 for the 2010-11 academic year, a 4.2 percent increase over the 2009-2010 tuition of $37,800, the administration announced Thursday.

The state of the economy was cited as a major reason for the increase.

“Like all of us, Washington University has felt the impact of these forces,” the letter read.

The announcement came in letters that were mailed to parents on Wednesday and were put in students’ mailboxes on Thursday.

>> Click here to read the letter sent to Washington University parents.

According to the letter, there has been improvement in the endowment since the announcement that it had declined by a quarter of its value. The endowment is still 15 percent below its value a year and a half ago, however.

Charges for housing and meal plans will increase as well. Depending on the housing style and meal plan students choose, the total amount students will pay next year varies. Students living on campus in a double-occupancy room will pay between $7,982 and $8,828 depending on housing style, a 4.3 percent increase over this year’s rates. The price of meal plans increased by 3 percent.

Fees in graduate programs saw the same 4.2 percent increase in all schools except the Sam Fox School of Design & Visual Arts, where the increase was 4 percent, and the School of Medicine, whose prices will be set in March.

“Despite University efforts to contain costs, some expenses cannot be restrained if the institution is to offer ever-improving programs,” the letter read. “Examples include updating classrooms and laboratories, hiring the best faculty and facing rising health-care costs for employees.”

The University faces a projected annual $30 million shortfall, and is taking steps to reduce costs to close the gap as well. Administrative salaries were also frozen, and Chancellor Mark Wrighton volunteered a 10 percent reduction to his salary.

Director of Student Financial Services Bill Witbrodt said that the increased tuition is factored into how financial aid applications are considered.

“The increase in tuition will cause an increase in financial aid,” Witbrodt said.  “The formula that determines how much financial aid is forwarded is based on cost. The University has planned to increase financial aid for the coming year, and I know that the University has launched a capital campaign to raise scholarship funds.”

The capital initiative, Opening Doors to the Future, was announced during the fall semester and seeks to raise $150 million for scholarships.

Witbrodt said that even students who have not received financial aid in previous years can apply. Changes in family circumstance are also taken into account.

“Anyone who hasn’t had access before to financial aid is invited to apply for financial aid,” Witbrodt said. “We know that in the current economy, our students’ families are having difficulty. We know that we’re probably going to have to increase financial aid to allow them to continue their education at Washington University. We hope that any students who are concerned about finances and their ability to stay at the University will contact us.”

Witbrodt said that despite the tuition increase, the University has the resources to meet financial need.

“The increase in tuition is a benefit for the University overall,” he said. “As far as we’re concerned, we’ve been provided financial resources to make sure that our students have the financial resources to continue their education at Washington University.”

According to the letter, financial aid to undergraduates has increased 22 percent over the past two years. Sixty percent of students receive aid.

David Messenger contributed to this story.

>> Click here to read the letter sent to Washington University parents.

“Opening Doors” will last five years, formally beginning Nov. 7 and ending June 30, 2014.

David Blasingame, executive vice chancellor for alumni and development programs, said that if the University mobilizes its affiliates to increase their support of current students, he feels the drive will have succeeded by the ending date.

“We hope we’ll have engaged a larger number of alumni, parents and friends of the University,” Blasingame said. “We hope that those folks will enjoy their experiences in providing those scholarships and that over time they’ll continue their support.”

Money for the drive will be raised in the form of gifts and pledges, mainly from alumni and parents of current students.

“We’ll also contact some non-alumni, non-parent friends of the University who might want to support some of our initiatives,” Blasingame said.

This pool of prospects includes both non-profit foundations and corporations that value contributions made by University students, including contributions in the St. Louis area.

One of the initiative’s most significant components is its $2 million McDonnell challenge grant. This grant, named for John McDonnell, vice chairman of the board, challenges donors to meet certain criteria for their pledges that will result in their donations being matched.

This grant, like the rest of the drive, is intended not only to bring in capital but also to challenge University affiliates to support the University more through student scholarships.

Breaking down the numbers

Last year, the University awarded about $66 million in financial aid to undergraduate students. Over half of all undergraduates received some form of financial aid. Twenty-two percent received aid greater than the cost of tuition.

Graduate students also received aid in large numbers. Eighty-two percent of law students, 89 percent of medical students and 92 percent of social work students received some form of financial assistance.

Bill Witbrodt, director of Student Financial Services, said “Opening Doors” will ensure that the University can maintain these high rates of financial aid and expand the diversity of scholarship recipients.

“What this would do is allow us the flexibility to increase campus diversity in many ways, and to make sure that we can make it financially possible to enroll all the students that we admit,” Witbrodt said.

Drive comes as economy stalls

One of the strongest forces behind the initiative, Blasingame said, is students’ increased need for financial assistance in today’s ill economy.

“What’s happened with the economy has made it such that some of our current students were impacted, and some of the families of our prospective students were impacted,” Blasingame said. “So we’re trying to build up our financial aid resources to try to reach out to those students.”

Witbrodt echoed this sentiment, saying that the “Opening Doors” initiative will go a long way toward keeping financial aid stable in rough waters.

“We don’t know what the future will bring,” Witbrodt said. “And we need to have a scholarship base.”

A goal of the administration is to lighten the load of the 16 million students and their families who must collect all pertinent financial information in order to fill out the six-page financial assistance application known as the FAFSA. Depending on a student’s circumstances, the paperwork can contain up to 153 individual questions.

During his presidential campaign last year, Obama promised to get rid of the FAFSA completely, an application that some say discourages students of lower-income backgrounds from applying for college.

According to some studies, there are up to 1.5 million college students who are eligible for federal Pell Grants but have not applied for financial assistance. Similar data has shown that some college students resort to private loans when they could receive better federal loans.

While the proposed changes would be a significant change in the financial aid application process, this wouldn’t be the first time the FAFSA has been altered. According to Bill Witbrodt, director of financial services at Washington University, the FAFSA has undergone several gradual changes over the past few years.

“The current FAFSA we have had less questions than the one the year before, which had less questions than the one the year before that,” Witbrodt said. “There has been some progress made toward simplifying it. The process can be made a lot simpler, and I’m thinking that the proposals that President Obama made should come to fruition.”

In the past, the increased simplicity of the FAFSA has not caused a great change in the number of applications received by Student Financial Services.

“I think the thought behind all this is that simplifying the FAFSA will be removing one of the barriers to college access in general,” Witbrodt said.

Some students and parents filling out the FAFSA, however, have complained about the length of the application.

“My parents complained about the FAFSA all the time,” sophomore Vaishnavi Hariprasad said. “My dad dreads filling it out every year because it takes so long.”

Even though the initiative to simplify the FAFSA is moving quickly, propositions to get rid of certain questions on the FAFSA require approval from Congress.

The Department of Education (DOE) acknowledged the problems with the current application, noting that several questions on the FAFSA are “largely unverifiable and could penalize families for saving for college.”

In January, the DOE will no longer require students from low-income families to answer questions about their financial assets that are not used to determine their eligibility for aid. In addition, the DOE will experiment with a plan that would permit the use of an applicant’s IRS data to answer 18 questions about finances.

Many students look forward to a more compact FAFSA application.

“I think reforming the FAFSA is great,” Hariprasad said. “I don’t think the form was inherently hard to fill out, but it was definitely tedious. I think getting rid of some of those other questions is really helpful, since when I was applying to college I didn’t know how to answer some of the questions.”

While many believe that the increased simplicity of the FAFSA will cause more people to apply for aid, Witbrodt said it is still more important to increase college accessibility by advertising the FAFSA.

“It’s not just simply the fact that the FAFSA is simpler to file,” he said. “It’s what kind of public relations are used to get the word out to students that the FAFSA is an easy form to complete and that financial aid is available.”

The University’s new student health insurance plan is the result of a bidding process that occurred last spring. Every other year, the student health insurance plan goes up for bid in a confidential meeting. For the last two years, Great-West Health Care was the health insurance provider for University students.

This year, Aetna was selected for its ability to provide the best plan at the lowest cost. The bid and its acceptance were overseen by a committee of deans from each school and students who had requested changes in the past.

Debra Harp, director of administration at the Habif Health and Wellness Center, said she feels it is in students’ best interest that the University puts its health insurance up for bid every two years.

“Putting the student health plan out to bid every other year is a very prudent thing to do in order to make sure that the rates reflect the usage of the plan and to make sure we are offering the best possible benefits,” Harp wrote in an e-mail.
Regarding this year’s change, Harp emphasized the variety of options that will accompany the change, as well as the plan’s reduction in cost.

“During the bid process two years ago, WU was able to add an optional prescription plan at a low cost, as well as a low cost dental plan. During this year’s bid process we were able to reduce the student health fee and made sure the plan remained unchanged for that reduction in cost,” Harp wrote.

Some new options in the Aetna plan are discounted services for students, such as lowered prices for weight-loss counseling, smoking cessation therapy, and vitamin and mineral supplements. As for the lowered cost, student health insurance fees have declined from $686 to $550 under the plan.

Still, some students are unhappy with the plan. Graduate student Mark Smith, who was invited to sit in on the bid committee meeting, says he is disappointed with the University’s decision to switch to Aetna.

“The school should have been looking for a plan that accurately reflects the needs of undergrads and for grads and one that is more reflective of the adults and the adult community,” Smith said.

Student health insurance, then and now

The University’s health insurance plan was created in 2000 and enacted in 2001. It has served University students since then, with minor changes.

The student health insurance serves as each student’s primary coverage, and the fee covers nine free counseling visits, nutritional consults, about 20 free lab tests, and other low-cost health services.

This year, with high unemployment nationwide, some students may have less access to their parents’ health care, even if they participate in the Consolidated Omnibus Budget Reconciliation Act (COBRA), which was designed to allow working families to keep their health insurance in case of unemployment. According to Harp, the new Aetna plan tries to adjust to these new needs.

“Many students and their families are finding this is their only healthcare coverage during times of unemployment,” Harp wrote. “In addition, many employers are cutting their contributions toward healthcare premiums or increasing deductibles to very high amounts, which places a financial burden on the family. This plan helps alleviate some of those financial burdens.”

The new healthcare plan will also work with the University’s financial aid services.

“The University wants to make sure that it knows about any financial difficulties that students’ families are having so that we can help,” said Bill Witbrodt, director of Student Financial Services. “We want all of our students to remain here pursuing their education at Wash. U.”

Earlier this month, eight student loan companies were forced to comply with a marketing code of conduct after an extensive investigation into such questionable practices. The private lenders were accused of making misleading statements about loans and using strategies purposefully aimed to deceive students.

The eight companies entering the agreement include Campus Door, EduCap, GMAC Bank, Graduate Loan Associates, Nelnet, NextStudent and Xanthus Financial Services. The eighth company, My Rich Uncle, agreed to comply with the standards voluntarily.

The investigations were conducted by New York Attorney General Andrew M. Cuomo after a long and complex inquiry into the student loan process.

In a press release on his Web site, Cuomo stated that “these settlements are a major step forward in cleaning up an industry where false and misleading advertising practices have been all too rampant.”

The student loan business is notorious for its long history of dubious practices.

Last year, an investigation revealed that lenders were offering university officials benefits such as vacations to the Caribbean and free rounds of golf in exchange for promoting their loan services.

Officials with Student Financial Services at Washington University say that it has had little to do with these incidents.

“Some of these direct marketing practices bypassed the authority of the school,” Connie Bradford, a loan manager at the University who works behind the scenes to approve loans, said. “We almost always deal with lenders who make an effort to find out about the students to whom they’re lending.”

Overall, however, students should still be wary of procuring loans through private companies.

“When our office receives requests from private lenders asking us to certify such loans for Wash. U. students, we intervene by contacting those students to make sure the students know what they are getting themselves into and to suggest other, more favorable ways to access the funds they need,” Director of Student Financial Services Bill Witbrodt said.

The largest private student loan company in the country, Sallie Mae launched its Education Investment Planner (EIP) in early August to help students, parents and financial aid officers come up with a personalized plan regarding how to pay for college. The planner also aims to motivate payers to think about the long term payment process.

“Sallie Mae developed the EIP in response to feedback from customers and higher education policy advocates indicating that families need better ways to assess the cost of college and their choices for footing the bill,” Patricia Christel, a spokeswoman for Sallie Mae, wrote in an e-mail. “The planner makes it easy for a family to think about the total cost of a degree, say, four years for a bachelor’s degree, rather than planning how to pay just one year at a time.”

But some financial aid experts, including Washington University Director of Student Financial Services Bill Witbrodt, believe that the new tool, though well intentioned, may mislead students.

“It’s nice that it exposes folks to the financial aid process [who] might never become familiar with it,” Witbrodt said. “It’s dangerous because it could give folks the wrong impression [of how this process works].”

The tool works in three steps. First, it estimates total college costs using information submitted by colleges to a national database. Then, the EIP asks the user to provide information on the amount of money the family can contribute toward the degree from various sources, including income, savings accounts, relatives, friends and projections of various grants and scholarships for which the student may qualify.

If more funds are needed, the tool then estimates the maximum level of federal loans a student would be eligible for based on the student’s year in college.

Finally, the planner asks the user to choose a mix of federal Parent or Grad PLUS loans with private loans.

The tool can indicate how much money the student should expect to receive from these sources. If the student requires loans, the planner estimates the monthly repayment on those loans after graduation and the annual income needed for the repayment of the loans to be manageable for the student.

“We encourage students and parents to use EIP to explore several different scenarios for how they might pay for college to see what works best for them,” Christel said.

The income earned by the student following graduation can be of prime importance. According to a Sallie Mae study of 1,400 college students and parents, about 70 percent of families said that the student’s expected post-graduation income was not a factor in their decisions.

“We hope that EIP will help to change this statistic—so that more and more families are reporting that they are thinking carefully about a student’s likely starting salary as part of their decisions to take out student loans,” Christel said.

Witbrodt, however, said that the tool fails to take into account intangible factors, such as whether the family is a single-parent or a two-parent family.

“It’s always dangerous for a prospective student to work on one of these calculations because a lot more goes into it than just raw data,” he said. “Students can fill out an app and give all the information, and then a computer can figure out how much the student is supposed to need based on the information, but then it has to be refined.”

According to Christel, the tool is not intended to determine how much a family can to contribute, and it asks the family to estimate that number.

Witbrodt recommends that students and their families rely more on financial aid officers at their respective institutions for financial guidance.

“I think it could be dangerous because it could discourage students from applying to the best schools, making them appear too expensive, and with this instrument the students and their family is out there on their own,” Witbrodt said.

Witbrodt also noted that the planner does not take into account some other available loans.

“Financial aid folks have knowledge and access to other forms for financial aid besides these student loans,” Witbrodt said. “Our financial aid office knows about different trusts that have been established to provide no interest loans and other sources of income.”

Students believe the planner might be useful but they also agree that families should not rely on it alone.

“I think that it could be useful but I also think that when dealing with financial loans and finances in general should be able to research in depth enough the proper and necessary information,” senior Ross Zeitlin said. “I don’t think it’s going to be that helpful.”

Passed on August 14, the College Opportunity and Affordability Act of 2008, the extension of the Higher Education Act, will govern most federal financial aid policies and will work to make the financial aid process more transparent to students.

While the act contains more than 100 amendments, two of the provisions most applicable to Washington University students, according to Director of Student Financial Services Bill Witbrodt, are the year-round availability of Pell Grants and the increase in the monetary amount of the grants.

Pell Grants, part of a federal grant program sponsored by the Department of Education, will increase from $4,800 to $6,000 in 2009 and will increase to $9,000 through the 2013-2014 academic year.

The provision also enables Pell Grants to be used toward summer school, which can help students graduate earlier and ultimately alleviate student loans.

“We don’t have financial aid in the form of scholarships for summer, so people who are eligible for Pell Grants can use these,” Witbrodt said.

Although the exact numbers are not yet known, due to the change in the University’s financial aid policy last year, there are more Pell Grant recipients this year than last year. The University’s new policy enables students from families earning less than $60,000 a year not to take out student loans. Instead, the students receive a grant from the University that does not have to be repaid.

“That enabled a lot more needy students to enroll here,” Witbrodt said.

According to Witbrodt, because the University is a top-tier private university with a generous financial aid program already in place, many of the provisions will not have an impact on the University’s students.

“Wash. U. already has such a generous financial aid program that even if the Pell Grants didn’t increase we would still make sure our students receive the necessary aid,” Witbrodt said.

The Higher Education Act will also enact laws to help regulate the costs of textbooks by ensuring that professors have all the necessary information available to them when choosing textbooks for their students.

Publishers will now have to release not only the price of the book but also the copyright dates of the last three editions and a description of any significant changes made between editions.

“It will make sure that professors have the information they need to choose the textbook that will be best for students in terms of both their education and their wallet,” Pedro de la Torre, an organizer for education advocacy group Campus Progress, said in an e-mail to Student Life.

“The changes between editions are almost always extremely small, but coming out with new editions allows the publishers to reduce competition from the used book market, which is much cheaper for students.”

In addition, de la Torre says the bill will require books and supplemental materials that are sold together to be available for sale separately as well.

“These ‘supplemental materials’ are rarely used in classes, and in many cases are little more than an attempt to get more money out of students,” de la Torre said.

While the act is intended to eliminate conflicts of interest between financial aid offices and student loan companies, de la Torre says that a drawback of the act is that it does not require universities to report which students are receiving scholarships or financial aid provided by the school.

“Over the past couple decades, schools have been giving a smaller share of these funds to students with documented financial need, and more to students from higher income backgrounds,” de la Torre said.

One of the act’s weaknesses is that it does not require loan companies to report their potential recipients to the appropriate universities, making it more difficult for respective financial aid offices to counsel their students, de la Torre said.

Other clauses of the act include a program on the Department of Education’s Web site that will allow students to compare tuition prices and financial aid policies for different schools.

Witbrodt says that he and the financial aid office are still sifting through all the information of the amendments, but that the Higher Education Act is an overall positive movement for higher education.

“Everything about the act is done in a positive way for the benefit of students,” Witbrodt said.

“This is another step in the right direction; it’s a very small step, but at least we are still waking in the right direction. It is important for the students to remain engaged. Some of the best provisions of the bill are there because students have remained involved,” de la Torre said.