The Student Debt Crisis at State Community Colleges

by Sophie Quinton Stateliness News

Virginia community college student Wilis Rodriguez petitions the Legislature to make college affordable. More community college students are struggling with debt.

Community colleges charge lower tuition than just about anywhere else. They’re open to everyone. They offer the kind of technical training employers want. And they can serve as an affordable steppingstone to a four-year degree.

As President Barack Obama said in the fall: “They’re at the heart of the American Dream.”

But while plenty of community college students graduate with a degree that leads to a better job, or to a four-year college, many community college students drop out. And a growing number of students are taking on debt they cannot repay.

States have focused more on reducing the debt students accumulate at four-year colleges than at community colleges. But some of the steps they’re taking could help community college students, as well.

Most states are now partly funding public colleges and universities based on whether students graduate on time. And some states are tackling community college costs by creating scholarships that eliminate tuition, as Obama has proposed.

In 2000, 15 percent of all first-time college students seeking degrees at a public two-year college borrowed. Twelve years later, 27 percent did. At Michigan’s Macomb Community College, where Obama spoke, just 6 percent of students take out federal loans. But of those students, who typically owe $5,170 at graduation, 18 percent default on their loans.

Working-class people poured into state community colleges and expensive for-profit trade schools when the economy soured. Although for-profit colleges tend to charge higher tuition, research shows that in recent years typical for-profit and two-year college borrowers have similarly high default rates.

Thirty-eight percent of two-year college students who started to repay their loans in 2009 defaulted within five years, as did 47 percent of for-profit college students, said a September study led by Adam Looney, an economist at the Treasury Department. Just 10 percent of students who attended selective four-year colleges defaulted over the same period. The vast majority of two-year colleges are community colleges, the study noted.

Default rates are now falling, along with enrollment at community and for-profit colleges. But Looney’s study warns that many borrowers who attend the institutions will continue to struggle in the student loan market.

Not Just a Four-Year Problem
Many community college students start out with the odds against them. They tend to be older, live in poorer communities and have little family wealth to support them — 36 percent have family incomes of under $20,000, according to the Community College Research Center at Columbia University.

Still, community college students historically haven’t had to borrow to finance their education. Tuition usually runs a few thousand dollars a year — from $1,400 in California to $7,500 in Vermont. Low-income students who qualify for the maximum federal Pell Grant — $5,815 this year — usually find that their grant covers tuition.

Yet increasingly, community college students are borrowing. In Virginia, one of the few states to publish detailed student debt information, the share of community college students graduating with debt has more than doubled over the past decade.

In 2014-15, when community college tuition was $4,080, 37 percent of Virginia graduates who earned a two-year degree that prepared them to transfer to a four-year college had debt, up from 15 percent a decade ago. Among graduates who earned a two-year occupational degree, 41 percent had debt.

(Virginia’s community college system says the state debt figures are too high, but that may be because the state is calculating debt differently. The state looks at debt owed at the point of graduation, which may include debt from other institutions.)

“They’re borrowing for things just beyond the cost of tuition and fees. They’re borrowing to live,” said Tod Massa, who oversees the state’s postsecondary education data.

Many community college students need to borrow to pay for textbooks, transportation, food and rent, even if they’re working while they go to school. The total cost of attending a Virginia community college rose from $9,410 a year to $15,083 over the past decade for full-time students who live with their parents, according to state data. Students who live on their own pay more.

More Virginia community colleges include federal student loans in financial aid packages now than in past years, which also could be pushing up student debt.

Small Loans, High Default Rates
Policymakers tend to focus on stories of scary-high debt, such as a graduate student who owes six figures. But students who owe much less are more likely to default.

“The typical loan in default is around $5,000. That’s total, that’s not per year, that’s all that someone borrowed,” said Susan Dynarski, a University of Michigan professor of public policy, education and economics.

At Old Dominion University in southeast Virginia, for example, the average graduate with federal debt leaves school owing $23,900, according to federal statistics. Seven percent of graduates default on their federal loans within three years. But at nearby Tidewater Community College, where the average graduate with debt leaves owing $10,250, twice as many graduates default.

Student loans can create a snowballing crisis for borrowers. Debt that cannot be repaid can lead to default, fees from loan servicers, a damaged credit score, and eventually the garnishment of wages or government benefits. In some states, people can lose their professional licenses or driver’s licenses as a result of defaulted student loans.

A lot of factors determine someone’s ability to repay their loans, including what kind of job they’re able to get after graduation — which can depend on their major and the local economy — and whether they graduate at all.

The small size of loans in default suggests that many borrowers dropped out, Dynarski said. And students who drop out don’t get to enjoy the financial payoff of a higher credential.

At colleges that serve more lower-income, minority and first-generation students, such as community colleges, graduation rates are typically lower. About 38 percent of students who entered public two-year colleges in 2009 graduated, or transferred and completed a four-year degree, compared to 61 percent of students who started at a four-year college, according to the National Student Clearinghouse Research Center.

Completion, Affordability and Managing Debt
States are taking a few steps to hold down college costs and put pressure on all colleges to make sure students graduate. As of fiscal 2015, 26 states were spending part of their education funding to reward outcomes such as graduation rates. And 10 more were moving in that direction, according to HCM Strategists, a consulting firm.

Many states, including Virginia, increased funding for all higher education institutions this year and asked colleges to hold down tuition. Tennessee, Oregon and Minnesota have created scholarship programs that make two-year colleges tuition-free for students who meet certain requirements.

Some researchers and advocates say tuition-free programs don’t go far enough because paying for living expenses — not tuition — is the biggest financial problem most community college students have.

To tackle that, Sara Goldrick-Rab, a professor of educational policy studies and sociology at the University of Wisconsin, said states could increase grant aid or follow Minnesota’s example and extend work-study opportunities.

States also have started to take some steps to help borrowers who are struggling with existing student loan debt.

Virginia state Del. Marcus Simon, a Democrat, said his colleagues in the Legislature have long considered student debt to be a federal issue. But he thinks the state can help. This year, he put forward bills that would allow students to refinance their loans through a state authority, require student loan servicers to get a license and create an office to inform and assist borrowers.
“We want to create a system where there’s some regulation, there’s some oversight, and there’s just some basic information that you have to get about your loan,” Simon said.

Refinancing likely wouldn’t be an option for borrowers who are behind on their loans, or have damaged credit. But all borrowers could benefit from more information and assistance.

Some borrowers don’t know the difference between a grant and a loan, let alone that some federal programs will reduce their monthly payments to nothing while their incomes are low. The fact that people with low earnings are defaulting shows that not enough of them have enrolled in those programs, Dynarski of the University of Michigan said.

Last year, Indiana began requiring all institutions that enroll students who receive state financial aid to provide students with an annual estimate of their total loan debt and future monthly repayments. A new Nebraska law requires all publicly funded postsecondary educational institutions in the state to provide that information to students.

Colleges, which are penalized by the federal government for high default rates, are trying to help students graduate and keep them from falling behind on payments.

To keep students on the path to graduation, Northern Virginia Community College (NOVA), the largest two-year college in Virginia, has redesigned remedial math classes and hired counselors to work with freshmen to help them find a major and schedule courses. The school also has contracted with a company that sends delinquent borrowers automated phone calls and another that counsels them over the phone.

Some colleges warn students not to take out too much money for living expenses, and some will deny loans.

“We see a significant number of students who are coming to us with existing loan debt,” said Joan Zanders, head of financial aid and support services at NOVA. If a borrower owes $70,000 from prior education, say at a for-profit college, “it makes no sense whatsoever for them to dig a deeper hole for themselves to get a certificate.”

NOVA officials say there’s a link between financial education and academic success. When students can budget their financial aid money and pay their bills, they’re more likely to stay in school. So NOVA’s required orientation course now includes a unit on how to stick to a budget, manage credit cards and understand student loans.

Like community colleges across Virginia, NOVA saw a spike in borrowing during the recession. Now, Zanders said, “it’s actually going down.” She said she thinks this is partly due to the improving economy and partly due to better outreach.

CURRENT ISSUES IN THE AREAS OF ESTATE, TAX AND PERSONAL AND BUSINESS PLANNING

by Randall K. Craig, J.D., CELA, CAP
Attorney at Law

The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.

Visit Our New Website. Our website was recently updated and modernized. Many of our prior newsletters are available for review, as well as numerous articles and presentation outlines that I prepared and presented over the last several years. Please take time to visit our website and provide us with your comments!

IRA Charitable Distributions Made Permanent. One of the provisions of the Consolidated Appropriations Act of 2016 reinstates and makes permanent the rule that an IRA distribution which would otherwise be taxable can be excluded from gross income if it was made directly to a qualified charity. The exclusion is limited to $100,000 per year for each individual taxpayer. A qualified charity is a public charity and not a supporting organization or a donor-advised fund. To be eligible for the exclusion, it must be made on or after the IRA participant attains 701⁄2 years of age. The principal advantage of the direct charitable distribution is that it avoids the augmentation of the IRA participant’s income as would occur if the IRA participant first received a distribution and then made the charitable contribution after receiving it. This can give rise to negative tax effects even though the participant would still be allowed an itemized tax deduction for the charitable contribution.

9th Annual Mid-America Institute On Aging. This event is scheduled to take place on August 11 and 12, 2016, with a pre-conference on August 10, 2016. It is sponsored by the University of Southern Indiana and the Southwestern Indiana Regional Council on Aging, Inc. (SWIRCA & More) and will be held at the University of Southern Indiana. It is designed not only for health professionals, but also for caregivers and the general community. I am presently scheduled to speak on the proposed changes in the Veterans Administration’s pension rules pertaining to Aid and Attendance care which are contemplated to become effective this year. I also intend to address certain distinctions between the VA pension rules pertaining to trusts and the Medicaid trust rules.

Asset Preservation – Transferring The Home. There are many different approaches to protecting the home in the context of asset protection planning. It is very common for people to be concerned about protecting their home if long term care might be required in the future. Planning with the residence can be very effective, and the rights and interests of all parties beneficially protected, but it must be undertaken with caution.

Some people will simply transfer their home to their children, which creates a number of risks. A parent could be forced out of the home, and of course the death of a child would involve other family members as owners. Also, the child could be the subject of a lawsuit or a tax lien, and the divorce of a child could have a negative impact on the parents’ occupancy of the residence. The mere continued occupancy by the parent when ownership does not exist can create a Medicaid qualification problem later, as can the simple transfer of property because of the applicable five year “look-back” period, the result of which is that an application for Medicaid can be denied and a Medicaid penalty incurred because of a transfer within five years of the date of the application. As a means of addressing some of these risks, some people will transfer the property but reserve a life estate. There will still be an adverse tax impact to the child when the property is sold, if sold during the parent’s lifetime, and further, if the parent is admitted to a long term care facility, the parent still has an interest in the property, which can create Medicaid complications. If the property is sold while the parent who holds a life estate is still living, the parent will receive the value of the life estate, which is frequently as much as one-third or more of the total value of the property. Consequently, life estate planning is not a desirable strategy in most circumstances.

The best plan will generally be to transfer the residence to a particular kind of an asset protection trust. Doing so will avoid the implications of changes at the children’s level due to death, divorce, bankruptcy, lawsuits, tax liens, etc., and neither the death of the child nor the death of a parent will create any negative ownership or tax implications. The property can be sold either before or after the parent’s death without capital gain consequences. The transfer will be subject to the five year “look-back” period, but with proper planning, those issues can easily be dealt with and numerous other complications avoided. I have engaged in asset protection planning transactions involving the residence and other real property utilizing asset protection trusts in hundreds, if not thousands, of cases, and favorable results have always been achieved with no or minimal negative consequences.

Drafting Beneficiary Designation Forms. It is generally best and usually advisable for the client’s attorney to prepare the beneficiary designation form for any significant retirement plan, or even in the case of life insurance when the beneficiary arrangement is complex. For example, if the arrangement involves a trust, legal counsel should almost always be involved in the beneficiary designation form preparation process. Even common developments, such as the death of the beneficiary, must be anticipated. It should also be contemplated that a younger beneficiary might exist, in which event it might be appropriate for the beneficiary designation to specifically refer to a trust, or perhaps to a custodial arrangement under a Uniform Transfers or Gifts to Minors Act, which will prevent the beneficiary from receiving the retirement plan or insurance distribution before the age of 21 or the age specified in the trust document.

Clients frequently fail to complete the process, even when they are given specific instructions, and often other financial professionals involved in the process are not aware of the contemplated planning arrangements or they may not be as informed and up-to-date as the client might expect in the particular planning or taxation area. I have also found that it is desirable for legal counsel to retain a copy of the confirmed beneficiary designation arrangements. I have had several situations over the course of my more than 40 years of legal practice when the financial institution or insurance company was unable to locate the client’s last beneficiary designation, and the result would have been that the funds would be paid to different beneficiaries, or paid in a different manner, than contemplated by the latest beneficiary designation. In the case of a pay-on-death (POD) or transfer-on-death (TOD) designation, the result might be that probate may be required when the POD/TOD designation would have avoided probate entirely, and in addition, the funds controlled by the POD/TOD designation might pass to unintended beneficiaries. I cannot overstate the importance of giving proper attention to the issue of beneficiary designations.

Additional Information. Future issues of this Newsletter will address other issues of current interest. Please contact my office with any questions that you might have.

Randall K. Craig, J.D., CELA, CAP
Attorney at Law
Telephone: 812/477-3337
Facsimile: 812/477-3658

A Department of Parks and Recreation Sand Volleyball Tournament will be held on June 5^th, 2016 at Wesselman Park, 551 North Boeke Road, Evansville, IN. Proceeds from the event will be donated to Holly’s House.

Team participants will receive a shirt and be eligible for prizes and returned registration fees. For more information regarding team registration fees and event details, please email Karen Ham at uriah82@aol.com

The goal of the event is to encourage community members to participate in a fun and safe activity while raising money for Holly’s House, a safe and welcoming place where sexually abused children and adult victims of domestic or sexual violence can report the crime. Holly’s House serves nine Southwest Indiana Counties, and provides a child abuse prevention education program, “Think First and Stay Safe,” to elementary students in five of the counties served. Last year, Holly’s House assisted 400 victims of child sexual abuse and adults who experienced sexual assault or domestic violence, and presented the “Think First and Stay Safe” program to over 5,000 children, all at no cost.

Holly’s House is a non-residential victims’ advocacy center providing services for victims of child abuse, domestic violence and sexual assault in southwest Indiana. The mission of the organization is to empower victims of intimate crime and abuse by providing support, promoting justice and preventing violence. For more information, please visit www.hollyshouse.org.