New Rules for Student Loans

The federal Education Department is taking a more responsible approach to curbing student loan defaults now than it did last year. Not only that, its new approach could save the federal government $5.4 billion over the next decade. However, the department and Congress still need to change eligibility formulas to increase the number of students who qualify for aid.

New rules issued a few weeks ago by the new education secretary, Lauro F. Cavazos, still penalize colleges with any number of students who fail to pay back federally guaranteed loans. But the proposals also offer to help schools manage their loan programs.

Last year, the department threatened to cut off not just loans but all federal student aid to schools with default rates above 20%. Community colleges and colleges with traditionally black enrollments had the most to lose because their low-income students had more trouble than most paying off their loans. Black colleges worry that even the newer rules may hurt their students.

Under Cavazos’ new plan, federal loans could be cut off or curtailed in 1991 at some 200 institutions where more than 60% of past loans were in default. Another 450 schools with default rates between 40% and 60% would have to reduce defaults by 5% a year or lose some or all their loan money. Schools with default rates of more than 20% would have to develop a plan for reducing defaults. All schools would provide guidance to first-time borrowers. The department would try to reduce discrimination against low-income or minority students by making allowances for schools it felt had taken the proper steps but still had a default rate of more than 20%.

Still at issue is the formula for calculating default rates. One method is to compare the number of borrowers who left school in 1986, for example, with those who had not started to repay their loans by the end of 1987. Many state agencies allow students more time than that to begin repaying loans, usually leading to lower default rates.

One target of the Education Department’s campaign is unscrupulous trade schools that fail to provide sound training but still leave students in debt. The department proposes that all such schools, regardless of default rate, be required to tell prospective students how many prior students finished their courses and landed jobs.

The department’s regulations head off legislation that started moving through Congress after Cavazos’ predecessor, William Bennett, proposed more arbitrary cutoffs last year. But the law-makers rightly still want to see the government change the calculations that determine loan eligibility. They feel, for example, that family homes or farms should not be counted as assets for families with incomes below $30,000. That change would make more students eligible for loans. It could help reduce loan defaults, too, because more middle-class students would be in the loan pool.

The government, colleges and trade schools must do a better job of helping students avoid burdensome debt and costly defaults while making sure those who are needy are not deterred from higher education. The new rules, prudently applied, should move toward those goals.