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Minnesota’s community colleges are supposed to be affordable. So why do their students have the highest loan default rates?

One in seven Minnesota community college students with federal loans defaults within three years.

Among the reasons students choose to attend a community college, one of the most important is that community colleges are affordable. So it may come as some surprise that about one in seven Minnesota’s public community college students who takes out federal loans for school defaults on them within three years of the date they have to start repaying them.

That’s higher than the rates of student borrowers defaulting after they attend for-profit, public-four year and nonprofit schools in Minnesota, according to new data released by the U.S Department of Education.

Minnesota’s two-year community colleges are designed to be more accessible and affordable than the state’s four-year schools. So why are students at the most affordable schools defaulting on their loans at higher rates?

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More likely to default

The overall default rate for Minnesota students whose loans entered repayment in 2013 was about 9 percent, but some types of schools — and some campuses — had higher default rates than others, according to the federal data.

For two-year public community colleges, the rate was highest, with more than 15 percent of federal loan borrowers defaulting within three years. About 8 percent of students who attended private for-profit schools defaulted within three years, compared to 4 percent of students attending Minnesota public four-year universities and 3 percent of students attending private nonprofit schools.

Federal student loan default rates by type of institution in the U.S. and Minnesota
Minnesota's federal student loan default rates are lower than than the United States' as a whole. Students who take out federal loans to attend community college default on those loans at higher rates than students at other types of institutions in Minnesota and in the U.S.
Source: U.S. Department of Education

The highest default rates among community colleges in Minnesota were at Fond du Lac Tribal and Community College in Cloquet, where 27.1 percent of students who took out federal loans defaulted within three years, according to the 2013cohort data. Closely following were default rates at St. Paul College, where 26.8 percent of students with federal loans defaulted on them within three years.

Of course, these data reflect only students who have defaulted on loans, and not students struggling to repay them.

No Minnesota schools had default rates over 30 percent. Students at institutions with default rates of 30 percent or higher for three consecutive years can lose access to federal financial aid.

Default rates at Minnesota's two-year public colleges
Some two-year public colleges in Minnesota have higher rates of students defaulting on their federal student loans than others.
Source: U.S. Department of Education

While fewer two-year college students take out federal loans to attend school in the first place, it is troubling that a larger share of those who do fall behind on payments and wind up in default, said David Baime, senior vice president of government relations and policy analysis at the American Association of Community Colleges. This issue isn’t unique to Minnesota — the default rate at public community colleges nationwide is more than 18 percent — more than double the 7.3 percent rate for public four-year schools.

Paying for school

Part of the reason for the higher default rate has to do with who goes to community colleges: students who attend public two-year schools are a diverse crowd. Nearly half of public two-year college students are over age 25, according to the Minnesota Office of Higher Education, versus 11 percent of students at University of Minnesota campuses. Nearly a third are racial or ethnic minorities. Many community college students work in addition to juggling school, many are first generation students or recent immigrants, and many are supporting families on top of their schoolwork.

“In Minnesota … two-year colleges are open-door institutions” said Ron Anderson, the vice chancellor of academic and student affairs at the Minnesota State college system, formerly known as MnSCU, which includes all of Minnesota’s public two-year colleges. “What that means is we provide opportunity for any high school graduate, regardless of class standing or academic preparation, to have access to a college education. So for us, that means we have a very diverse group of students — we have many students coming to us from low-income families, many students coming in with varied levels of academic preparation, and both of those pieces are key to academic success.”

Minnesota has a high-tuition, high-aid model, Anderson said — the cost of attending community college (before aid), while more affordable than going to a four-year school, is higher than the national average.

According to the College Board, the average published tuition and fees for in-state students at public two-year colleges in the U.S. is $3,440 annually. For community colleges in the Minnesota State system, annual tuition and fees for full-time students are between $5,000 and $5,700, before any student aid. The median debt for students who graduate with an associate’s degree in Minnesota is about $18,200, compared to $26,800 for students who graduate with a bachelor’s, according to the Minnesota Office of Higher Education.

“While the cost is higher than comparable states, the aid is also higher, and the intent there is really one of directing the financial support to students who need it most. So for example, rather than have a structure in which tuition is low for everyone, our state has chosen a structure where those who can afford to pay it are asked to pay it, and those who can’t afford it (receive aid),” Anderson said.

That doesn’t mean it’s affordable for everyone, said Dylan Kelly, a student at Minneapolis Community and Technical College and the president of the Minnesota State College Student Association.

For some students, state and federal grants may cover the cost of tuition — or most of it — but some still take out loans to pay for food and housing, he said.

“A lot of our students are living right at that line. They have their Pell grant (federal grants for low-income students), they have their government-subsidized loans maxed out, and they’re still struggling to get by,” Kelly said. “If their car breaks down or they have to pay a medical bill, their kid has asthma and they have to go to the doctor, that can push them out.”

The Federal Reserve Bank of New York Consumer Credit Panel and Equifax found that student loan borrowers with the least debt were the most prone to loan default.

Whether because of financial hardship, lack of academic preparation or lack of support, many community college students who default on their loans do not finish school, Kelly said.

Graduation rates

Not graduating is a problem at Minnesota State’s two-year campuses. According to College Scorecard, the federal government’s website designed to make information about higher education more transparent, the three-year graduation rate for full-time, first time students at two-year schools in Minnesota is as low as 13 percent (at Century College in White Bear Lake), and as high as 57 percent (at Alexandria Technical and Community College).

The national average graduation rate (in three years for two-year schools and six years for four-year schools) is 42 percent, and most public two-year schools in Minnesota fall below that average.

According to the Bureau of Labor Statistics, full-time workers over 25 who have an associate’s degree earn an average of $120 per week, or about $6,240 more per year, than workers with a high school diploma. The average person holding a bachelor’s degree makes $17,630 more in a year than the average worker with an associate’s degree.

Students who borrow money to attend school but don’t finish might not have access to higher-paying jobs they might have had they either finished their associate’s degree, or go on to a four-year school to finish a bachelor’s degree, as many community college students do.

A work in progress

These are things that Minnesota State is concerned about, Anderson said. He said the system has worked to keep tuition as low as possible — the legislature has frozen it the last few years, and it declined by 1 percent this year over last (though state funding for two-year colleges in Minnesota is 36 percent lower than the national average according to Minnesota State). Minnesota State also recently kicked off a campaign to raise $50 million for scholarships.

Anderson noted that default rates at Minnesota State schools have dropped in the last three cycles — from nearly 18 percent in the 2011 cohort to 15 percent in the 2013 cohort data.

U.S. Education Secretary John King has said new student loan repayment plans, such as income-based repayment, have put a dent in national student loan default rates, but the effect of those plans isn’t clear in the breakdown for Minnesota.

In recent years, Minnesota State has worked with Minnesota high schools to prepare students for a smoother transition to college, and also to make more college credits available for students to earn while they’re still in high school.

Those efforts may have helped reduce default rates, as they’ve increased the number of students completing their degrees in a timely fashion at Minnesota State schools, Anderson said: Minnesota State’s completion rates have improved by more than 2 percent in the last five years.

“While that might strike you as a small number … I’ll tell you it’s an incredible dial to move when you look at a system educating just under 400,000 people,” he said.