If you need to take out a loan for college, it is tough to find a better deal than a federal student loan.1 The interest rate is low and fixed, fees are minimal, and the federal government pays the interest for the majority of recipients while they are still in school, or even after students graduate if they become unemployed or face other economic distress. Starting next year, the loan payments for virtually all types of federal loans to students past and present can be capped at an affordable amount based on the borrower's income and family size.
Perhaps the most important feature of federal student loans is that they are offered to students regardless of their income or credit history. With college costs rising faster than grant aid, the federal student loan programs can help fill the gap with reasonably priced financing for almost every college student. But students cannot get a federal student loan if the school they attend does not participate in the federal loan program. While almost all four-year colleges and universities in the country do participate, an alarming number of community colleges – where lower income and minority students are most likely to attend – do not.2
More than one million students are enrolled at community colleges that have opted out of the federal student loan program. In 13 states, more than 10 percent of community college students do not have access to federal loans. In eight states, more than 20 percent cannot get a federal loan. These students must resort to riskier, more expensive forms of debt, such as credit cards or private student loans, when they need help bridging the gap between available grant aid and college costs.
African Americans and Native Americans are much less likely to have access to federal loans than other community college students. Nationally, 20 percent of African-American community college students and 19 percent of Native-American students are unable to take out federal student loans, compared with nine percent of White students. The same is true of 11 percent of Latino students at community colleges and five percent of Asian-American students.
Our discussions with non-participating colleges revealed some reasons why they opt out of the federal loan program. Most common is a concern that students might default on their loans, which could cause the college to face sanctions that threaten its ability to disburse federal aid in the future. Our analysis indicates that this risk is much more manageable than is commonly assumed, and does not justify denying all students at a college access to federal loans.