To Refuse or Reduce Loans? That Is the Question

RDunn-100x125To give away money is an easy matter … and in any man’s power. But to decide to whom to give it, and how large and when, for what purpose and how, is neither in every man’s power nor an easy matter. Hence it is that such excellence is rare, praiseworthy and noble. – Aristotle

Aristotle got it. He got how excellent we are at what we do. That it takes a rare combination of skills to be a good financial aid administrator (FAA). That our profession is praiseworthy and noble.

To Refuse or Reduce Loans?

… to decide to whom to give it, and how large and when, for what purpose and how …

Deciding whether students get money? Is that really what we do? Is that what we want to do?

At minimum we help students receive money if they qualify and are eligible. We help them get money so they can achieve their educational objectives … so they can eventually enter into society and contribute to making the world a better place. Oversimplified for sure … but if a few of the students that we help go out and make a difference then we have made a difference … with only a few degrees of separation. And in this way what we do is noble and praiseworthy. Aristotle got it.

To borrow or not to borrow? That is the question many students and families ask themselves as they try to figure out how to pay for college. To let them borrow or not to let them borrow, and if so, how much to let them borrow? Those are the questions many financial aid administrators must face as they deal with such issues as default rates, lifetime borrowing limits, maximum time frame, and the 150% subsidized loan limit.

Reasons for refusing to certify a loan or reducing loan amounts are often discussed on the financial aid listserv, FINAID-L. The following comments are representative of many schools in this discussion:

We have developed a unique excessive-debt review process where we conduct an extensive review and may ultimately refuse to certify, reduce the amount certified, or certify as requested.

We have a policy in which we may refuse to certify loans that we believe will not be repaid, excessive debt being one reason. 

For students close to their lifetime limits, we may choose to prorate loans to last until the student graduates.

Checkpoint: What do the regulations say?

When I was learning financial aid back in the day (a little bit after Aristotle), I was taught that you could not decline to certify a loan for a student based only on a suspicion that they would be unwilling or unable to pay it back. The only reason a loan could be denied was if it could be clearly documented that the student didn’t need the loan, such as if they won the lottery or came into a large inheritance. However, as you can see below, the regulations are not that specific. Although the regulations do emphasize documenting the reasons, they do not specify what those reasons could or should be.

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Refusing to originate a loan or originating for less than maximum eligibility

2013-2014 Federal Student Aid Handbook, Volume 3, Chapter 5, page 3-86

HEA Sec. 479(A)(c), 34 CFR 685.301(a)(8), DCL GEN-11-07

On a case-by-case basis, you may refuse to originate the loan for an individual borrower, or you may originate a loan for an amount less than the borrower’s maximum eligibility. However, you may NOT limit borrowing by students or parents on an across-the-board or categorical basis. Similarly, you may originate a loan for an amount less than the borrower’s maximum eligibility. However, you must ensure that these decisions are made on a case-by-case basis, and do not constitute a pattern or practice that denies access to borrowers because of race, sex, color, income, religion, national origin, age, or handicapped status. Also note that your school cannot engage in a practice of originating FSA Loans only in the amount needed to cover the school charges, nor limit Direct Unsubsidized borrowing by independent students. When you make a decision not to originate a loan or to reduce the amount of the loan, you must document the reasons and provide the explanation to the student in writing.

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As I see it, FAAs struggle with this dilemma because of two very noble reasons: One is to identify abusers of the system and the second is to make sure students with high debt can still complete their degrees. We aspire to be good stewards of the taxpayer’s money and, while there are exceptions, we are skilled helpers by nature and like helping students.

These days, students who may be abusing (or over-using) the system are being detected like never before through mechanisms such as proof of identity, proof of high school diploma, Unusual Enrollment History (UEH), Pell Lifetime Eligibility Used (LEU), 150% subsidized loan limits, and pace and maximum time frame SAP components. And still, for many reasons, some schools use their own institutional measures for identifying students who may need extra scrutiny. Regardless of how they are identified, FAAs find themselves in a position of trying to determine if and/or how much a student should be allowed to borrow.

In my view, instead of being suspicious, we should be thrilled for the students who have persevered through the financial aid process. They have completed FAFSAs, passed through or resolved database matches, completed verification, satisfied all other awarding and other miscellaneous requirements, are making satisfactory academic progress, and doing their best to go make it through college. We should try not to be suspicious and instead should pat them on the back, congratulate them, and help them finish. As higher education supporters and financial aid administrators, we believe in the power of the degree and that completion is paramount to borrowers being able to repay their loans. We must assist them in navigating through whatever barriers remain and help them traverse a financial roadmap to graduation. We must keep in mind that there may be a very fine line between assisting them to completion and hindering them from ever reaching that accomplishment. To paraphrase Aristotle, “it’s no easy matter.”

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