Education Department focuses on reform of under-the-radar higher ed financial aid rule

An under-the-radar federal rule routinely leaves vulnerable college students unexpectedly owing money to their former institutions and blocked from continuing their education or even getting an official transcript. Reforming that rule is now on the Education Department’s regulatory agenda.

More than 39 million Americans attended college and left without earning a degree. Many of those individuals are from lower-income backgrounds, and rely on federal financial aid to pay for college. About 40 percent of those who take federal loans for college do not graduate. 

While owing money on a federal loan without having earned a degree is bad enough, the situation is even worse for students who leave college in the middle of a semester. That’s because of a complex set of federal requirements for dealing with financial aid known as “Return to Title IV” or R2T4.

Under the rules of R2T4, if a student makes it through 60 percent of an academic term, they get to keep all the federal aid — grants and loans — awarded for that term and used to pay for their tuition, fees, and other expenses.

If they withdraw from college before the 60 percent mark, however, their college is required to return a share of the disbursed federal aid to the government. While the formula is complicated, roughly speaking, a student is only entitled to keep the share of aid equal to the share of the semester they completed. For example, if a student was enrolled for 25 percent of the semester, they can expect to keep about 25 percent of the awarded aid and the college can use the aid to cover about 25 percent of the amount they’ve charged. All other disbursed aid must be returned by the college to the federal government.. 

Because colleges charge full tuition and fees at the start of the term, it is highly likely that the student in these circumstances will owe money to their college for charges in excess of the amount of aid the student was able to keep. They may also be required to pay some portion of their federal student loan to the federal government immediately, instead of over the course of 10 or 20 years.

Imagine, for example, that a student attends a college that charges $10,000 in tuition and fees for a term, and requires payment in full — without the possibility of a pro-rated refund — 4 weeks, or 25 percent, into a 16-week term. The student uses a $2,500 federal Pell grant and $7,500 in federal loans to cover the full cost of the term. If the student leaves college after week 6, they will only be entitled to keep about $3,750 of their aid, and will owe $6,250 in tuition and fee charges that can no longer be covered by financial aid back to the institution. 

To make matters worse, the vast majority of colleges and universities impose an additional barrier on students who owe them money: they hold their transcripts and block registration until the full balance is paid. This effectively blocks students subject to R2T4 from continuing their education anywhere, unless and until they pay the institutional debt. At least 6.6 million individuals have “stranded credits” because of institutional debt — some significant share because of R2T4.

The students who leave college in the first half of an academic term often do so because they are facing a financial or personal crisis. They are our most vulnerable students and yet the combination of federal R2T4 and institutional refund policies are placing significant additional burdens on them — burdens that students who do not rely on financial aid, or who have the resources and support to persist through the majority of the term do not face.

Instead of leaving these students holding the bag, both the Education Department and institutions ought to have more accountability, and bear more of the financial burden, when a student is unable to get through a term.   

Encouragingly, the federal Education Department has put reforming R2T4 on the agenda for its 2023 negotiated rulemaking session. It is clear from the structure of the policy and the reports of affected students that R2T4 is a significant problem for those that face it. What can be done about it? 

We recommend five key actions, some of which can be initiated through Education Department rulemaking and some of which require action on the part of states or institutions:

• Establish a process and standards for reconciling the schedule for return of Title IV funds and institutional refund policies. Put simply: When institutions charge 100 percent of the tuition for the term before students have earned 100 percent of their aid, it creates a chasm into which students already facing extraordinary circumstances fall. Institutions should match refunds to the amount of returned aid (which the Education Department might also relax) to shift the weight of the burden—and impose greater responsibility for supporting persistence—on the institutions.   
• Protect vulnerable students from the financial consequences of returning Title IV funds. Students below a certain income threshold, or for administrative simplicity, those who receive a Pell grant, should not have costs originally covered by financial aid converted to an immediate balance due. 
• End the requirement to immediately repay the returned portion of federal loans, which puts affected students in a financial crunch that no other student borrowers face. 
• End the practice of withholding transcripts of students who leave college and owe a balance to the institution. As we have written elsewhere, this practice places a significant barrier for students seeking to complete postsecondary credentials. 
• Ensure that colleges and universities provide complete and understandable explanations to students receiving federal student aid about the financial consequences of leaving before the 60 percent threshold. This means not only explaining R2T4, as most colleges do, but also explaining how it relates to institutions’ refund policies, and what balances students can expect to owe to the institution (and not just to the federal government) if they leave before the 60 percent threshold. 
• Require the Education Department to release data on R2T4, including the number and demographics of students affected, the dollar amounts at issue, and the policies (including transcript and registration hold policies) that apply to affected students.
  

For too long, the financial and educational burdens imposed on vulnerable students who leave in the middle of a term has been outside of public scrutiny. The inclusion of R2T4 in negotiated rulemaking is a welcome opportunity to bring this issue out of the shadows and into the light, and to right the balance of responsibility among the federal government, the institution and the student. The department should not let this opportunity go to waste.  

Sarah Pingel is senior researcher at Ithaka S+R. Martin Kurzweil is vice president of educational transformation at Ithaka S+R.