PROSPER Act Return of Title IV Policy: Et tu, Brute?

By Glenn Bogart, J.D.

I just read a piece on what the Republicans’ PROSPER Act (Reauthorization of the Higher Education Act of 1965, the law governing the federal student aid programs) would do to the current Return of Title IV funds law to make it “better.”

Julius Caesar, while he was being assassinated, supposedly exclaimed, “Et tu, Brute?” when he saw that Brutus, who he thought was his friend, was among the assassins. For those untutored in Latin, this meant, “You too, Brutus?,” or “Even you, Brutus?” Mr. Caesar was expressing surprise that even his friend, Brutus, had joined his political enemies in killing him.

The same thing seems to be happening now, as relates to the Reauthorization. The Republican offering includes provisions that would devastate schools in the area of Return of Title IV funds.

This proposal calls for three radical changes to the Return of Title IV funds regime. First, it would change the order of refunds, such that Pell Grant funds would have precedence. Instead of returning loan funds first, you would have to return grant funds first. If a student received a Stafford Loan and a Pell Grant, most likely he or she would still have loan money to repay after he or she drops out. This is the opposite of the situation as the law is now, where upon a student withdrawal where a return of funds is due, the school pays back loan money first, and the Pell is used in order to pay for most of the tuition and fee charges.

Under this new scenario, what do you think will happen to your default rate? We know that dropouts who have student loan balances are the most likely of all former students to default. Under this proposal, you’ll have a lot more students in that category.

Just as bad, or even worse, is the proposed provision that would require a 100 percent return of Title IV funds if a student drops out within the first 25 percent of a payment period.

The Republicans tout this as a “cost-sharing,” “skin in the game” provision. But imagine how your life would be if you could receive nothing for a student who stops attending at any time prior to the 25 percent point in the payment period. That student took up class space, and you can’t replace him. You issued him or her a $700 kit in a cosmetology program, and the government won’t let you keep a dime in federal student aid. If you want to recoup these losses, you have to go after the student, which earns you a reputation as a hard-ass in the community and discourages other prospective students from enrolling.

Your best course of action in such a situation is to tighten admissions standards and, if you have an inner-city school, to move to the suburbs – the same thing that happened during the late 80s, early 90s, default rate hysteria. Minority students are the most likely ones to drop out, so if you want to survive, you have to find a way to exclude them. Making it harder for them to get to your school in the first place is the obvious way to accomplish that. They won’t enroll if they can’t get there, and if they don’t enroll, you won’t have as many early drops, where you’ll have to eat the whole thing under this new proposal.

And there’s more. The current R2T4 rules say you can keep all the federal student aid for the payment period (typically a semester, a quarter, or 450 clock hours) if the student attends past the 60 percent point in that payment period. Under the PROSPER proposal, there is never a point before 100 percent where you get to keep 100 percent.

So, to summarize, the PROSPER Act reauthorization of the Higher Education Act would:

• Change the refund order. Instead of paying back loans first, you would be paying back grants first, leaving many, many more early drops with student loan balances to repay. This will inevitably lead to higher student loan default rates.
• Require the school to return all federal student aid funds if the student withdraws before completing at least 25 percent of the payment period. If the student withdraws at 50 percent of the payment period, the school returns 75 percent of the federal student aid.
• Require the school to return some federal student aid money no matter when during the payment period the student withdraws. If the student withdraws at 99 percent of the payment period, the school has to return 25 percent of the federal student aid.

There are other provisions in the bill that will cause some concern – for example, all federal student loans become unsubsidized, and the FSEOG program is abolished. This piece is about R2T4, though, so we won’t get into these other provisions here.

As to R2T4, the PROSPER Act is a disaster for every kind of school, regardless of whether state-supported, private non-profit, or private for-profit. It’s also a disaster for students who withdraw, leaving many more of them with larger student loan balances to repay than under the current regime. It is hard to see how this helps anybody, well, prosper.

GLENN BOGART, J.D. is a Title IV compliance consultant who specializes in school compliance reviews and Department of Education program review responses and appeals. A former ED program review officer, he holds a bachelor’s degree in government from Southern Illinois University, and earned the Juris Doctor degree at Western New England University in 1986. He resides in Birmingham, Alabama, but travels all over the U.S.

Mr. Bogart started his consulting business in 1992, after having served briefly as director of internal audit and compliance at Phillips Colleges, Inc., and prior to that as corporate vice president for financial aid for another large group of proprietary schools. Over the years, he has contributed frequently to these pages.