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This college-debt-collection tactic is now effectively banned

For years, colleges have withheld the transcripts of former students who owe them money as a way to convince them to pay up. But often what the practice did instead, was stymie students’ efforts to complete their education. Now, it could get more difficult for schools to hold transcripts hostage as a debt-collection tactic. 

As a condition of participating in the federal financial aid program, colleges won’t be able to withhold transcripts in certain circumstances, the Department of Education announced Tuesday. Any term where a student used federal financial aid money, including federal student loans and Pell grants, to fund their education, in whole or in part will be subject to the ban on transcript withholding as long as the bill for that term is fully paid off. 

That means if a student leaves school with an unpaid bill, their school can’t withhold their transcript for previous terms as long as those periods meet two conditions: The student used federal financial aid money to fund that coursework and they’ve paid the bill for those semesters in full. 

“This change will ensure that students will receive credit for the education that they have completed and help them with transfer and finding a job,” James Kvaal, the undersecretary of education, told reporters Tuesday. 

The announcement comes following years of scrutiny on the practice. The Consumer Financial Protection Bureau said last year that blanket policies to withhold transcripts as part of an extension of credit are considered abusive under the Consumer Financial Protection Act, which the bureau enforces. Multiple states, including California and New York, have banned the practice. 

Roughly 6.6 million students owe $15 billion to colleges they attended, according to a 2020 analysis from Itahka S+R, a nonprofit research and advising group focused on higher education. The funds can range from unpaid library fines and parking tickets to tuition or loans owed by students. Often students incur this debt when they leave early from their college due to financial or other unexpected circumstances. 

In many cases, the unpaid bill bars students from returning to complete their degrees. If schools withhold students’ transcript, they also can’t transfer elsewhere to finish their education. 

Colleges approach money owed to them by students and former students in different ways. Over the past few years, some colleges have voluntarily wiped out the debt students owed to them or made it easier for students with unpaid balances to return. A few years ago, the Biden administration gave schools flexibility to use pandemic-era relief funds to cancel this institutional debt. Community colleges, HBCUs and regional public colleges took them up on the offer. 

In other cases, schools will go as far as suing students to collect on the unpaid bills. The new regulations won’t stop colleges from taking legal action to pursue the funds. There are also some categories of students who could fall through the cracks of the rules, like students who didn’t use federal financial aid to pay their tuition — they may have a payment plan with their school, for example — and can still have their transcripts withheld. In addition, under the rules colleges can still withhold diplomas or other credentials over unpaid bills. 

But overall, the new regulations will likely help “the vast majority of people who experience transcript withholding,” said Winston Berkman-Breen, the legal director at the Student Borrower Protection Center, an advocacy group. 

“A single semester where there’s a balance can no longer be the justification for withholding their entire academic record to the extent they used federal financial aid during those other terms,” Brankman-Breen said. “Effectively for a lot of people that means there’s now a national ban on transcript withholding.” 

Still, the Department didn’t ban the practice entirely, or go as far as the CFPB, which described the practice as abusive, Berkman-Breen said. That means its impact on students will likely be in the details of how schools implement it, he said. Some schools may double down, while others “might just readily give it up because it isn’t worth the cost of implementing a more complicated compliance system,” he said.  

“There is a world in which [the Department of Education] said, ‘This is categorically abusive, we regulate schools, you can’t do this,’ but they didn’t do that,” he said. “They have left instances where they are conceiving it can take place.” 

Pressed on the details of whom the new rules would help, a senior department official explained in part the agency’s thinking behind its approach to the issue in a conference call with reporters. 

“If the fed government is supporting credits in whole, or in part, we don’t think schools should be able to withhold those transcripts,” the official said. 

Clearer communication about financial aid

The rules on transcript withholding came as part of a broader package of regulations aimed at holding schools more accountable to students and taxpayers, which the department released Tuesday. The rules take effect on July 1, 2024. 

In addition to limiting colleges’ debt-collection tools on the back end, the new regulations also put more guardrails around how schools communicate with students about cost and debt on the front end. Research from the Government Accountability Office and others have found that colleges often leave out crucial information about cost and whether students have to pay back in aid in their financial aid offer letters. 

These are the communications students receive after they’ve applied to college and filled out the Free Application for Federal Student Aid or FAFSA, the government’s financial aid form. Some schools also require students to fill out the CSS Profile, which asks more detailed questions, in order to determine eligibility for certain types of aid. 

In theory, these communications are supposed to help students and families understand how much they’ll actually pay to attend college and the resources available to them to do it. But in reality, they’re often difficult to decode. 

“You shouldn’t have needed an advanced degree to understand how much you’ll end up paying for college,” Secretary of Education Miguel Cardona said on a conference call with reporters.

Under the rules announced by the department Tuesday, colleges will be required to include a school’s cost of attendance — a figure that captures tuition, room, board and other costs, including those not directly charged by the school — the source and type of financial aid offered to a student and whether a student has to earn the aid or pay it back. The financial aid communications also must include a school’s net price or the cost of attendance minus any funds a student receives that they don’t have to pay back. 

“What the department has proposed here handles some of the low-hanging fruit on financial-aid offers,” said Clare McCann, higher-education fellow at Arnold Ventures, a philanthropic organization. “These are pretty basic expectations to have of institutions. If you asked most people they would assume colleges are already doing this on financial aid offers.” 

The new requirements come as legislation is stalled in Congress that would require schools to use a standardized form to communicate about financial aid. The Department has issued best practices surrounding financial aid offers and a template institutions could use that would help them follow those guidelines. 

But, “we are not able to mandate that colleges follow those practices or use a particular form, what we do here is require that institutions provide students clear information,” on certain factors like the cost of attendance, a senior Education Department official told reporters. 

Rachel Fishman, director of the higher education program at New America, a think tank, called the announcement “a powerful moment” because it’s the first time there have been any regulations governing how colleges communicate about costs and aid with students. 

Her research has found that a large share of colleges don’t provide any information about college costs in their offer letters and that schools use a variety of different terms to describe the same product — for example, a direct unsubsidized federal financial loan — making it difficult for students to fully understand how much they’ll pay for school and compare offers. 

The department’s rules still don’t mandate a standardized template, which would make it easier for students to make an apples-to-apples comparison when they receive these offers, Fishman said. It would also make the communications more similar to what consumers experience with any other type of financial product — a form laying out terms and conditions that’s mandated by law to be consistent, she said. 

“What’s really nice is that this codifies something that’s basically voluntary so that there is a bit of a stick for those institutions that are doing something egregious,” she said. “It’s not going to take it to the level it needs to be, which is what needs to happen through legislation.” 

Requiring colleges to be financially prepared for closures

The bulk of the regulations released Tuesday aim to better protect students and taxpayers from the consequences of schools collapsing. When colleges close precipitously, students attending the school have their federal student debt canceled, but the government rarely recoups that money from the institutions. 

Between January 2014 and June 30, 2021, the Education Department discharged $550 million worth of debt held by students whose schools had closed. The agency recouped just $10.4 million of those funds, it said in its regulations. 

Under the rules announced Tuesday, certain triggering events will require schools to take steps, like getting a letter of credit from a bank, to ensure they have the funds to cover loan discharges in the event of a collapse. These triggering events may include entering a receivership, a process similar to bankruptcy or experiencing a significant fluctuation in federal student aid volume. 

“We have been bearing the cost of weak regulations for many many years now and these enhanced regulations will go a long way in making sure schools and not taxpayers are bearing those costs,” McCann said. 


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