Creditor Colleges: Canceling Debts that Surged during COVID-19 for Low-Income Students

Abstract

When a student receiving Title IV financial aid, such as a Pell Grant, withdraws after attending for 60% or less of an enrollment period, federal aid rules require colleges to return a portion of students’ Title IV aid disbursals to the U.S. Department of Education, in a policy known as “Return of Title IV Funds.” As a result, schools must absorb a financial loss or treat at least some portion of a withdrawn student’s Pell disbursal as a debt to be collected. A surge in mid-semester withdrawals during the COVID-19 pandemic has meant that California Community College (CCC), California State University (CSU), and University of California campuses increasingly operate as creditor colleges for these debts. Since Pell Grants are awarded based on demonstrated financial need, these debts almost exclusively afflict low-income students—students who are also more likely to be students from racially marginalized communities. Approximately 373,025 students have accrued institutional debts annually since the pandemic began, for a total of nearly 750,000 students affected in the 2020-2021 and 2021-2022 academic years. If schools resume collections, in future years we estimate that 147,709 students would be placed in collections annually.

Keywords: student debt, inequality, financial aid, higher education

JEL Classification: I24