If you must borrow for college, your best bet is a federal student loan.
You don't need a credit check. The interest rate is low. Repayment plans are flexible. And, thanks to a new law, federal loan debt could be forgiven after a number of years if you work in certain needed fields.
Problem is, more than 1 million community college students, or about 10 percent, don't have access to federal loans, according to a new report by the Project on Student Debt. The reason: Their schools won't participate in the federal Stafford loan program.
Schools that bypass this program -- Baltimore City Community College being one -- fear that too many defaults could jeopardize other federal aid for the rest of their students. And they don't want to saddle students with debt.
These are legitimate concerns. But sometimes loans are necessary -- even at community colleges with modest tuition rates.
More students are priced out of four-year schools these days and choosing community colleges. Enrollment also rises during a recession -- which we might be in -- as workers lose jobs or can't find one without more training.
If you don't qualify for need-based aid and don't have tuition money, you might resort to credit cards or high-rate private loans. And private loans are getting harder to come by as the credit crunch drags on.
Maryland community colleges that offer federal loans say they don't encourage borrowing and the number of takers isn't high. Still, for some students, a federal loan might be the difference between "going to college or not going to college at all," says Melissa Gregory, college director of student financial aid at Montgomery College.
To understand why some community colleges aren't in the loan program you have to go back to the early 1990s. Borrower default rates, especially at some fly-by- night trade schools, shot up so much that Congress stepped in, according to the Project on Student Debt report. After that, schools whose default rates were 25 percent or higher in three consecutive years would lose their ability to disburse Pell Grants. These are the biggest source of grant aid, critical to students and schools.
Colleges abandoned the loan program rather than risk losing Pell Grants. Today, 60 percent of community college students in Georgia and about half in Louisiana, North Carolina and Alabama don't have access to federal loans, the report states. In Maryland, it's just under 11 percent.
Besides Baltimore City Community College, Chesapeake and Carroll community colleges are not in the loan program. Their student aid includes grants, scholarships, work-study and deferred payment plans.
Carroll never participated in the federal loan program. The Baltimore and Chesapeake schools left it in the mid-1990s.
Ron Smith, dean of student development at Baltimore City Community College, says few students took out federal loans back then, but the default rate among those who did was more than 30 percent, and the school didn't want to endanger its Pell grants, federal work-study and supplemental education opportunity grants.
"So many of our students rely heavily on Pell Grants to fund their education," he says. "It is the single most important student financial assistance at this institution."
Back then, the typical student came from a family of four earning less than $20,000. That picture hasn't changed much today, Smith says. Many times, Pell Grants -- which can be up to $4,310 a year -- are enough to cover tuition, fees and books with a little left for transportation, he says. Eleven students took out private loans this academic year.
Loans were never big at Chesapeake Community College, says Mindy Schaffer, director of financial aid. When the school left the loan program, three of the four borrowers in repayment had defaulted, putting the college's default rate at 75 percent, she says.
Schools say students aren't clamoring for loans. Besides, students who transfer to a four-year college for their junior and senior years will likely borrow as much as $11,000 in federal loans, Schaffer says. "We don't want to add to that."
Robert Shireman, executive director of the Project on Student Debt, says community colleges not in the loan program should take a second look. Under the federal formula, schools with few borrowers are given more leeway so that a small number of defaults won't cause them to lose federal aid, he says. And defaults have dropped now that schools are required to give borrowers financial counseling.
"The reality is that no matter how hard we try, some students do find that they need to borrow," he says. "We can't fool ourselves into thinking that denying them the best loan option prevents them from taking out loans."
At the Community College of Baltimore County, about 3,000 of the college's 18,000 seeking degrees on its three campuses take out federal loans, says Jerome Lovick, director of financial aid.
Borrowers tend to be in health care programs, he says. For instance, once nursing students enter time-intensive hospital training, it's difficult for them to work full time. Sometimes, a federal loan is their only option to make ends meet, he says.
The fact that Howard Community College offers federal loans attracts nursing students from areas where the community college has no loans, says Katherine Allen, director of financial aid services.
And if workers return to college for more training during these tough economic times, the need for federal loans could grow. Once you earn a bachelor's degree, you no longer qualify for Pell Grants, but you still can be eligible for Stafford loans, says Montgomery College's Gregory.
So to all those schools not in the loan program: If you see students are using credit cards or private loans, you'd be doing your students a big favor by returning to the loan program.