How to end the weirdest and worst student debts

California's Little Hoover Commission investigates shadowy charges known as student institutional debts through which colleges harm students and themselves.

If we are to break oligarchy, we need diverse and powerful citizens and civil society organizations. Public universities have helped produce this kind of civil society in California. They do so not just by providing individual resources to lots of graduates from all walks of life. They also do so by connecting these alumni with shared identities, values, and social networks. Back in 2012, a network of these alumni confronted a state financial crisis as union leaders, non-profit executives and elected officials. In place of cuts to healthcare and schools, they got the state to pass the nations highest tax on millionaires.

California’s community colleges and public universities remain the best in the world, a bulwark of California’s civil society. But they still have some dumb systems that no one would ever recreate if they started from scratch, that limit their potential and the possibilities for their students. Last Thursday, I testified to the California state legislature’s Little Hoover commission about one such system: the charging of shadowy “student institutional debts” and the blocking of degree completion for students who owe them.

Before I share my testimony below on how to end these weird debts, let me first praise the bi-partisan members of the Little Hoover Commission. They themselves are a testimony to the civic power produced by the state’s public universities. Nearly every one of them cited their deep moral concern as an alumnus of the University of California, California State University, and Community College systems. And every last one of them dug into the weirdness of student institutional debts to the point that they could challenge the disappointing defenses of the status quo from college and university lobbyists. I very much look forward to the Commissions findings and report.

But, what are these weird student debts you say? I first encountered them when I coauthored the Creditor Colleges study with Jonathan Glater, Laura Hamilton, and Dalié Jimenez. Here’s how I explained them in my testimony:

Institutional debts work differently than student loans, and they tend to be more harmful. 300,000 mostly low-income California students incur these debts in an average year. These debts in turn create obstacles to student degree completion. They also reduce enrollments at community colleges and public universities, reducing tuition revenue.

Institutional student debts thus pose a problem, but also an opportunity to substantially improve degree completion and increase tuition revenue to support our higher education segments.

Here’s how this works. The largest portion of institutional debts are incurred by students when they withdraw from school in the middle of an academic term because of a health or economic hardship. Schools are required to return some of these students’ Pell grant and loan aid to the US Department of Education. They also must return Calgrant and Middle Class Scholarship aid to the state. As a result, institutional debts mostly impact low-income students that utilize these aid programs.

While they are not required to do so, most schools then place registration holds that bar further enrollment until students repay their federal aid to the school. Schools also commonly use this structure to try to recoup school-based aid awarded to students who withdraw mid-term. Such a case occurred at UCLA where the school sought to take back a $9,000 Blue and Gold grant that UCLA had used to pay itself for a students’ housing. You’ll hear from that student Stephanie later this morning.

As you’ll hear from Stephanie, students often do not know that they will incur a debt when they withdraw. Stephanie was not informed.

It is difficult to track the exact extent and circumstances in which students incur institutional debts. This is because neither the state nor the federal government require schools to publish data when this occurs. While inadequate, the data submitted by the segments to this commission is by far the most extensive data they have ever published.

But here are the estimates we produced for the Creditor Colleges report, which none of the California higher education segments have disputed:

• Around 320,000 community college students incur a total of around $100M in institutional debts annually.

• Around 34,000 CSU students incur around $58M in institutional debts.

• Around 18,000 UC students incur around $30M in institutional debts.

These are rough estimates. But they are consistent in orders of magnitude with the data just provided by the segments on the number of students with debt on the books. [84,000 at CSU. 60,000 at UC]

This is a bit less that 10% of all undergraduates at CSU and UC. It’s closer to 15% of all community college students annually.

At this scale, institutional debts are highly consequential for efforts to increase degree completion rates.

As you will hear from Stephanie, the debt imposed a hardship when her mom used high interest credit card debt to pay it so that she could complete he degree. Data from the segments, however, shows that students rarely ever repay institutional debts. This is because, like Stephanie, students often have already used their aid funds to pay for housing or other costs of attendance. So they simply do not have the money to pay the debt. And you can’t get blood from a stone.

Consistent with this, at CSU and UC campuses with full data just provided to you, just 3% of CSU students and just 1% of UC students with debts are enrolled in payment plans. At UC Merced, we ultimately write off about 75% of institutional debts as uncollectable.

Because schools place registration holds on students with institutional debts, students are barred from taking further courses towards a degree.

A carte blanche use of registration holds may be penny wise, but it’s pound foolish for schools. Enrolling a student for just one additional semester would typically bring in more tuition revenue than the amount of the institutional debt. Enrolling a student for all of their terms left towards a degree would bring in even more tuition revenue. Students can use federal loans, Pell Grants and Cal Grants to pay these tuition costs. They can’t use those funds to pay an institutional debt.

With only a fraction of students ever repaying debts, it would boost schools’ revenue to figure out a way to continue enrolling students with institutional debts.

Perhaps because of the revenue losses from enrollment holds, a growing number of schools have increased the institutional debt size threshold for which they institute registration holds. We have found 17 CSUs now allow students to register with institutional debts below $200. 9 of those CSUs allow students with debts up to $1,000 or more to continue taking courses. CSU San Bernardino and Sonoma state allow students with debts up to $4,000 to continue. Unfortunately, we are only aware of 2 UCs, UCSD and UC Merced, where students with debts up to $250 are allowed to register. UC Merced has a waiver program for much larger debts. Some community colleges also use higher thresholds, but we lack systematic data.

Overall, the data points to several legislative solutions:

1. Setting standard thresholds for the amount of institutional debt required for a registration hold. There are equity problems with the inconsistency across schools.

2. Requiring a one semester grace period for debts before implementing a registration hold. During this period, schools should be required to offer zero-interest payment options so that students like Stephanie don’t have to use high-cost credit to pay off institutional debt for re-enrollment. This will create incentives for schools to avoid mid-semester withdrawals through better support and communication for struggling students.

3. Require schools to track and report comprehensive data on institutional debts and policies for redressing associated problems.

4. Drop the requirement that schools return Calgrant and Middle Class scholarship aid for a student that withdraws mid semester for students who have not previously withdrawn mid-semester.

Again, I thank the commission for its attention to this important issue where California has an opportunity to substantially improve degree completion and increase tuition revenue to support our higher education segments. This could also provide a model for improving educational attainment and equity nationally.

References

Data and testimony from all witnesses, colleges, and universities: https://lhc.ca.gov/wp-content/uploads/Supplemental-Information-for-3-26-26-Hearing.pdf

Martin, Andrew Colin. Financialized Administrative Burdens: Unequal Institutional Student Debts in California Public Higher Education. Master’s thesis, University of California, Merced, 2025.

Eaton, Charlie, Jonathan Glater, Laura Hamilton, and Dalié Jiménez. 2022. Creditor Colleges: Canceling Debts That Surged during COVID-19 for Low-Income Students