Student Aid

The Fights that Loom Ahead for the Higher Ed Stimulus

Ben Miller — Tue, 10 Feb 2009 19:00:00 -0500

This afternoon the Senate voted 61-37 to pass a slightly slimmer iteration of the American Recovery and Reinvestment Act than it initially proposed. Now, members of Congress will have some important decisions to make when they try to reconcile the two competing stimulus bills in conference committee. Today, Higher Ed Watch takes a look at some of the looming fights. Tomorrow, we will offer our suggestions for resolving the discrepancies between the two bills.

The following higher education issues will need to be resolved:

School Construction

House Bill: $6.0 billion | Senate Bill: $0.0 billion

The bill passed by the House of Representatives and the one reported out of the Senate Appropriations Committee both contained billions of dollars for postsecondary construction funds. The original Senate version also included language guaranteeing that community colleges would receive their fair share of funds. To appease a group of moderate Democrats and Republicans who were unhappy with bill's overall price tag, however, the Senate replaced their bill with an amendment that eliminated all higher education construction money. Now, the conference committee will have to decide how much, if any, money should be left in for postsecondary construction. In addition, it will also have to decide whether to dedicate a certain percentage of these funds to community colleges.

State Fiscal Stabilization Fund

House Bill: $79 billion | Senate Bill: $39 billion

Both the House and Senate bills would create a State Fiscal Stabilization Fund. a pool of money that the federal government would give states to help them avoid making cuts to their kindergarten through higher education budgets. The bills would also provide incentive grants to states that improve their elementary and secondary data collection systems and assessments, and more equitably distribute teachers. In addition, the House version would allow states to use a portion of the fund ($24.8 billion) for other pressing priorities, such as public safety.

Overall, the Senate bill includes less funding for stabilizing states' education budgets ($31.5-billion as opposed to $38.8-billion in the House version) and for the incentive grants ($6.9-billion as opposed to $14.4 billion). The conference committee will thus have to determine the appropriate spending levels for these activities, as well as whether to include money for other state priorities besides education. The conference committee will also have to decide whether to include a clause in the Senate bill that allows the Education Secretary to waive a spending requirement for states that benefit from the stabilization fund. Known as maintenance of effort, this part of the legislation requires states receiving stabilization funds to keep their kindergarten through higher education funding at or above the fiscal year 2006 level.

Pell Grants

House Bill: $17.1 billion total ($15.6 billion in discretionary money, $1.5 billion in mandatory) | Senate Bill: $13.9 billion (all discretionary)

The House would increase the maximum Pell Grant by $500 and retire the Pell Grant shortfall. It also includes additional mandatory money to ensure that the money provided by the College Cost Reduction and Access Act is enough to increase the award of every recipient by $490.[1] The net result is a maximum Pell award of $5,350, which is $619 higher than this year's maximum of $4,731. The Senate Bill, meanwhile, also tries to retire the shortfall, but includes no mandatory money. It also says that the Pell money should be used to raise the maximum award by $281 in the 2009-10 school year and $400 for the following academic year. The conference committee will have to decide whether to include mandatory money; how much to increase the maximum awards; and whether it should set the maximum award for the 2010-11 academic year.

Student Financial Assistance Changes

House Bill: $2,000 annual loan limit increase, a retroactive change to lender subsidies, $490 million for work-study, and $50 million for Department of Education administration. | Senate Bill: $61 million for Perkins loans

The House bill contains a number of provisions affecting student financial assistance and programs, none of which are in the Senate version. These include: a $2,000 increase in federal loan limits on top of the one enacted last year as part of the Ensuring Continued Access to Student Loans Act (ECASLA); a change in the way lender subsidy payments are calculated; additional funding for the Department of Education to manage the student loan purchase programs created under ECASLA; and more money for the federal work-study program. The Senate bill, meanwhile, contains only a small increase in the capital contributions it provides colleges for Perkins Loans. The conference committee will have to decide which of the student aid proposals it wishes to keep and which to dump. Expect a particularly strong fight over the proposed loan limit increases.

American Opportunity Tax Credit

House Bill: $2,500 credit, 40 percent refundable | Senate Bill: $2,500 credit, 30 percent refundable

Both bills would temporarily replace the Hope Scholarship Tax Credit with the new American Opportunity Tax Credit -- which is somewhat similar to one of President Obama's campaign proposals. They have the same income phase outs and qualified expenses, but differ on how much of the credit is refundable -- i.e. can be claimed by students and families that do not owe enough in taxes to benefit otherwise. The cost difference between the two proposals is about $800 million over 10 years, so this may not be much of a fight, given the overall bill's size.

Teacher Quality Partnership Grants

House Bill: $100 million | Senate Bill: $50 million

Both bills include funding for partnership grants under the Teacher Quality Enhancement Grants program. These grants go to helping teachers' academic, clinical, and field preparation and development. The relatively small amount of money under consideration also likely means this won't be a major point of contention for the conference committee.

529 College Savings Accounts

House Bill: Nothing | Senate Bill: Allows for technology purchases under 529s

The Senate bill expands allowable uses of 529 college savings accounts for the next two years to include educational technology, such as a computer or Internet access. This is a fairly small change and also is unlikely to provoke much dissent.

Come back tomorrow when Higher Ed Watch will offer its suggestions for how the House and Senate can reconcile their differences in committee.

[1] The College Cost Reduction and Access Act provided a separate stream of mandatory money to give each Pell recipient a $490 increase in their award. This is determined by taking the total amount of mandatory money and dividing it by the number of Pell recipients. Due to an unexpectedly high Pell enrollment, however, the amount of mandatory money provided was not enough to give everyone a $490 boost. The House bill attempts to fix this problem with additional mandatory money. The Senate does not. Check out Ed Money Watch this week for a post that explains this issue in greater detail.

A Last Look at Higher Education in the Bush Years

Ben Miller — Tue, 20 Jan 2009 14:30:00 -0500

Today, Barack Obama will become the 44th president of the United States. But before turning the page, Higher Ed Watch takes a look back at the Bush administration's higher education record by the numbers.

One caveat: Because the current academic year is still ongoing, the table above does not reflect the nearly 50 percent increase in direct-loan volume that has occurred over the past 12 months in the wake of the credit crunch. Were it included, the number and volume of direct loans disbursed would be substantially higher.

We think that it is also important to note that a number of new higher education programs have been created and started during the Bush years. The largest and most consequential of these new programs include:

Academic Competitiveness Grants (ACG) : These grants are given to low-income first and second year undergraduate students who complete a "recognized rigorous secondary school program of study" and maintain a 3.0 grade point average in college. A freshman can receive up to $750 in ACG aid and a sophomore can receive up to $1,300. According to the College Board, 456,000 students received ACG awards averaging $768 in 2007-08. A more recent analysis of Department of Education data by The Chronicle of Higher Education, found the total number of ACG recipients last year to be slightly lower at nearly 400,000.

National Science and Mathematics Access to Retain Talent (SMART) Grants: SMART Grants are available to low-income third and fourth year college students majoring in engineering, mathematics, science, technology, or high-priority foreign languages. Students must maintain a cumulative GPA of 3.0 or higher to receive the grants, which are worth $4,000 a year. In 2007-08, according to the College Board, about 72,000 students received SMART Grants averaging $3,194. The Chronicle, however, found the total number of SMART Grant recipients last year to be closer to 65,000.

Teacher Education Assistance for College and Higher Education (TEACH) Grants: This program provides students $4,000 a year in grant aid if they promise to go into teaching in a high-need area for four years. The grants convert, however, to unsubsidized loans if students don't fulfill their four- year commitment or their school is no longer deemed high need. The 2008-09 academic year is the first for which students are eligible for the awards. As a result, accurate figures on usage are not yet available.

With that, we bid farewell to the Bush administration and welcome to the Obama administration. We look forward to seeing what changes are made to higher education policymaking over the next four years.

10 Higher Ed Questions for Arne Duncan

Ed Policy — Mon, 12 Jan 2009 14:29:00 -0500

Education Secretary-Designate Arne Duncan will appear before the Senate Heath, Education, Labor, and Pensions Committee for his confirmation hearing on Tuesday morning. While Higher Ed Watch won't be there to grill Duncan, we do have some tough questions on higher education policy for the Chicago Public Schools chief. Feel free to suggest ones of your own.

(1) Do you believe that the federal student aid programs, as currently designed, are appropriately targeted and work both efficiently and effectively in expanding college access, or do you believe that the programs need to be overhauled to ensure that the doors of college remain open for low-income and working-class students?

(2) Do you expect the administration to continue supporting both the Direct and Guaranteed Student Loan Programs or instead push for a 100 percent Direct Lending model given research that shows this program is less costly to run?

(3) As currently designed, federal higher education tax credits disproportionately favor middle- and upper-income families and are largely unavailable to low-income families due to the fact that they are nonrefundable and have limitations on the costs that they cover (tuition and fees versus cost of attendance). Given that the federal student aid system was created to increase the enrollment rates of those who could not otherwise afford to attend, are tax credits an efficient way to deliver limited student aid resources? Has the administration given any thought to revamping the current tax credits so they are available to lower-income families? What steps do you anticipate taking to ensure that the President-elect's proposed American Opportunity Tax Credit is available to low-income students who may have trouble meeting the 100 hour service requirement due to family and work responsibilities?

(4) Over the last several years, the federal government has increasingly asked and expected families to save more for their children's college education, and more and more are doing so in 529 college savings plans. As currently designed, 529s disproportionately benefit higher-income families who can afford to save and who reap enormous tax benefits for doing so. Potentially building on some innovations in various states, what would you do to make 529s more progressive or more attractive to the millions of moderate- and middle-income families who find it hard to save for their children's education but very much want to?

(5) The College Cost Reduction and Access Act, signed into law in September 2007, included a new auction program to determine taxpayer subsidy levels paid to private lenders that make federal student loans. The auction program will apply to all federal Parent PLUS loans made in the 2009-2010 academic year and thereafter. Does the administration plan to implement the program as required under law, or will it seek changes to the program, or argue that it be postponed as some stakeholder interest groups have suggested?

(6) Studies have shown that a large percentage of students taking out private loans do not first exhaust their eligibility for cheaper federal student loan options. This can be extremely harmful to students, since private student loans almost always have much higher interest rates than federal loans and rarely provide repayment options that take into account income or public service. What do you think can be done to ensure that students first exhaust their cheaper federal student loan options before turning to private student loans?

(7) Private student loans currently enjoy a level of protection in bankruptcy court akin to unpaid taxes, child support, and government fines. In reality, they are more similar to a car or home loan, which is dischargeable during bankruptcy proceedings. This disparity in treatment creates an enormous burden for students who find themselves stuck with high-cost debt during tough financial times. Do you believe that more should be done to equalize the bankruptcy treatment of private student loans so that they are closer to other conventional types of consumer debt?

(8) Ever-increasing college prices are a major concern of American families. Some experts fear that college will be absolutely unaffordable for all but the most affluent within the next 25 years. Do you envision a proactive way for the federal government to do more to control college costs?

(9) According to budget officials at the Department, the Pell Grant program is facing a $4 to 5 billion shortfall in the coming year. Will attempting to close that gap prevent the administration from being able to fulfill its campaign promise to significantly increase the maximum Pell Grant?

(10) The Bush administration has been accused of turning a blind eye to allegations of corruption in the student loan industry. Will the Department of Education, under your leadership, make enforcement of student loan law and regulations a higher priority than it has been? How would you accomplish that?

Image used under a creative commons license from flickr user Obama-Biden Transition Project

A Senator's Legacy

Stephen Burd — Thu, 08 Jan 2009 15:00:00 -0500

At Higher Ed Watch, we were saddened to learn of the recent death of former Sen. Claiborne Pell, the Rhode Island Democrat whose work on Capitol Hill helped open the doors of college to tens of millions of low-income students. The Pell Grant program remains the cornerstone of the federal government's efforts to help the most financially-needy students obtain a higher education.

As Maura Casey, an editorial writer for The New York Times wrote in a moving tribute to the Senator on Tuesday, "Pell Grants have been around so long that few remember how much opposition they had to overcome or how revolutionary they once seemed."

In fact, Senator Pell -- "a wealthy New England aristocrat," as Casey described him -- had to fight an epic battle in 1972 against his Democratic colleagues in the House of Representatives and the higher education establishment to create the grant program that he first dreamed up, legend has it, on a ski slope in Switzerland. [Whether or not he had ever skied at all is a matter of much debate.]

Pell's vision was to create a new grant program to aid low-income students modeled on the GI Bill, which had helped pay for his graduate education. Under the Senator's plan, federal grants would go directly to students who could use them at the college of their choice. The idea, however, was met with fierce opposition from the leading national higher education associations who wanted the money to go straight to their member institutions. They argued that college officials were in the best position to determine which students were in most need of financial aid funds. The college groups had powerful allies on the House education committee, who fought on their behalf.

A battle between the Democratic leaders in the two chambers waged for two long and grueling months in the spring of 1972. The dispute was ultimately resolved in the early morning hours of a mid-May day when Rep. Carl Perkins of Kentucky, who chaired the House education committee, finally relented.

Since then, more than 55 million low- and moderate-income students have benefited from the program. That is quite an accomplishment.

Unfortunately, funding for the Pell Grant program has not kept up with skyrocketing increases in college prices over the past three decades. As a result, the grant's purchasing power has, with some exceptions, been mostly in decline during that period of time.

College lobbyists, who have become champions for Pell Grants, place the blame squarely on the government for failing to adequately finance the program. But the truth is that Democrats and Republicans alike have legitimately grown tired of boosting spending on student aid, only to see their efforts squandered by ever-escalating tuition increases.

Colleges' increasing reliance on enrollment management and financial aid leveraging techniques to create award packages has also harmed the effectiveness of the Pell Grant program. All too often, schools use Pell Grants to replace institutional aid they would have provided financially-needy students otherwise, and then shift the money they save into merit aid to attract the kind of high-achieving students that improve their rankings. The upshot is that low- and moderate-income students are expected to supplement their Pell Grants by taking on heavy loads of debt.

In addition, as lawmakers have increased eligibility for the awards, the program has become extremely expensive. The Department of Education estimates that each $100 increase in the maximum award costs about $400 million. And that's not counting the $4-5 billion shortfall that the program is currently facing -- and an even bigger one looming in fiscal year 2013 when mandatory money that is currently propping up the maximum grant runs out.

While the Pell Grant program will always be a centerpiece of the government's efforts, federal officials need to find new ways to better leverage college and state support to ensure that the doors of college remain open to low-income and working-class students. If we have any hope of at least maintaining and hopefully building on the gains in college accessibility over the last 40 years, we desperately need colleges and states to stop working at cross purposes with the stated goals of the Pell Grant.

It's just too bad that we don't have a visionary like Senator Claiborne Pell to lead the charge. In this battle and others, the patrician Senator from Rhode Island will be dearly missed.

Target Campus-Based Aid

Michael Dannenberg — Wed, 07 Jan 2009 16:00:00 -0500

The holidays may be over, but the higher ed community is still waiting to see what Uncle Sam is going to put into its stimulus stocking. Our bet is it will be much needed tens of billions of dollars, hopefully for both student aid and campus infrastructure.

At some point though, and it may not be in his first budget, President Obama is going to follow through on his campaign promise to grow investment in areas critical to America's economic and civic future while also taking a scalpel to government programs where there is poor targeting, inefficiency, or ineffectiveness. Federal higher education programs won't be free from that examination, nor should they be. The key for advocates and incoming Secretary of Education Arne Duncan, however, is to make sure that savings generated by identified cuts are plowed back into quality education programs.

Since its inception, Higher Ed Watch has focused on identifying waste and inefficiency in the federal student loan programs, because that's where big taxpayer savings were to be had for redirection into increased student financial aid. But other programs deserve examination as well.

For example, will someone please give us a convincing reason why in a world of finite resources the federal government should give $146 million a year in campus-based aid to 48 private college and universities with billion dollar plus endowments while simultaneously under funding federal early-intervention programs for low-income secondary students? Why don't we target campus-based aid on community colleges and other cash-strapped institutions of higher education? Wealthy institutions should pay for campus-based aid out of their own resources, which are generously subsidized by the federal tax code.

The Ivy League alone had endowment wealth totaling approximately $100 billion at the end of fiscal year 2007. These eight institutions accounted for one-fourth of postsecondary institution endowment wealth nationwide. They have enough wealth to finance tuition costs for every needy student on their campuses with a fraction of their endowments' five-year average rate of interest.

Super-size endowments have been built with and continue to enjoy substantial taxpayer support. We allow colleges to accept tax-deductible contributions. We free them from local property tax liability. We exempt their investment earnings from taxation.

Now to their great credit, a number of wealthy institutions of higher education have used taxpayer-supported endowment resources to guarantee generous financial aid packages to students from low and middle-income families. Princeton, for example, covers tuition, room, and board expenses for students from families earning $75,000 or less and students from substantially higher incomes also receive steep tuition discounts. Harvard guarantees that students from families earning less than $60,000 a year pay nothing and those earning up to $180,000 pay no more than 10 percent of family income toward postsecondary education expenses.

It's true Ivy endowments have taken a hit during the current economic downturn. Harvard, for example, reported a 22 percent drop in endowment wealth from June 30 to Oct. 31 last year. Again to their credit, Princeton, Harvard, and other wealthy institutions have all made clear they will not scale back their financial aid in response. Good for them.

Of course Harvard saw gains of 8.6 percent, 23.0 percent, and 16.7 percent on its endowment during the previous three years. In fact, Harvard has only had three other years of negative endowment growth in the last 30 years--and none of those was a decline of more than 3 percent. Harvard's five-year annual 17.6 percent rate of interest on its endowment is more than enough to cover the extra two-tenths of one percent of endowment wealth necessary to fund its new financial aid policies.

And Harvard's recent endowment loss is still less than the S&P 500's loss over the same period of time. In fact, it would be shocking if Harvard lost more during the current financial downturn than cash-strapped institutions of higher education, like those invested in Wachovia's Common Fund for Short Term Investments who saw their assets frozen in October.

Which is precisely the point. In a world of finite resources, the federal government should look at relative need and cost-efficiency in awarding campus-based aid. That means helping community colleges and other cash-strapped institutions of higher education first.

Harvard is a phenomenal academic institution, and we should encourage it and other wealthy institutions of higher education to recruit, admit, enroll, and retain low-income students. In a world of infinite resources or even just ample taxpayer resources, giving federal campus-based aid dollars to Harvard is a worthwhile investment. But in a world of finite resources, federal dollars should be targeted on the neediest students attending the neediest schools.

Christmas doesn't last forever.

Ben Miller contributed to this post.

Happy Thanksgiving

Ed Policy — Tue, 25 Nov 2008 15:00:00 -0500

Higher Ed Watch is about to take the week off to celebrate Thanksgiving, and help ourselves to plenty of turkey, cranberry sauce, stuffing, and pumpkin pie. But before we do, here is a brief list of some things that we are especially thankful for:

New leadership coming to the U.S. Department of Education that will hopefully close the revolving door between the agency and the student loan industry.

Growing interest in redesigning the federal student aid programs to make them less complicated and more equitable. Over the last several months, both the College Board's Rethinking Student Aid Study Group and the U.S. Department of Education have unveiled proposals for overhauling the system. While we don't entirely agree with the details of either plan, we hope these efforts will spur policymakers to consider broad-scale reforms. The aim should be to design a coherent system that is efficient and targets aid to those students who need it most.

The reliability of the federal Direct Student Loan program. Not only is the program more cost-effective for the government to run than the competing Federal Family Education Loan (FFEL) program but it is also free of the types of conflicts of interest that have plagued the bank-based program and led to the 9.5 percent and "pay for play" student loan scandals. At a time of great financial turmoil, it has been comforting for colleges and students to know that an alternative federal loan program exists that does not needlessly rely on the financial markets to ensure students receive loans.

Increased protections for private student loan borrowers. As part of the Higher Education Act reauthorization legislation it passed this summer, Congress took some important steps to safeguard students. For example, the new law requires lenders to provide clearer information about the interest rates and fees they charge borrowers and to inform potential applicants about the availability of cheaper, safer federal loans. The measure also bans lenders from branding private loan products with a college's name or logo on it. In addition, it forbids colleges from entering into "opportunity loan" deals with lenders -- arrangements in which loan companies waive or loosen credit requirements on private student loans in exchange for becoming the exclusive provider of FFEL loans on a campus. While the new law doesn't go far enough, it's at least a good start at ending some of the worst practices that have harmed students.

But mostly we're thankful for our loyal and spirited readership. Thanks for tuning in, and enjoy the holiday!

Higher Ed Roundup: Week of November 10 - November 14

Ed Policy — Fri, 14 Nov 2008 16:28:00 -0500

Paulson Says Student Loans to Benefit from Bailout

New York Governor Announces Spending Cuts for Higher Ed

Bush Administration Unveils Blueprint for Revised Financial Aid System

Transfer Students are Disengaged, Survey Finds

Paulson Says Student Loans to Benefit from Bailout

Treasury Secretary Henry Paulson announced this week that he is expanding the administration's $700 billion bailout plan to aid consumer lenders, including student loan providers. "The illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards," Paulson said in a statement on Wednesday. "This is creating a heavy burden on the American people and reducing the number of jobs in our economy." While Treasury has thus far declined to give details about the proposal, industry observers expect that it will be focused on expanding the availability of high-cost private student loans. The bailout package that Congress approved in October gave the Treasury Secretary the authority to purchase "troubled assets," including private loans. At Higher Ed Watch, we are extremely wary of the government extending help to private student loan providers, many of whom engaged in predatory practices by pushing high-cost private loans on high-risk borrowers. We'll keep you updated when we learn more about the plan.

New York Governor Announces Spending Cuts for Higher Ed

Public colleges and universities in New York are the latest to be told to brace for midyear reductions in state funding. Gov. David Paterson's deficit reduction proposal, which he unveiled on Wednesday, calls for reducing state appropriations for the State University of New York (SUNY) and the City University of New York (CUNY) by $115 million this year and $238-million next year. If enacted, the plan would require tuition hikes for students from both systems, of $300 this spring and an additional $600 next fall. With the announcement, New York joins a growing list of states that have moved to cut funding for higher education to cope with growing revenue shortfalls and a sagging economy, including states that have already endured budget cuts earlier this year. Last week, for example, California governor Arnold Schwarzenegger proposed an across-the-board cut of 10 percent for the state's public colleges and universities, after asking California State University to give back $31.3 million earlier this year. Meanwhile, Pennsylvania Gov. Ed Rendell has asked the state's public colleges to give up 4.25 percent of their current year appropriations as part of a broader effort to prevent a budget shortfall.

Bush Administration Unveils Blueprint for Revised Financial Aid System

As promised earlier this year, the Bush administration has unveiled a sweeping plan to overhaul the federal financial aid programs. The proposal, which Undersecretary of Education Sara Martinez Tucker submitted to Congress this week and shared with Inside Higher Ed, calls for:

Replacing the current Free Application for Federal Student Aid (FAFSA) with a shorter, two-page form requiring easily obtainable information, mostly from IRS tax returns.
Consolidating programs, including eliminating the Supplemental Educational Opportunity Grant program and Perkin's Loans.
Decoupling aid awards from the cost of attendance at an individual school - making it easier for the Department to send aid reports to students before they apply to college, and targeting federal aid to the students who need it the most.
Calculating aid awards based on the relationship between the average cost of attendance (tuition, room and board, and fees) at a public two-year college and the student's Adjusted Gross Income.

Tucker said that her plan provided "a rational approach to federal student aid" that would benefit students and taxpayers alike. The plan, which is expected to be met with stiff opposition from lobbyists for higher-priced colleges, will probably have a short shelf life, as the incoming administration is likely to have different priorities.

Transfer Students are Disengaged, Survey Finds

While many popular college rankings compare schools with each other, this year's National Survey of Student Engagement (NSSE or "Nessie), a survey of quality of the student learning experience, finds significant variation among student groups within individual schools. For example, aggregate results of the survey, which was conducted at 722 four-year colleges nationwide, finds that transfer students lagged "native" students on most indicators of student engagement, including interaction with faculty outside of class, class preparation, and participation in extracurricular activities. Higher education experts say the finding is particularly significant, as increasing numbers of students are starting out at community colleges and then transferring to four-year institutions to reduce their costs. "Institutions of all types need to consider early and ongoing programs to engage their transfer students," the report states.

Election 2008: A Taxing Decision for Obama

Ben Miller — Thu, 06 Nov 2008 17:00:00 -0500

On January 20, 2009, Sen. Barack Obama (D-IL) will be sworn in as the 44th president of the United States. Around the same time, millions of college students across the country will be beginning their spring semesters. And these classes will arrive with sizeable tuition bills. Obama has a plan for helping students tackle these costs -- a tax credit for students who perform community service. But the president-elect should take note. Tinkering with the tax code is a less than ideal way to promote college access and affordability.

The cornerstone of Obama's college plan is the American Opportunity Tax Credit. Worth $4,000 annually, it is available to all college students, regardless of income, so long as they complete 100 hours of public service during the academic year. The tax credit is fully refundable, meaning that if a student's tax liability is less than $4,000, they will have their tax bill paid off and then receive a rebate for any leftover credit amount.

On paper at least, the American Opportunity Tax Credit (AOTC) appears far better than existing higher education tax credits. This is especially true with respect to the Hope and Lifetime Learning tax credits, which were championed by Obama's Democratic predecessor Bill Clinton. The Hope credit is worth up to $1,650 (100 percent of the first $1,100 spent on higher education and 50 percent of the next $1,100) for the first two years of postsecondary enrollment. The Lifetime credit, meanwhile, is worth up to $2,000 (20 percent of the first $10,000 spent on higher education) and may be taken so long as students are enrolled.

The primary problem with these tax credits are that they are not refundable, meaning that they are largely unavailable to the low-income students who need the government's help the most but don't pay taxes. In addition, operating on a percentage basis makes both of these credits confusing, and the Lifetime credit's high threshold means students with tuition bills under $10,000 will not be able to receive the full credit.

While Obama's proposal promises to cure the issue of refundability, there are still several unanswered questions about how it would work. First, would it cover only tuition expenses, or would it include other things, such as room and board and textbooks, that are currently excluded from Hope and Lifetime calculations? Second, would it replace the existing tax credits or simply be added on top of them? The mix of tax credits is already too confusing to students. A recent report by the Government Accountability Office found that almost 30 percent of filers claiming a higher education tax credit currently choose the wrong one, providing them with a smaller benefit than they are qualified to receive. Meanwhile, the report found that several hundred thousand eligible taxpayers don't claim the credits at all, perhaps in part because they don't realize that they are available.

There are also questions to be asked about how the community service requirement would be implemented. The Internal Revenue Service (IRS) clearly doesn't have the capacity to ensure that all credit recipients are actually fulfilling the 100 hour requirement, which would leave it up to the Department of Education, individual schools, or the volunteer agencies to monitor. Also, what kind of supports would it contain for students who want to serve their communities but may be limited due to the need for childcare or immediate income to support their families?

A better option, albeit more difficult to pass, would be to enact a $4,000 grant program instead. This would also create an opportunity to better target funds, make it easier to control their cost, and ensure that they go to the neediest students. Under this model, Pell Grant eligible students could be rewarded for their service and states could potentially provide matching funds. Moreover, receiving the money as a grant means students wouldn't have to wait to file their taxes to receive funds. This is a major problem with existing tax credits, because students file for and receive them months after having to come up with the money to pay their tuition.

Admittedly, there are disadvantages to a grant program. Unlike tax changes, Congress would have to pay for the program with discretionary funding each year, subjecting it to the possibility of annual budget cuts. A yearly search for discretionary dollars will make it more difficult to enact the program and does not guarantee students will receive funds for a prolonged period of time. These are major challenges, but a grant program is still more attractive because it avoids the administrative difficulty of having the IRS track the community service requirement.

There are 74 days to go before Obama's inauguration. As he begins forming a transition team and fleshing out policy proposals we strongly urge him to think carefully about the implementation of the American Opportunity Tax Credit. At the very least, it should replace the existing Hope and Lifetime credits and include non-tuition and fee expenses. Ideally, however, the incoming administration would take an even bolder approach and consider an overhaul of the student aid system as a whole -- one that is better targeted and much simpler to understand and access.

(Image used under a Creative Commons license from Flickr user sinderphytik)

Election 2008: Our Wish List for the President-Elect

Ed Policy — Wed, 05 Nov 2008 18:15:00 -0500

Barack Obama's historic victory last night ensures that a change in direction is coming to the U.S. Department of Education and hopefully to federal higher education policy.

Starting tomorrow, we will take a closer look at Obama's signature higher education proposals. (Got to give him at least a one day honeymoon, right?) Today, we will present our wish list for the incoming administration. Here are some changes we would like to see:

Emphasize Oversight and Enforcement at the Department of Education: Over the last eight years, the Bush administration officials in charge of the Department looked the other way as widespread abuses occurred in the Federal Family Education Loan (FFEL) program. To this day, the Department has not disciplined a single lender for violating a federal law that prohibits loan providers from offering inducements to secure student loan business. At the same time, the education secretary allowed lenders to keep more than $1 billion they illegally obtained in improper subsidy payments. Federal leadership is sorely needed to protect the integrity of the federal student loan programs, for the sake of both the students who depend on them and the taxpayers who finance them. For starters, the new administration should take a close look at the conflict-ridden relationship between Sallie Mae and USA Funds, the guarantee agency it effectively controls. As we have noted, there is compelling evidence that the loan giant has exploited this arrangement to take advantage of borrowers who are having difficulty repaying their federal loans. A thorough investigation is needed.

Lead the Way on Federal Student Loan Reform: The time has come for the government to reassess the way we provide low-cost federal loans to students. Do we still need two competing federal student loan programs to fulfill this function? If so, we need to focus on finding the most efficient ways to run these programs. Currently, the way the government sets subsidy rates in FFEL is arbitrary, wasteful, and subject to political manipulation. In addition, the program's complexity makes it ripe for abuse and makes good oversight by both the Department and Congress more difficult. Hopefully, Obama and his Democratic colleagues in Congress won't let the lenders' scare tactics frighten them away from pursuing reform. If anything, the credit crunch provides even further evidence that policymakers need to fundamentally change the way the government compensates student loan providers.

Provide Relief to Student Loan Borrowers in Desperate Straits: In 2005, Congress tucked a provision into bankruptcy reform making it extremely difficult for financially distressed borrowers to discharge private student loans. As we have said before, we don't see any good reason for private loans to be accorded the harshest bankruptcy status. Individuals who borrow private loans are trying to better their lives. They certainly shouldn't be treated more harshly than those with excessive credit card debt. This summer, Obama unveiled a plan to rewrite federal bankruptcy law to make it easier for financially strapped senior citizens, military families, and individuals suffering from medical emergencies to get relief from debilitating debt. We would like to see Obama extend this relief to struggling private student loan borrowers as well.

Strengthen Consumer Protections for Students Against Unscrupulous Trade Schools: Over the last decade, some of the largest publicly traded for-profit higher education companies have come under intense scrutiny from federal and state regulators and have faced numerous lawsuits by former employees, shareholders, and students over allegations that they have engaged in deceptive recruiting and admissions tactics to inflate their enrollment numbers. Yet at the same time, the Bush administration and Congress, under both Republican and Democratic control, have weakened provisions in the Higher Education Act that aim to protect students from questionable schools. If Obama and the Democratic-led Congress are serious about changing Washington, they need to put the interests of students before those of deep-pocketed trade school lobbyists. The new administration can get off to a fast start on this front -- by using the Department of Education's upcoming negotiated rulemaking sessions to overturn regulatory changes the Bush administration made in 2002 that made it easier for unscrupulous trade schools to take advantage of low-income and working-class students.

Concentrate on Redesigning and Simplifying Federal Student Aid, Rather than Adding New Programs: The federal student financial aid system is not working as well as it should. Financially needy students are taking on too much debt and working an excessive amount of hours at jobs outside of school to pay for college. The last two Congresses have seen new additions to the federal student aid programs, including the introduction of new grant and loan forgiveness programs aimed at increasing the academic preparation of low-income students and encouraging students to go into low-paying, public-service careers such as teaching. While well-intentioned, lawmakers have created a mish mash of programs that are redundant and don't always interact well together. We would suggest that the new administration step back and consolidate, coordinate and simplify financial aid in ways that make it clear where students can get the best deal as it relates to paying for college and paying student loans back. The federal government doesn't need new programs, it needs a coherent system. It's also time for a president who is willing to take institutions of higher education head on in the debate over rising college prices.

That's our wish list. How about yours? Please send us any higher education recommendations you may have for the next president. We look forward to reading them.

Election 2008: Student Aid Hurdles for the Next President

Ed Policy — Tue, 04 Nov 2008 16:00:00 -0500

No matter whether Sen. Barack Obama (D-IL) or Sen. John McCain (R-AZ) wins today's election, the next president is going to face major challenges on the higher education front.

While neither candidate has made education a centerpiece of his campaign, each has offered proposals that may be difficult to carry out given the hurdles that lie ahead. Not the least of which is the federal budget deficit, which is likely to far exceed the $482 billion the Congressional Budget Office projected in July. Obama may be particularly frustrated in his plans, as he has called for significantly increased spending on federal student aid. McCain, on the other hand, has proposed consolidating the government's aid programs.

Here is a brief description of some of the other student aid challenges awaiting the next president:

The Continuing Credit Crunch

Over the last year, the federal government has made extraordinary efforts to help the student loan industry cope with the turmoil in the financial markets. As a result of these efforts, and the revitalization of the Direct Student Loan program, students haven't experienced any difficulty obtaining federal loans.

Still, there's little evidence that the credit crunch is likely to subside anytime soon. With more and more colleges considering switching to Direct Lending, lenders and their allies at groups like the National Association of Student Financial Aid Administrators will continue to raise panic levels and demand greater federal intervention to prop up the ailing Federal Family Education Loan (FFEL) program further (including a renewed effort to get Congress to rescind the cuts it made to lender subsidies last year). In the face of these entreaties, it will be important for the new president to remember that the point of the federal student loan programs is not to protect the well-being of each and every lender, but to make sure that low-cost loans are available to college students.

The new administration will also have to resist efforts by the loan industry to use the credit crunch to kill key student loan reforms, such as the new pilot PLUS auction program that is scheduled to go into effect next fall. If anything, the credit squeeze provides even further evidence that policymakers need to fundamentally change the way that the government compensates student loan providers.

Budget Shortfall in the Pell Grant Program

A surge in demand for Pell Grants -- caused by the downturn in the economy and a major expansion in student eligibility for the awards by Congress -- has left the program in a deep hole. According to the Department of Education's budget chief, Congress will need to find an additional $4 to $5 billion to keep the maximum Pell Grant award at its current level of $4,731. Given the political stakes, the next president and Congress will likely find the money to keep the program whole. But spending such an exorbitant amount just to maintain the status quo will leave them with few, if any, additional resources to raise the Pell Grant further or to finance other student-aid priorities.

This could be especially problematic for Obama because he would be under substantial pressure from Democratic-leaning interest groups to substantially increase spending on student aid. Ironically, if elected, he could find himself in the same position as former Democratic President Bill Clinton was early in his presidency. During his first several years in office, Clinton and the Democratic Congress grappled with a $2 billion Pell Grant shortfall and were able to provide only a tiny increase in the maximum grant. College leaders and lobbyists complained bitterly. This is "what we are used to seeing from Reagan and Bush. But a kick in the teeth hurts a lot more from a friend," Julianne Still Thrift, then-president of Salem College and a strong supporter of Clinton, told The Chronicle of Higher Education in 1993.

Expiring Student Aid Programs and Benefits

The next president is also going to have a very difficult decision to make regarding student loans toward the end of his first term. The interest rate reduction that Congress approved for subsidized federal student loans is due to expire at the end of the 2011-12 academic year. In other words, under current law, loans issued that year will have a fixed interest rate of 3.4 percent for the life of the loan, but loans issued the following year will carry a fixed rate of 6.8 percent. The new president will have to decide whether he supports extending the 3.4 percent interest rate. Doing so could cost as much as $3 billion a year. Of course, allowing student loan interest rates to double could be politically risky, no matter the costs or public policy implications. [At Higher Ed Watch, we believe that policymakers should consider expanding the existing student loan interest rate reduction instead. That proposal would be less costly and better targeted on recent college graduates with burdensome levels of debt.]

Also expiring during the next president's term will be two relatively new grant programs that provide additional support to Pell Grant eligible students who meet certain academic standards. Both programs were created in 2006 by the Republican-led Congress and funded through 2010. The first, Academic Competitiveness Grants (ACG), are given to low-income freshmen and sophomores who complete a "recognized rigorous secondary school program of study" and maintain a 3.0 grade point average in college. The other, SMART Grants, are available to low-income juniors and seniors majoring in mathematics and science. The new president will have to decide whether to extend these programs, at a cost of $1 billion a year.

For a number of reasons, these programs have not been particularly well received by financial aid administrators and college lobbyists, and they have been underutilized by students. In fact, Congress has had to rescind a significant amount of the money it has provided for these programs, citing low participation rates. Still, these programs do provide generous benefits to financially-needy students. So deciding whether or not to continue financing them will not be an easy call to make.

Despite these hurdles, we remain hopeful that the next president will take higher education policy making in a new direction. Tomorrow, we will highlight some of the changes we would like to see the next administration make. Stay tuned.