Student Aid

Guest Post: Should We Give Up the In-School Subsidy on Student Loans?

Ed Policy — Tue, 11 Aug 2009 13:30:00 -0400

[Editor's Note: Last month, George Miller, the Democratic chairman of the House of Representatives Committee on Education and Labor, created a furor when he included a provision in a student loan reform bill that would have eliminated the in-school interest subsidy on federal Stafford loans for graduate and professional students. Warning that the provision was a "deal breaker," lobbyists for colleges and advocates for graduate students forced Miller to reverse course and remove the offending provision from the bill. In this guest post, student-aid expert Sandy Baum explains why eliminating the in-school interest subsidy for both undergraduate and graduate students -- and redirecting the savings to help financially distressed borrowers repay their debt -- is a worthwhile public policy endeavor.]

By Sandy Baum

In these difficult economic times, the struggles of many students both to pay for college and to repay their student loans are all too visible. It is no surprise that suggestions to eliminate the in-school subsidy on Stafford Loans elicit strong objections from many people concerned with these struggles. But particularly in these difficult economic times it is vital that we find the best ways to help students -- ways that are equitable and that use limited funds as efficiently as we can to make college affordable for as many students as possible.

Students with documented financial need are eligible for subsidized Stafford Loans, for which the government pays the interest while the student is in school, for six months after the student leaves school, and during qualifying periods of deferment. Students without documented financial need and those who have borrowed the maximum amount of subsidized loans for which they are eligible can borrow unsubsidized Stafford Loans, on which the interest accrues while they are in school and during other periods of non-payment. The interest rate on subsidized loans is now lower for the life of the loan than the interest rate on unsubsidized loans.

Not Well Targeted

This policy might be a good one if subsidized loans consistently went to financially distressed students who will have the most difficulty repaying their student loans, and if this group of students could count on getting all the subsidized loans they need so interest would not accrue on any of their federal loans while they are in school. However, neither of these conditions holds. The almost $8 billion per year spent on the in-school subsidy could do much more to help make education affordable if the loan programs were re-designed to focus on diminishing the repayment burdens of those who are struggling the most to pay back their loans.

In 2007-08, 25% of dependent students from families with incomes below $30,000 took only subsidized Stafford loans, but 13% (over 800,000) relied on unsubsidized Stafford Loans as well, according to the most recent student aid data from the Department of Education. At the same time, 39% of the subsidized Stafford Loans going to dependent students went to those from families with incomes above $60,000. In other words, even if pre-college circumstances were the only relevant measure, the Stafford Loan system would not be doing a good job of targeting its subsidies.

The lack of targeting results partly from allowing cost of attendance to enter into the eligibility criteria, so that students who qualify for the subsidy at high-priced institutions may have significantly higher incomes than many who do not qualify because they attend lower-priced colleges. Also, students who are in school for the longest time -- those who go to graduate school -- benefit most and they rarely either come from the lowest-income families or end up with low earnings. In addition, under the current system, with all students allowed to borrow more Stafford Loans than the amount of subsidized loans to which they have access, the proportion relying on both types will increase, contributing to complexity and confusion.

But most important, financial circumstances before college are not the primary determinant of borrowers' ability to repay their loans. It is certainly true that borrowers from low-income families are most likely to struggle with their loans because their parents are unlikely to be able to help them either with their payments or with other expenses. But this reality does not mean that borrowers from middle- and upper-income families are protected from repayment difficulties. In the current economy, examples of students from relatively affluent backgrounds with strong academic credentials who find themselves unemployed or employed in low-wage jobs are easy to find. And many of those students will find that their parents are now in no position to help.

A Better Solution for Borrowers

The new Income-Based Repayment Plan is a great step in the right direction, protecting students whose incomes do not support their federal loan payments. But it is not a complete solution to the problem. Those with unsubsidized loans -- and those with subsidized loans whose incomes are low for long periods of time -- will see interest accruing on their debt. Even if they are protected from default, they will face growing balances that could negatively affect their financial futures. As a result, it will take significantly more funding for the IBR program to provide the necessary safety net for student borrowers. The almost $8 billion dollars a year that could be saved by abandoning the in-school subsidies could, in addition to providing more funds for Pell Grants and other student aid programs, make a big difference in our ability to protect student borrowers from financial distress during repayment.

If we shifted these subsidies to the repayment period, we would be able to make a meaningful promise to students and potential students that they could borrow the funds they need to make college accessible without being worried about overly burdensome debt payments in the future. Needed improvements include having the government cover the interest payments for all borrowers whose IBR payments are lower than interest due for some period of time -- say one year -- and then capping the total amount of debt that can accrue at, for example, 150% of the amount borrowed. In addition, remaining debt should be forgiven after 20 years instead of 25 years and when this occurs, it should not be a taxable event, as it is under the program's current design.

Necessary Trade-Offs

The purpose of the in-school subsidy is to reduce the payments borrowers will have to make after they graduate, but the current system does not provide the safety-net its supporters claim. Students have little understanding of the difference between subsidized and unsubsidized loans (or unfortunately, of the difference between federal and private loans). What they do understand is their payments once they leave school. A student who borrows $5,000 a year for four years at 3.4% interest would owe $20,000 with in-school subsidies and face monthly payments of about $197. The same borrowing without the in-school subsidy would lead to a debt of about $21,800 and monthly payments of about $214. At a 6.8% interest rate, the debt would be about $23,600 unsubsidized and the monthly payments would be about $272. But the real issue, whether the debt results directly from borrowing or from accrued interest, is whether the borrower can afford the monthly payments. And only a better-subsidized IBR repayment program can address this issue.

The subsidized Stafford Loan program also introduces unneeded complexity into the student aid system. Students cannot predict their eligibility for subsidized loans, which depends on a combination of the complex federal need analysis formula and the cost of attendance at the institution at which they are enrolled. Steps to simplify the aid application process and the need analysis formula are currently being implemented by the Department of Education and considered by Congress. But because of their more complex financial situations, a simple methodology that would be effective for allocating Pell Grants would not be appropriate for the more affluent families with children eligible for subsidized loans at expensive institutions. Removing the in-school subsidy and moving the subsidies to the repayment period would eliminate the need to evaluate family financial circumstances in allocating Stafford loans and would allow students to know their loan eligibility in advance.

We need to simplify and strengthen the student aid system and make it more generous. But it will work best for students if we are flexible enough in our use of federal resources to trade some of the existing subsidies for funding that will be better targeted, easier to understand, and more effective in solving student financing problems. Students need the money that is now going to in-school subsidies -- but they need it in better designed, more effective programs.

Sandy Baum is a senior policy analyst at the College Board and an independent consultant. She has written extensively on issues relating to college access, college pricing, student aid policy, student debt, affordability and other aspects of higher education finance. She was also one of the founders of the College Board's Rethinking Student Aid Study Group, which released in 2008 an ambitious plan for overhauling the federal financial aid programs. Her views are her own and do not necessarily reflect those of the New America Foundation.

Guest Post: The More Things Change...

Ed Policy — Tue, 04 Aug 2009 19:00:00 -0400

By Travis Reindl

For those of us who work in or follow higher education policy, the past six months have been eventful. A new administration came into office, naming education as one of its top policy priorities and setting a goal for reclaiming world leadership in college attainment by 2020. Congress is now debating whether to end the bank-based student loan program and pump $40 billion into the Pell Grant program. That's a decent amount of movement, even for the biggest cynic.

But lest you fear that the higher education policy agenda will move too far, too fast, rest assured -- the guardians of the status quo in the higher education lobbying world are alive and well in the era of "change we can believe in."

Last month, President Obama announced the American Graduation Initiative, a ten-year, $12 billion effort designed to boost the number of community college graduates by five million over the next decade. The program includes a competitive grant program for states to build stronger community college linkages to K-12 education and the workforce; funding for efforts to increase college completion at these institutions and others; and capital for updating or expanding facilities. Reaction to the proposal has been largely positive, though some, including the American Council on Education, have expressed the entirely legitimate concern that states could use the new federal funds to supplant, rather than supplement, their support for postsecondary education.

But the proposal ran into resistance from some higher education lobbying groups, particularly the National Association of Independent Colleges and Universities (NAICU), which represents the nation's private colleges. Even before the President's announcement, NAICU President David Warren privately e-mailed members, warning that "there are some disturbing signs that enthusiasm for expanding their [community colleges'] role may drive policy decisions that are both unfair and unwise." The proposal, he complained, has "the federal government providing funds directly to one sector of American higher education, to the exclusion of other sectors."

Several days later, another NAICU official voiced concern to Inside Higher Ed about "the precedent of deferring national higher ed policy to state bureaucrats who may or may not have the national interest in mind." NAICU then issued a legislative alert arguing that the proposal "shifts the relationship with the federal government from student-based toward institution-based."

Some facts are in order at this point. Community colleges serve 40 percent of the nation's students and receive 32 percent of total Pell Grant dollars, so for private colleges to claim that community colleges are receiving something out of turn is questionable. Moreover, helping community colleges, which are experiencing double-digit enrollment increases and double-digit funding cuts from their state legislatures, seems to be more in "the national interest" than aiding institutions that are barely growing and many of whom have sizable endowments. Finally, the idea that spending just over $1 billion per year on community colleges represents a fateful step toward government control of higher education when the federal government spends tens of billions of dollars on student aid each year is pretty melodramatic.

A FAMILIAR STRATEGY

In the end, this all comes down to money. Ending the Federal Family Education Loan Program (FFELP) would be fine with NAICU and many of the other higher education associations as long as all of the estimated savings (up to $90 billion) would go to student financial aid. Why? There are relatively few "strings" (i.e. institutional accountability measures) attached to federal student aid, and the higher the maximum Pell Grant, the more private institutions stand to gain because of their prices. So when the House passed a bill that redirected nearly $20 billion of the "new" money away from Pell Grants to community colleges and K-12 construction, private colleges and their advocates immediately geared up for battle.

We've seen this strategy before. In 2003, Rep. Howard "Buck" McKeon (R-CA) proposed stronger congressional monitoring of and institutional accountability for skyrocketing tuition increases (which averaged $683 that year at private universities, compared with $332 at public universities). NAICU led the opposition, declaring that:

"The concept behind this proposal is federal price controls, pure and simple. This nation tried that approach to wages and gasoline prices in the 1970s, with disastrous results. We can anticipate similar results if the concept is applied to higher education."

In 2006, the issue was the proposal for a federal data system that could account for student movement across institutions and state lines, so that policymakers and researchers would be able to more accurately assess how well the nation's higher education system was serving students. The creation of a "unit record" data system would have been especially useful in gauging the performance of community colleges and public comprehensive colleges because they deal with a significant number of transfer students, who are not counted in graduation rate data currently collected by the federal government.

NAICU officials decried the proposal as "Orwellian" and commissioned a poll that, not surprisingly, showed that 60 percent of Americans opposed "requiring colleges and universities to report individual student information to the federal government" (implying that institutions would be sending course grades and a host of other personal data to Washington, a major overstatement of the proposal). At a news conference releasing the poll, David Warren said the proposal "is so egregious and ill-conceived that it is necessary to express the views of the public."

A CLEAR PATTERN

There is a clear pattern here. Just about any proposal that questions or threatens the status quo-one in which the federal government is expected to continue pumping billions of dollars into the existing student aid system, no matter the cost, no matter the result-is met with doomsday rhetoric that appeals to Americans' (and politicians') basest fears. Big Brother is watching you. Bureaucrats waste your money and screw up everything. Colleges' autonomy and academic freedom are in peril. This strategy has been quite effective, but at a time when more Americans than ever believe that college is essential but increasingly out of reach, these arguments are becoming a little tired and tone-deaf.

As they plow ahead through the dog days of summer on higher education reform, and hear from higher education associations such as NAICU, Congress and the White House should remember just how much many of these groups have at stake in keeping things just as they are.

Travis Reindl is the state policy and campaigns director at CommunicationWorks, a public affairs firm that specializes in educational improvement. Prior to joining the firm, he had 15 years of experience in higher education policy and advocacy. Most recently, he served as program director at Jobs for the Future, where he led a national initiative focused on increasing productivity in higher education. Before that, he headed the state policy analysis unit at the American Association of State Colleges and Universities. He has written extensively on issues of college affordability, accountability, and governance. His views are his own and do not necessarily reflect those of the New America Foundation.

Ed Money Watch on Proposed Pell Grant Formula Change

Ed Policy — Mon, 27 Jul 2009 16:01:00 -0400

We'll be back tomorrow at our usual time. But in the meantime, check out this post on our sister blog Ed Money Watch. In this item, our resident federal budget expert Jason Delisle explains how the new Pell Grant funding formula included in the student-loan reform legislation the House Committee on Education and Labor approved last week wouldn't necessarily guarantee students a rising Pell Grant each year. President Obama had proposed financing the program entirely through mandatory funding, meaning that spending for the program would no longer be determined through the annual appropriations process. The House bill, however, would ultimately continue to leave it up to appropriators to determine most Pell Grant funding as well as the maximum grant each year.

Stay tuned for more coverage of the House bill in the days ahead.

Guest Post: A Closer Look at Income-Based Repayment

Ed Policy — Mon, 20 Jul 2009 16:15:00 -0400

By Deanne Loonin

The new Income-Based Repayment program (IBR), which went into effect this month, is a very positive development for borrowers with low incomes who have taken on too much federal student loan debt. IBR is more broadly available than the existing (and still alive) Income Contingent Repayment option (ICR) in the Direct Student Loan program. The formula for determining eligibility for IBR is simpler than that for ICR and in most cases will result in lower payments for struggling borrowers.

Under IBR, borrowers who have a pre-tax income below 150 percent of the poverty line will not have to make any payments until their incomes rise over those levels. Those with higher pay will not be asked to devote more than 15 percent of the portion of their income above that threshold to student-loan repayment until they are earning enough to make regular payments. Any debt remaining after 25 years of payment through the IBR program will be forgiven by the federal government.

Still, as beneficial as this new program will be, we need to be careful not to oversell it. After all, there are some flaws with the program's design that will limit the amount of help it can provide the most financially distressed student loan borrowers. Fortunately for borrowers, the Department has already agreed to fix a few key problems that were included in the original regulations -- such as one that would have required married borrowers to make much higher monthly loan payments than unmarried ones in identical circumstances. But more needs to be done.

In addition, the availability of IBR should not distract us from our efforts to expand the safety net. The most vulnerable borrowers and those harmed by unscrupulous schools should be able to get immediate relief through bankruptcy and targeted administrative discharges rather than having to wait 25 years or more to get some relief. [In fact, there is a dangerous trend in bankruptcy courts where judges who may have previously granted discharges based on financial hardship are now holding back because they believe borrowers should instead go through 25 years in the IBR or ICR plans.]

Here are some of the program's main limitations:

It doesn't provide any help to borrowers with low incomes who have taken on unmanageable levels of high cost private student loan debt. Although the Department of Education considers private student loan regulation outside of its jurisdiction, these borrowers are desperately in need of the type of flexibility that IBR provides because their lenders have failed to step it up and offer them any meaningful, long-term repayment assistance.
The program's 25 year forgiveness component is not as generous as it initially appears. As is the case with ICR, the amount the government eventually writes off is potentially taxable. If Congress does not address this problem, federal student loan borrowers who have been making payments through the program faithfully for a quarter century will be in for a rude awakening. The path to forgiveness is also unclear at this point but given that not all payments or deferments count toward the 25 year period, it is unlikely that forgiveness will be automatic.
The repayment program is not immediately available to borrowers in default. Like ICR, borrowers must either rehabilitate their loans or consolidate them in order to make use of IBR. There are some very serious problems with these programs, including Congress' recent decision to limit rehabilitation to a one-time deal -- which will effectively prevent many borrowers from accessing IBR. At the Student Loan Borrower Assistance Project, we believe that the government should allow borrowers in default to move directly into IBR to help them get their debt back into good standing. To make the program even more accessible, we believe that all borrowers in late stage delinquencies should be offered the option of selecting IBR to help prevent them from defaulting.

These limitations should not take away from the importance of IBR. The key is to make sure that borrowers know about the program and understand its pros and cons. This is where quality borrower services come in, hardly a strong point of the student loan industry and the government.

The Department and loan holders must ensure that their staffs are giving accurate information about these programs. We are already hearing from borrowers who are getting misinformation. We need to keep a particularly careful eye on private lenders since they do not have the previous experience of administering the Income Contingent Repayment program. Will they be forthcoming in explaining the IBR option even if it means negative amortization or otherwise very low payments? They are required by law to do this, but who will keep them in line?

At this point, the most important thing is for borrower advocates, financial aid staff, loan holders and collectors, as well as Department of Education employees and contractors to study up on the intricacies of IBR and pass this information on to borrowers. The program will only start to live up to its promise if those who can benefit from it are made fully aware of all of the option.

Deanne Loonin is a staff attorney with the National Consumer Law Center and the director of the center's Student Loan Borrower Assistance Project. She focuses on consumer credit issues generally and more specifically on student loans, credit counseling, and credit discrimination. She is the principal author of numerous publications, including "Too Small to Help: The Plight of Financially Distressed Private Student Loan Borrowers," and "Income-Based Repayment: Making it Work for Student Loan Borrowers." Her views are her own and do not necessarily reflect those of the New America Foundation.

Fixes Needed for Federal Program Promoting Public Service

Stephen Burd — Wed, 01 Jul 2009 16:30:00 -0400

In 2007, Congress created two new programs aimed at making it easier for students to repay their federal student loans and encouraging them to pursue careers in the public service. As we wrote yesterday, one of those programs -- Income-Based Repayment -- goes into effect today. The other one -- Public Service Loan Forgiveness -- is already up and running but may not live up to its full potential unless changes are made to the regulations governing it.

Under the loan forgiveness program, which Congress included in the College Cost Reduction and Access Act, the federal government will forgive the remaining debt of Direct Student Loan borrowers who have made 120 payments on their loans while working in a public service occupation. Borrowers with loans through the Federal Family Education Loan (FFEL) program can take advantage of this benefit by consolidating their debt into Direct Lending.

Lawmakers created the program in reaction to reports that student loan borrowers were increasingly shying away from pursuing public-service careers, such as teaching and social work, because of their heavy debt loads. By providing loan forgiveness, the bill's authors hoped to provide incentives to college graduates to enter these fields and reward them for their service.

Sounds pretty straightforward, right? Unfortunately, the program is not operating in the way lawmakers envisioned. That's because the U.S. Department of Education, under its previous leadership, decided to keep people in the dark about whether their chosen jobs qualify them for the benefit. Under regulations the Department issued in October, student loan borrowers will not know whether they qualify for the loan forgiveness until after they have made all 120 required payments.

Last year, at Higher Ed Watch, we questioned the Department's decision -- asking why borrowers working at low-paying jobs should have to face this type of uncertainty. We joined the Project on Student Debt in calling for the Department to develop a system that allows borrowers to confirm and track their eligibility over time for this benefit. But Department officials refused to budge, saying that tracking borrowers' eligibility status would be "a costly and complex" undertaking. Maybe so, but doesn't the Department have the obligation to carry out the will of Congress?

Now that there are new leaders at the Department, we would hope that they would revisit this regulation. They should make it a topic of the negotiated rulemaking sessions they plan to hold in the fall.

Our friends at the Institute for College Access and Success (TICAS), which runs the Project on Student Debt, have asked the Department to revise the rule to allow borrowers who have made at least 12 payments on their loans "request a confirmation of eligible payments and employment on a form provided by the [Education] Secretary." [Disclosure: Higher Ed Watchis supported in part by TICAS.

"Giving borrowers clear information upfront, and periodic confirmation of how many more years of eligible work and payments are required before they qualify for forgiveness, will provide an incentive to continue in public service and ultimately meet the forgiveness requirements," Pauline Abernathy, the acting director of policy and strategy at TICAS, recently wrote in testimony she provided the Department. "It will also reduce the number of borrowers applying to the Department for loan forgiveness before it is appropriate for them to do so."

We wholeheartedly agree. Borrowers who devote themselves to public service should not be left in the dark about whether they qualify for help from this worthy program.

A Good Day for Student Aid

Ed Policy — Tue, 30 Jun 2009 15:00:00 -0400

Some big changes are coming to the federal student aid programs tomorrow that will save students money and make it easier for struggling borrowers to repay their government-backed student loan debt.

Most of these changes are the result of three pieces of legislation that have been enacted over the last several years: the Deficit Reduction Act of 2005, the College Cost Reduction and Access Act of 2007, and the American Recovery and Reinvestment Act of 2009. All contain provisions that go into effect on July 1. These include:

A $619 increase in the maximum Pell Grant, to $5,350 for the 2009-10 academic year.

A 0.4 percentage point reduction in the fixed interest rate charged on new federally subsidized Stafford loans to 5.6 percent.

A one-half percentage point decrease in the origination fees that borrowers must pay on their federal student loans to 1.5 percent of total amount borrowed.

Meanwhile, borrowers with variable-rate Stafford Loans originated before July 1, 2006 will see their rates drop to 2.48 percent on Wednesday. That's two percentage points lower than the current 4.21 rate on these loans. Members of the Class of 2009 can lock in an even lower rate of 1.88 percent if they consolidate their variable rate loans during the sixth month grace period before they enter repaym

But the most significant change that will go into effect on Wednesday is the introduction of the Income-Based Repayment (IBR) program, which is aimed at helping borrowers with low incomes who have taken on too much federal student loan debt. Under the new program, borrowers who have a pre-tax income below 150 percent of the poverty line will not have to make any payments until their incomes rise over those levels. Those with higher pay will not be asked to devote more than 15 percent of the portion of their income above that threshold to student-loan repayment until they are earning enough to make regular payments. Any debt remaining after 25 years of payment through the IBR program will be forgiven by the federal government. (Unfortunately, private student loans do not qualify for the reduced payments.)

According to our friends at the Project on Student Debt, who have championed the program, a single person making $30,000 a year with $30,000 in debt will see his or her monthly payments cut in half under IBR. The project has developed a calculator at www.ibrinfo.org to help borrowers determine their eligibility for the plan.

"In this tough economic climate, Income-Based Repayment will be a godsend for so many people, helping to guarantee that [federal] student loan payments won't be the thing that breaks the bank," says Lauren Asher, the president of the Institute for College Access and Success (TICAS), which runs the Project on Student Debt. [Disclosure: Higher Ed Watch is supported in part by TICAS.]

Independence Day is still a few days away. But with these new benefits, students already have a reason to celebrate.

Explaining Negative Funding for Higher Ed

Jason Delisle — Tue, 23 Jun 2009 18:50:00 -0400

Every year the federal government provides billions of dollars worth of grants, loans, and other forms of assistance through mandatory funding to students pursuing a postsecondary education. Yet, according to the president's 2010 budget request, total mandatory funding (funding not provided through the appropriations process) for education programs in 2009 is negative $20.3 billion. Although a negative funding level is counterintuitive, it can be explained by the budgeting methods required for federal student loan programs.

The way the federal government reports the costs of new student loans makes up part of the negative 2009 funding figure. Most spending in the federal budget is accounted for on a cash basis -- that is, money appears in the budget as it is made available and spent. Loan program costs, however, are presented as the subsidy conferred by the federal government to borrowers and private lenders administering the loans. Even though the federal subsidy will be conferred to borrowers and lenders over the life of the loan, its total value shows up in the budget all at once, in the year the loan is made.

When accounting for the total value of federal student loans made in 2009, federal budget analysts assume that fixed borrower interest rates of 6.8 percent and other fees will more than offset the federal cost of the loans. In other words, estimated collections exceed estimated costs, and this is presented as a negative subsidy rate in the budget. In total, federal budget analysts estimate that loans issued in 2009 will cost negative $12.7 billion.

Subsidy rates for 2009 loans, however, explain only some of the negative education funding reported in the president's fiscal year 2010 budget request. "Reestimates" of all student loans made from 1992 through 2008 explain nearly all of the rest. The same budget rules (established in the Federal Credit Reform Act) that require all new loan costs to appear in the budget when the loans are made also require budget analysts to annually update the original estimates for all loans issued since 1992. These updates, called reestimates, are "booked" in the current fiscal year when the president's budget is released. In other words, any changes to prior estimates for loans issued from 1992 through 2008 are accounted for in 2009. If costs are higher, then the reestimate is positive. If they are lower, then the reestimate appears as a negative number.

According to budget analysts, reestimates of these older loans total negative $18.5 billion, which is reflected in the fiscal year 2009 mandatory funding level for the U.S. Department of Education. This is due to dramatically lower interest rate projections that will reduce the costs of older loans compared to previous estimates. Additionally, loan purchase programs implemented in 2008 and 2009 are expected to lower the cost of the federal subsidy on loans issued in prior years.

To sum up, the negative $20.3 billion fiscal year 2009 funding figure that appears in the mandatory budget for federal education programs reflects negative costs for both 2009 loans and updates to estimates for all loans made since 1992. Although mandatory funding for other education programs, such as Pell Grants, is positive, the large negative numbers for student loans produces a net negative number for 2009.

How Would You Spend $87-Billion?

Stephen Burd — Thu, 18 Jun 2009 19:20:00 -0400

Yesterday, at Higher Ed Watch, we urged Democratic Congressional leaders to keep their eye on the ball and move forward with President Obama's plan to make Pell Grants into a true entitlement for low-income students.

But what if eliminating the Federal Family Education Loan (FFEL) program doesn't produce enough savings for Congress to achieve this lofty goal (as recent media reports suggest)? Or what if opposition to creating a new Pell Grant entitlement program is strong enough among fiscally conservative Democrats and appropriators to kill the proposal? What then should be done with the tens of billions of dollars the government would save by providing loans entirely through the Direct Loan program?

We have a few ideas at Higher Ed Watch about how that money could be spent -- none of which involve extending the interest rate reduction that we wrote about yesterday.

Boost the Maximum Pell Grant

Using the mandatory money that would be saved by eliminating FFEL to provide another substantial boost in the maximum Pell Grant is the obvious solution that lawmakers would undoubtedly pursue. There are advantages to this approach. After years of neglect, and skyrocketing college prices, the grant's purchasing power remains disappointingly low. A massive infusion of funds could potentially restore the purchasing power of the maximum grant to what it was 20 years ago -- 60 percent of the average in-state tuition at a public four-year college (today the maximum award is worth about half that amount). That would be a worthy goal.

This approach, however, also has some significant downsides. For one thing, funding provided through budget reconciliation bills is often temporary due to complicated budget rules. If lawmakers do not provide a sufficient amount of funding to make the increases permanent, Congress will once again face the difficult choice of either substantially decreasing the Pell Grant (by thousands of dollars) or finding billions more per year just to keep the maximum award constant. And, without FFEL around, lawmakers will no longer be able to rely on lender subsidy cuts to make up the difference.

In addition, the progress that Congress makes with this infusion will be fleeting if lawmakers do not make a commitment to increase the maximum grant every year. With college prices continuing to escalate, a couple years of flat funding could drive the program's purchasing power back down. The Obama administration recognized this danger. "It is not enough just to make Pell Grants more generous and to put on a short-term patch," administration officials wrote in February, explaining why the President felt it was necessary to make Pell Grants an entitlement program. "Fourteen times since 1973, the maximum Pell Grant has failed to increase even in nominal dollars." The President's proposal would guarantee yearly increases in the maximum grant that exceed the rate of inflation.

On balance, it probably makes sense to use a large share of the savings to boost spending on Pell Grants if Congress is unable or unwilling to stick to the President's proposal. But given the limitations of this approach, we think it's critical for Congress to take other steps to increase college access and completion for low-income students.

Expand the Government's Early Intervention Efforts

Inside Higher Ed recently ran a column by Arnold Mitchem, the president of the Council for Opportunity in Education, arguing that increasing spending on "the Pell Grant alone will not solve the problem of getting first-generation and low-income students through college." He called on the President and Congress to take "a more comprehensive approach" by making a substantial investment in the federal government's early intervention efforts such as the TRIO programs, for which his organization advocates. "What is desperately needed instead is a more comprehensive view of student aid that reflects the recognition that low-income and first-generation students face multiple barriers -- class, cultural, informational, academic, and social -- to postsecondary education, and not just a lack of funds."

We wholeheartedly agree, although we think that Congress should concentrate its efforts on significantly expanding the Gaining Early Awareness and Readiness for Undergraduate Programs (GEAR UP), which research suggests offers the most promising model for preparing and motivating low-income students for college. Under GEAR UP, colleges partner with schools to provide counseling, mentoring, academic support, and college outreach services to entire grades of disadvantaged students. The partnerships serve these students for seven years, starting no later than seventh grade and continuing through at least high school graduation.

Funding for the GEAR UP, however, has been stagnant for much of the last decade, limiting the program's effectiveness. For example, many partnerships have been serving only one grade level in a school, rather than multiple cohorts, as the program's creators envisioned. The benefit of directing savings from ending FFEL to GEAR UP is that a relatively modest increase - doubling or tripling the program's budget, which is currently about $313 million - would go a long way to improving its performance and expanding its reach.

In exchange for the additional money, Congress should require the partnerships to serve multiple cohorts or even whole schools of low-income students, rather than just individual grade levels at the schools.

Reward Colleges for Serving Low-Income Students

Colleges currently have little incentive to enroll low-income students and their institutional aid policies increasingly reflect that fact. Under the sway of enrollment managers, many public and private colleges are using their limited institutional aid budgets to provide merit aid to the kind of high-achieving students that improve their rankings in U.S. News & World Report and other publications. Others use "merit" aid to attract high-income students who will otherwise be able to pay the full cost of attendance.

Congress could begin to reverse these trends by creating a new program that would reward colleges for enrolling and graduating low-income students. Under the program, colleges that admit a certain percentage of economically disadvantaged students would receive an institutional grant award from the government. Additional aid would be provided when these students graduate. Institutions would primarily use the money they receive for academic tutoring and student support services to help these students adjust to and succeed in college.

Variations on this proposal have been put forward by the leaders of the California State University system, the College Board's Rethinking Student Aid panel, and student aid expert Rupert Wilkinson in a guest post he wrote for Higher Ed Watch and his 2005 book Aiding Students, Buying Students: Financial Aid in America "Creating financial incentives for [higher education] institutions to remain committed or to recommit themselves to the public needs of society should be among the federal government's highest priorities," Charles Reed, the chancellor of the California State system and F. King Alexander, the president of Cal State-Fullerton, wrote in a column that ran in Inside Higher Ed in March. We couldn't agree more.

Those are our suggestions. But we'd love to hear what you think. Please write in with your recommendations.

Memo to Democrats: Keep Your Eye on the Ball

Stephen Burd — Wed, 17 Jun 2009 20:00:00 -0400

When it comes to student aid, President Obama has made his wishes clear: he wants Congress to use the savings it derives from eliminating the Federal Family Education Loan (FFEL) program to make Pell Grants a true entitlement for low-income students. But as Democratic Congressional leaders take up legislation to enact the President's plan, they are likely to have other ideas about how this money should be spent.

Some lawmakers will surely be tempted to take advantage of this opportunity and push for an extension of an interest rate reduction Congress approved in 2007 on subsidized federal student loans. Doing so would prevent a sudden rise in the student loan interest rate -- from 3.4 to 6.8 percent -- at the tail end of Obama's first term, when the rate cut is set to expire.

At Higher Ed Watch, we recognize that allowing the rate reduction to expire in 2012 would be a politically risky move. Nonetheless, we would strongly urge Congressional leaders to stay faithful to Obama's plan. The administration has handed them a once-in-a-lifetime opportunity to put the Pell Grant program on a firm financial footing by financing it entirely with mandatory funds. Diverting funds to pay for an interest rate cut could cripple this effort, without providing much of a public policy benefit.

A Central Campaign Plank

In 2006, Democrats made cutting the interest rates on student loans in half, from 6.8 to 3.4 percent, a central part of their campaign to wrest control of Congress. Party leaders believed that this pledge would have widespread appeal among middle-class families worried about ever-rising college prices.

Once in power, Democratic lawmakers moved quickly to try and make good on their promise. However, because of budget constraints they were forced to scale back their plan. Instead of reducing interest rates on all federal student loans, they limited it to only federally subsidized loans, which go to students with the most financial need. And instead of having the cut go into effect immediately, they phased it in over five years. (Students who take out new loans next fall, for example, will lock in a rate of 5.6 percent.)

In addition, because they included the measure on a budget reconciliation bill (the 2007 College Cost Reduction and Access Act), they were able to keep the reduction in place for only a limited time. As a result, just one cohort of federally subsidized student loans -- those issued in 2011-12 -- will actually carry a fixed interest rate of 3.4 percent over the life of the loans. After that, the rate cut expires and students will go back to paying a 6.8 percent fixed rate.

Little Bang for the Buck

It is certainly understandable why Democratic leaders would want to stop this increase from occurring, particularly at a time when President Obama is likely to be running for reelection. But we think it's worth pointing out that student aid experts in the Obama administration are not pushing for the extension. They recognize that the costs of such a proposal (estimated to be several billion dollars a year) would outweigh its benefits, because it would do little to accomplish the main goal of federal student aid policy: reducing the college-going gap between low- and moderate-income students and their more-affluent peers.

While extending the rate cut would certainly reduce the debt burden of some borrowers, even that benefit would be limited as it would continue to apply to only federally subsidized loans. Those financially needy students who need to take out unsubsidized federal loans would still be stuck paying higher rates on them. In addition, extending the rate cut obviously wouldn't do anything to help low- and middle-income students avoid having to take out high-cost private loans to help cover their college costs.

In contrast, President Obama's plan would fundamentally restructure the Pell Grant program to make it a more reliable and predictable source of financing for needy students. It would also raise the maximum grant to $5,550 for the 2010-11 academic year and guarantee future yearly increases that exceed the rate of inflation. The administration estimates that under its proposal, the number of students who would benefit from the Pell Grant program would increase by nearly 1.5 million, or 24 percent, over the next two years. Meanwhile, the administration has also called for significantly expanding the Perkins Loan program expressly to help financially needy students avoid having to take out expensive private loans.

Democratic Congressional leaders have the chance to make some truly substantial changes in student aid policy that would greatly benefit students and their families. But they must keep their eye on the ball, and not get distracted by pushing other costly priorities, like an extension of the interest rate reduction, that would give them little bang for the buck.

The Case for Helping Low-Income Families Save for College

Ed Policy — Thu, 04 Jun 2009 13:45:00 -0400

[Today, Higher Ed Watch is running a guest post from our colleagues in New America's College Savings Initiative responding to recent criticism of 529 college savings plans and their ability to benefit low- and moderate-income families. The author of this post is Mark Huelsman, a Program Associate with the College Savings Initiative, a joint project between New America and the Center for Social Development at Washington University in St. Louis.]

By Mark Huelsman

Recently, 529 college savings plans have come under criticism. Like many stakeholders in the economy, 529 plan owners have not been isolated from financial pain, and many critics have used recent market volatility and plan underperformance to call for reform. Others, however, have gone further and called for policymakers to abandon 529s in particular, and savings overall, as a plausible conduit to help families afford college. As New America's recently launched College Savings Initiative is charged with examining and improving 529 plans, we feel that it is important to respond to some of these arguments.

To their credit, many critics of these plans share our general goal -- to increase postsecondary access and affordability for low- and middle-income students. We simply differ over whether or not 529 plans provide a promising tool for helping students attend and complete college who could not otherwise afford to go.

Consider this: A recent Gallup survey from Sallie Mae indicates that, while 62% of parents are saving for college, only 32% of those making less than $35,000 have put any money aside for this purpose. Furthermore, half of those low-income families are saving even less (or in some cases not at all) in light of the recession. This is, quite obviously, cause for concern. But is encouraging savings -- and college savings plans as vehicles to do so -- really the answer? We believe so.

The general anti-529 argument, which has made the rounds in recent months, goes something like this: College prices have gone through the roof, to the point where many low- and middle-class families are being priced out altogether. Exacerbating the problem is the fact that many families have lost wealth in the market, including in 529 plans, which have a shorter time frame to recoup. As a result, we should scrap the savings model since it's overly risky. This wouldn't be a problem because, after all, low- and middle-income families don't have enough money to save in the first place and don't reap as much tax benefit from 529s. A better approach would be to simply increase spending on Pell Grants or other forms of federal aid, and at the same time, significantly increase subsidies for state universities to make college more affordable, and bolster attempts to control the price.

Unfortunately, this approach amounts to throwing the baby out with the bath water.

We recognize that, for most families, 529s will never hold enough to fund an entire education. Instead we see them as a significant part of a balanced financial plan - including grants, loans, scholarships, work study and other forms of aid. In this vein, we should certainly use all policy levers necessary - including increased student aid funding - to make college more affordable and accessible. It is the potential of the college savings plan, however, to incorporate progressive features, which we believe could have broad effects, both financial and behavioral.

College savings, at the very least, replace college debt that comes with interest to pay. This is critical because the less student loan debt families incur, the more money they have at their disposal - for a home, a retirement, or for emergency short-term savings.

Some have questioned whether 529s can even be considered "assets" like a house or a retirement fund, since the 529 is a means to an end, and homeownership/retirement is an end in itself. To that, we would point to the fact that many families have lost the home equity that was supposed to be "permanent" or, in some cases, the homes themselves. Yet we don't find it likely that many would argue that homeownership has become a bad idea. To be sure, responsible homeownership, as well as a retirement fund and, yes, an education, all have important roles to play in building wealth over the life course. And unlike a home, you can't foreclose on a college degree.

Still, one might ask: Why the emphasis on savings and assets, broadly? In other words, should policymakers instead focus on increasing earnings (of which increased savings will be a natural byproduct)? To that, there are several arguments.

First, two decades of research from the asset building field suggest that asset ownership is a useful tool in generating income for the populations we're discussing. Second, there is also evidence to suggest that, controlling for other factors, a parent's savings and net worth correlate with a child's educational attainment. As one example, a 2008 paper from the Center for Social Development on the topic can be found here; it finds that parents' liquid assets have significantly positive associations with years of schooling, high school graduation, and college attendance. Finally, college savings can make for savvier consumers. If families have more personal funds to spend on college, the likelihood increases that they will shop around for a better deal. If people start saving, they inevitably think about costs earlier, making them more conscious of price options. If policymakers can get families to save on a broader (or even universal) scale, it has the potential to create competition among major universities to give students more bang for their buck.

This is not to say that 529s, as currently structured, are perfect. Too many 529 administrators incorporated too much risk in their investments, which meant that so-called "conservative" investments were anything but. In general, there are a couple of ways to fix this without going so far as to dismiss the very idea of the investment plan. For instance, how about mandating that each state plan has a truly safe capital preservation option, such as an FDIC insured account, that a family can use as the tuition bills become larger on the horizon (like a number of states currently do)? Or in a down market, how about allowing families to change their mix of investments quarterly (as opposed to twice a year, which is now a temporary rule)? Or, if we want to stretch out the timeline for those families who have had the misfortune of losing money as college approaches, perhaps allow 529 monies to temporarily be used to pay off student loans.

Generally, these fixes all come with tradeoffs, and the implications of some remain unexamined, but the point remains that these investment vehicles could stand to be improved without being scrapped. The College Savings Initiative hopes to do so by conducting research on innovative 529 features such as matching deposits and seeding accounts, as well as studying policy options such as reforming higher education tax credits to better meet at-risk populations. Without the option of a 529, low-income families would lose yet another opportunity to reap the benefits of saving and investing, and move up the income ladder. Savings is certainly not a silver bullet, but we believe it is an essential part of any plan to address the college affordability crisis.