Financial Aid

Oversold?

Jason Delisle — Wed, 30 Jan 2008 00:00:00 -0500

In Kansas Governor Kathleen Sebelius's Democratic response to President Bush’s final State of the Union Speech Monday night, she touted a new law to “reduce the costs of college loans” as one of the major accomplishments of the new Democratic Majority in Congress. She was referring to enactment of the College Cost Reduction and Access Act of 2007, which among other things reduces interest rates on federally subsidized student loans. It was a big pat on the back for Congressional Democrats, who made cutting student loan interest rates in half a central part of their 2006 campaign. But Democrats should be careful not to oversell their achievement, as very few borrowers will get the full interest rate cut promised.

To be fair, under the new law, borrowers will also benefit from increased loan forgiveness for work in public service, substantially increased Pell Grant aid, and a decreased financial aid penalty associated with student work and savings. Indeed, the new law represents a significant increase in federal student aid. Higher Ed Watch has lauded it in the past.

The Fine Print

But when it comes to the much ballyhooed student loan interest rate reduction, take a look at the fine print. The College Cost Reduction and Access Act of 2007, signed into law on Sept. 27, 2007, does cut student loan interest rates in half. But it slowly phases in those cuts on new student loans only, achieving the promised 50 percent cut by the 2011-12 school year. After that date, interest rates on new loans revert back to the current fixed 6.8 percent interest rate. The cliff-like, expiration of budget policies is usually done to comply with (or avoid) budget rules, such as the fast-track procedure in Congress called reconciliation. That is the case with the interest rate cut, and it is also the reason why the 2001 and 2003 Bush tax cuts expire.

[slideshow]The College Cost Reduction and Access Act’s student loan interest rate reductions will take place in equal increments as outlined in the table below. Loans disbursed in each year shown will carry the reduced interest rate for the life of the loan. A freshman entering college in the fall of 2008 will have four sets of loans at four different interest rates. And no borrower will have more than one year’s worth of loans at a rate “cut in half” of what it was in 2006, because only those loans disbursed in 2011-12 carry the 3.4 percent interest rate. Loans issued in the 2012 school year revert to the current 6.8 percent rate. (Click here for an explanation of why the rate cut phases in and reverts back.)

The most a borrower could save under the new law’s interest rate cut is $216 a year ($3,240 over the life of the loan) on a maximum cumulative debt of $17,125 repaid over a 15 year period. That works out to $18 a month. Many borrowers will save less because they will not qualify for the maximum loan amount, or because they will enter college after 2008 and will not be able to take advantage of each year’s lower interest rates before they revert back to 6.8 percent.

…And More Fine Print

The interest rate reductions only apply to Subsidized Stafford loans, and only for undergraduate study. Unsubsidized loans -- which are similar to subsidized loans except they accrue interest while a borrower attends school -- will continue to carry the current rate of 6.8 percent. Borrowers can qualify for either federal unsubsidized Stafford loans or subsidized, or a mix of the two, depending on the adjusted gross income (AGI) of a borrower’s parents at the time he or she attends college and their school's cost of attendance. Currently, about two-thirds of Subsidized Stafford loan recipients come from families with an AGI under $50,000, while one-fourth come from families with an AGI between $50,000 and $100,000.

The Policy Problem

There is a fundamental issue with the interest rate cut. Eligibility for the reduced interest rates is calculated based on the pre-college income of the student's family, with no regard for the student's earnings after graduation day. Moreover, the borrowers who qualify for the loan will not benefit while in school, but over the 10 to 20 years the loan is in repayment.

The NCES Baccalaureate and Beyond Survey suggests that years after graduating, the incomes of students with subsidized Stafford loans and those with non-subsidized Stafford loans are the same. Therefore, the interest rate cut provides a subsidy to students who come from low-income families, despite the fact that over the years of repayment they earn just as much as the borrowers who did not qualify for the lower rate loans. Is anyone surprised? After all, college is supposed to equalize earnings and employment opportunities. In short, the lower rates are a poorly targeted subsidy.

In sum, the interest rate cut isn’t as much of benefit as advertised, nor is it targeted to those students who need it most, at the time when they need it most.

Roundup: Week of January 21 - January 25

Ed Policy — Fri, 25 Jan 2008 00:00:00 -0500

Economic Woes Hit Sallie Mae, Nelnet

Tightening credit markets and the slowing economy appear to be spreading into the student loan industry, as two major lenders announced recently that they will be cutting jobs and shying away from riskier loans. Last Friday, Virginia-based Sallie Mae said it would be trimming 350 jobs across the country, roughly 3 percent of its workforce. Nelnet, located in Nebraska, announced it would cut 300 jobs, about 10 percent of its workforce — its second round of major layoffs since September. Both companies also announced changes to the loan services they would be offering. Sallie Mae said it would be more selective about offering private loans to students with low credit scores and those enrolled at schools with low graduation rates. Nelnet, meanwhile, announced it would stop offering loan consolidation services and would be more selective with the loans it offered.

The job and loan cuts were among a slew of negative Sallie Mae stories this week. The loan provider also reported that increased borrowing costs and loan defaults caused the company to lose $1.6 billion in the fourth quarter of 2007. In addition, Sallie Mae revealed that the Securities and Exchange Commission has been asking questions about public disclosures by high-level executives around when they sold shares of Sallie Mae stock — a likely outgrowth of the probe into allegations of insider trading by current CEO Al Lord. Somewhere, former Sallie Mae CEO, Larry Hough, is smiling.

Cuomo Extends Study Abroad Probe with 15 Subpoenas

New York Attorney General Andrew Cuomo’s investigation of study abroad companies reappeared this week with the announcement that his office had sent subpoenas to 15 colleges and universities. The investigation originally began back in August as an outgrowth of Cuomo’s student loan investigation, which uncovered numerous improper dealings between colleges and student aid providers. Cuomo initially sent subpoenas in August and September to five study abroad providers, uncovering a series of deals in which the programs would pay colleges a portion of their fees in exchange for signing up students. Despite this, the investigation lay largely dormant until Cuomo reportedly sent subpoenas out to more than a dozen colleges this week, including prestigious institutions such as Harvard, Brown, and Columbia. According to the New York Times, these subpoenas ask colleges about their process for selecting approved study abroad programs and whether they have received any inducements to sponsor a specific program.

Three More Colleges Announce Aid Expansions

Dartmouth, Bowdoin, and Colby colleges all announced substantial changes to their financial aid packages this week, following the recent lead of Harvard and Yale. Dartmouth’s expansion is the most impressive of the three, eliminating tuition contributions for students from families making under $75,000 annually, replacing all loans with scholarships, and considering all international applications need-blind. Dartmouth’s announcement differs from plans recently unveiled by Harvard and Yale, which cut costs significantly for upper-income families but still kept some form of contribution for all families making more than $60,000 a year. Meanwhile, Colby and Bowdoin announced this week that they would eliminate all loans from current and future student aid packages and replace them with grants, an impressive move given that both have endowments well under $1 billion (subscription required).

Big Pennsylvania Non-Profit Salaries Linked to Student Loan Scandal

Ed Policy — Tue, 03 Oct 2006 01:00:00 -0400

Last month, opinion leaders in Pennsylvania took aim at big bonuses doled out to the top executives of the Pennsylvania Higher Education Assistance Agency (PHEAA). First, Governor Rendell questioned why the bonuses should be so large - over $400,000 in one case alone - when PHEAA funds ought to be…

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

Will She or Won't She?

Ed Policy — Tue, 03 Oct 2006 01:00:00 -0400

The Education Department's Inspector General has called on student loan giant, Nelnet, to return more than $278 million in taxpayer subsidy payments and halt billing the U.S. Treasury an additional $882 million. That's almost $1.2 billion in taxpayer subsidies that could go to students instead of Nelnet. It's now up to Education Secretary Margaret Spellings…

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

News You Need to Know: Daily Roundup, Mon., Oct. 2nd

Ed Policy — Mon, 02 Oct 2006 01:00:00 -0400

Education Department audit accuses guaranteed-student-loan program of inadequate oversight

The U. S. Education Department's Office of Inspector General issued an audit last Friday charging the division that oversees the guaranteed student loan program with inadequate oversight of…

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

NEWS SCOOP: Ed. Dept. IG Calls on Nelnet to Give Up $1.2 Billion in Student Loan Subsidies

Ed Policy — Fri, 29 Sep 2006 01:00:00 -0400

The Department of Education's Inspector General (IG) has called on Nelnet to return $278 million in taxpayer subsidy payments for a controversial student loan accounting practice and halt billing the Department of Education more than $882 million in future taxpayer subsidy payments. The breathtaking audit is sure to…

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

NEWS SCOOP: Ed. Dept. IG Calls on Nelnet to Return $278M in Student Loan Subsidies and Halt $882M in Future Subsidy Billing

Ed Policy — Fri, 29 Sep 2006 01:00:00 -0400

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

News You Need to Know: Daily Roundup, Fri., Sept. 29th

Ed Policy — Fri, 29 Sep 2006 01:00:00 -0400

House Passes New Restriction on Eligible Lender TrusteesThe U.S. House of Representatives passed a third short-term extension bill for the Higher Education Act on Thursday that includes a provision placing new restrictions on college-bank partnerships. In January… Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

Student Group Tracks Higher Ed Watch and Files Complaint Against Private Loan Company

Ed Policy — Thu, 28 Sep 2006 01:00:00 -0400

The United States Students Association filed a complaint with the Federal Trade Commission last week against Loan to Learn and its parent company, EduCap, Inc., claiming false advertising. The complaint tracks an…

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

Nelnet Feeling Pressure From IG Over Alleged Improper Billing

Ed Policy — Wed, 27 Sep 2006 01:00:00 -0400

Are there new risks to investors of student loan giant, Nelnet? The for-profit lender filed an updated statement with the Securities and Exchange Commission (SEC) on Thursday, September 20th -- two days after a New America Foundation event focused on Nelnet's manipulation of the federal student loan system.

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.