Affordability

Don't Table Endowments

Ben Miller — Tue, 09 Sep 2008 16:52:00 -0400

Speaking at a Congressional roundtable on college endowment spending on Monday, college leaders and lobbyists offered a multitude of reasons why requiring institutions of higher education to spend a minimum amount of their endowments each year is bad policy and fundamentally unworkable. Among their arguments, they claim that a mandatory payout of endowment funds would be overly burdensome on institutions; would harm future generations of students on their campuses by depleting present resources; and would serve no public good.

We respectfully disagree. At Higher Ed Watch, we have offered a proposal for a mandatory payout that renders most of these objections moot. Our plan would require the wealthiest colleges to spend a specific percentage of the market value of their endowment funds each year, with the difference between their current spending rate and the new threshold going to concrete, measurable projects aimed at improving socioeconomic diversity among students and applicants.

Co-hosted by Sen. Charles Grassley (R-Iowa), the ranking member of the Senate Finance Committee, and Rep. Peter Welch (D-Vt.), who moderated the discussion, yesterday's event featured experts on college endowment practices, higher education leaders and lobbyists, and watchdog groups [Disclosure: the author of this post participated in the roundtable.] Ostensibly, the event's three major goals were to (1) provide a better understanding of the link between college costs and tuition, (2) define and classify university endowments, and (3) debate whether institutional endowments should be subject to a mandatory annual payout. Ultimately, the discussion largely focused on reasons that colleges believe requiring a minimum spending rate would be inadvisable.

Let's take a closer look at the arguments advanced by participants yesterday and show how our proposal addresses them.

Argument: A mandatory spending rate is too burdensome for colleges with small endowments

Most colleges do not have large endowments. According to Molly Broad, the president of the American Council of Education, the vast majority of postsecondary endowment funds (about 70 percent) are controlled by 75 universities. The rest is divvied up among the thousands of other colleges nationwide.

It is true that many schools with smaller endowments would be unable to meet an annual spending requirement. That's why Higher Ed Watch's proposal would leave these institutions alone. Our plan would require a mandatory payout level only from colleges with endowments over $500 million or some other agreed upon metric.

The 75 schools or so that would be affected represent a fraction of national postsecondary enrollment, but they are also among the premier colleges and universities in the world. As a result of their reputation, these institutions confer substantial benefits to their graduates. We believe that colleges should be doing more to ensure that those benefits are accessible to students across all socioeconomic brackets.

Unfortunately, that largely doesn't appear to be the case. Apart from isolated shining examples, such as Amherst and Smith colleges, where 20 percent or more of the student body is Pell eligible, America's wealthiest schools enroll a small and apparently decreasing number of low-income students. According to an analysis published this May by the Chronicle of Higher Education, only 13.1 percent of students at the 75 wealthiest private institutions in the 2006-07 school year received Pell Grants. Moreover, the Chronicle found that the number of Pell Grant recipients at these institutions actually decreased from 14.3 percent in the 2004-05 school year.

Argument: Forced endowment spending on tuition reduction wouldn't serve the public good

College leaders were very clear at Monday's roundtable that there is at best a tenuous link between endowment spending and a further lowering of tuition because institutions already use endowment funds to subsidize tuition and fees. They argued that mandating higher spending rates would lead to nothing more than a small decrease in tuition -- at best.

But reducing college prices is not a cure-all for college access problems. Ironically, the reduction in the proportion of Pell Grant recipients at wealthy schools occurred after several took steps to substantially reduce their tuition burden for financially needy applicants. This suggests that colleges need to do more than lower tuition costs to improve socioeconomic diversity on campus.

This is where mandating a minimum payout rate for endowments could be useful. Rather than just requiring colleges to spend more of their endowments on the nebulous, seemingly catch-all category of "student aid," colleges under our plan would be required to use additional funds to take proactive measures to attract more low-and moderate income students to their campuses, and help them succeed and graduate once there.

With such a mandate, colleges would not be able to use the increased endowment spending to supplant, rather than supplement, existing student aid dollars, or use them in a fungible way to finance extravagant capitol projects, such as dormitory amenities or new fitness centers for athletes.

Instead, the newly tapped endowment money could go to projects such as:

Centers of Excellence for Low-Income Student Success
Under the recently-passed Higher Education Act reauthorization legislation, colleges can apply for grants to create centers of excellence for veteran students. These centers are to consist of full-time staff members whose job will be to coordinate all aspects of veteran student life, running the gamut from academic and career advising, access and persistence monitoring, outreach, housing support, and tutoring assistance. We would like to see colleges use the additional endowment funds to create similar centers for low- and moderate-income students.

Improved High School Outreach
In Creating a Class: College Admissions and the Education of Elites (Harvard University Press, 2007), Mitchell Stevens, an associate professor of educational sociology at New York University, documents the mutually beneficial nature of close relationships between admissions officers at an elite New England liberal arts college and guidance counselors at prestigious public and private high schools. Admissions officials who are familiar with specific schools and counselors end up devoting more time to these schools, which aids their efforts to locate talented students. Under our plan, colleges could use additional endowment funds to buttress their efforts to build stronger relationships with officials at high schools that predominantly serve lower-income students.

Local Outreach
Increased endowment spending on preparing low-income students for a college education need not solely target individuals guaranteed to attend one of these wealthy institutions. Many colleges with large endowments are located in economically depressed cities and counties where an influx of money could have substantial effects on improving the educational outcomes of students in local school districts. For example, my alma mater Brown University, promised in February of 2007 to create a $10 million endowment for the Providence School District. This fund could be an important source of support for a district where 38 percent of its students are impoverished and just 28 percent of its fourth grade students scored proficient or higher on state mathematics tests.

Argument: Spending too much from endowments now would harm future generations

Many wealthy colleges claim that spending more endowment funds today would be unfair to future classes of students because it would deplete available resources -- a concept known as intergenerational equity. There are two problems with this argument. First, most colleges already are spending over 4 percent of their endowment funds each year, meaning they would likely be forced to contribute only a few tenths of a percentage point more. Surely this is not enough to drain what are extremely well-managed funds.

Second, the schools are adopting a notion of intergenerational equity that is far too narrow. Rather than thinking solely about the potential harm to future classes of students on a given campus, colleges should be thinking about the societal implications of continuing our current policies. According to the Advisory Committee on Student Financial Assistance, an estimated 170,000 otherwise qualified low- and moderate-income students do not attend college each year. These individuals are put at a significant disadvantage in the workplace and are likely to generate much less income over their lifetimes. Failing to attend college also has implications for individuals' children. The National Center for Education Statistics found that students whose parents had a bachelor's degree or higher enrolled in college at a rate 22 percentage points higher than students whose parents had no more than a high school diploma. Enrolling a low-income student today increases both their expected lifetime earnings and the likelihood that their children will go to college, having a positive impact on the college access of future generations.

Obviously the endowment issue is far more complex than just requiring a blanket payout rate for all institutions. But for the wealthiest colleges there should be fundamental questions raised about whether their lack of socioeconomic diversity is hindering them from fulfilling their greater educational mission. This also has implications for taxpayers, who forgo the billions of dollars the government loses by not taxing donations to, and earnings from, endowments. For these reasons, we believe that a mandatory endowment payout rate for higher education is an issue worthy of further debate and negotiation.

(Click here for more materials from the roundtable and here for comments prepared by this post's author for the roundtable.)

UPDATE: Video of the roundtable is now available here.

Guest Post: Six Principles for Financial Aid Reform

Ed Policy — Tue, 13 May 2008 14:00:00 -0400

By Art Hauptman

There is widespread agreement among financial aid analysts and practitioners that our country's student aid system is not working as effectively as it could be. Many believe that the solution to this problem is to have the federal government substantially increase the amount of money it spends on the existing student aid programs.

I disagree. The federal government currently spends roughly $40 billion for grants, college work study, loan subsidies, and tax breaks for college -- more than enough to achieve the programs' goals if they were operating effectively and efficiently. As I argued last week, the current structure of student financial support in this country needs to be changed in fundamental ways.

Federal aid programs and tax benefits should be molded into a more comprehensive and comprehensible whole. This would entail some program consolidation and a much better coordination of federal programs and policies with each other. The federal government should also strengthen the incentives it provides states, colleges, and the private sector so that these entities complement, rather than complicate, its public policy goals. Such a system should adhere to the following six principles:

It should be much simpler for students and their families to apply for aid and for college officials to administer it. The current application process serves as a huge barrier to access for many students and families, especially those most at-risk.

A modest amount of self help in the form of loans or work should be required of all students, although institutions should be encouraged to cover some or all of this self-help component for students from the most impoverished circumstances.

The largest proportion of assistance should be targeted on the most at-risk students. This greater commitment to targeting of benefits should include federal and state policies, institutional practices, and private sector initiatives.

Tuition tax breaks should be the primary form of non-repayable aid for middle class students and lifelong learners who are already in the work force. Tax benefits are much better suited for these two groups of students than cramming them into the already strained traditional student aid programs.

The federal student loan programs should be restructured to reduce the adverse effects of growing debt burdens and to stem instances of program abuse. The policy focus should shift from the traditional emphasis on when the loan is made to more attention being placed on helping borrowers when they enter repayment.

Greater reliance should be placed on non-financial aid activities to improve the preparation and increase the aspirations of students most at-risk. Student aid is clearly not enough when it comes to the riskiest students; reaching them in various ways while they are in grade school or middle school is clearly key to greater success.

By taking the following three steps, policymakers can accomplish the kind of reform that is needed without spending any additional money:

Federal student aid programs and tuition tax benefits should be integrated in a systematic way. Many student aid advocates have suggested doing away with the current range of tuition tax benefits and using the savings to increase spending on need-based financial aid. Others have suggested making the tax credits refundable. A better approach is to recognize the need for tax benefits -- both to offset current tuition expenses and stimulate more college savings -- and integrate the tax system with federal student aid programs: before, during, and after college.

The federal government should be more aggressive in seeking to increase the access and success of the students from the lowest income families. Federal policy makers have tended to rely on expanding Pell Grants as the means for helping low-income students. But it is increasingly obvious that other policies are needed to achieve this goal, including more early intervention through GEAR UP and related efforts, and providing incentives for institutions to require less borrowing from these students. It would also be worthwhile to consider establishing college savings accounts for poor but promising students to raise their aspirations.

A student-centered seamless federal student loan structure should be created. Federal student loan policies and practices have been central to postsecondary policy debates for the past several decades, with the primary focus over the past 15 years on whether loans should be financed directly by the federal government or privately financed. But the ‘direct loan' debate has obscured a number of other critical issues related to the provision of student loans, including the complexity of the system and whether federal policies contribute to rapidly mounting student debt burdens. We should consider how the federal student loan structure can be streamlined so that all loans have the same terms and conditions and real relief is provided to borrowers in trouble when they reach repayment.

These three sets of reforms could be paid for largely through changes in the student loan programs that would: restrict the in-school interest payments that the government makes on behalf of students in the subsidized Stafford Loan program to Pell Grant recipients; increase the share of federal student loans provided through the Direct Loan Program; and use auction mechanisms to determine a market rate of return on federally guaranteed loans and thereby drive down federal payments to lenders. In addition, improving coordination between the Pell Grant and tax credit programs would create some savings by making students from middle-income families ineligible for Pell Grants. This change would justify increasing tuition tax benefits for middle-class students and their families through the consolidation of existing tuition tax breaks into a new single expanded tuition tax credit.

Future posts will consider how adopting these reforms could lead to a reinvigorated system of student financial support in this country.

Art Hauptman is an independent consultant on higher education finance issues. His guest blog column will continue to appear each Tuesday in the month of May. The views expressed herein are his own and do not necessarily reflect the positions of the New America Foundation.

Guest Post: A System of Student Financial Support

Ed Policy — Tue, 06 May 2008 16:22:00 -0400

By Art Hauptman

Current arrangements for providing financial support to college students and their families in this country are not meeting many of the objectives for which they were intended. The Spellings Commission summed it up well in its final report: "The entire financial aid system - including federal, state, institutional, and private programs - is confusing, complex, inefficient, duplicative, and frequently does not direct aid to students who truly need it." As a result, the Commission and a number of other groups with wide ranging political agendas have recommended that "the entire student financial system be restructured". But what would that entail?

Since first established in the 1960s, the federal student aid programs of grants, loans, and work-study - in concert with state, institutional, and private efforts - have provided access to a postsecondary education for millions of Americans who otherwise might not have had enough funds to attend. More recently, federal tax offsets against current tuition expenses and tax-preferred incentives for college savings serve as an important source of financial relief for hard-pressed taxpayers from a range of incomes who worry that they will be unable to pay the constantly mounting bill for tuition and other expenses.

But there is good reason to believe that the financing system also has been a factor in some of the most nagging difficulties associated with American postsecondary education:

The growing number of students who require remedial coursework because they are not fully prepared to do college level work when they enroll

The fact that degree completion rates in the United States are below average among industrialized countries

Tuitions and other charges at both public and private colleges increasing at twice the rate of inflation for a quarter century, raising concerns about college affordability.

Student aid and tuition tax policies are certainly not solely or even primarily to blame for these concerns and trends. Many other factors are much more important in explaining the lack of student readiness, low completion rates, and mounting tuition bills. But the student aid system is not blameless.

The basic underlying problem is that the current system of providing financial support to college students and their families is not a system at all. Rather it is a loose conglomeration of policies and practices at the federal, state, institutional, and private levels that often conflict with each other, with the result that efforts by one governmental unit or group often cancel out efforts by others.

Moreover, federal policies are often in conflict with each other - student aid programs intended to promote greater access may be detracting from better student readiness and success as measured by degree completion. Increasing reliance on tax policies to help families pay for college is often at odds with the more access-oriented policies contained in the traditional federal and state student aid programs. As a result of poor design and lack of policy coordination, there are many problems with the current structure of providing financial support to college students and their families, including:

The system of applying for aid and administering it is far too complex which in itself becomes a large barrier to greater access.

Aid often is not well targeted to students from the lowest income families making it that much harder to achieve the goal of providing greater equity of access.

Student debt burdens are growing rapidly and there is far too little relief for the growing number of borrowers who are having trouble making their payments.

The existing financing structure places too much emphasis on getting students into college and there is not nearly enough focus on whether students are prepared to do the work or whether they will complete their educational program.

There is reason to suspect that the growing availability of aid, particularly loans, have been a factor in tuition and other charges growing at twice the rate of inflation for the past quarter century, suggesting a price effect of student aid.

The provision of government aid may encourage institutions that package aid to move their discounts up the income scale, suggesting that some forms of student aid, particularly government grants, may have an adverse substitution effect.

These and very real problems that indicate the current structure of student financial support needs to be changed in fundamental ways.

A subsequent post or two, if Higher Ed Watch doesn't tire of me, will describe a set of principles that should guide future reforms with specific suggestions for moving forward on this agenda. Big changes are needed to make current levels of government support work better for students and their families. Patchwork won't do.

Art Hauptman is an independent consultant on higher education finance issues. The views expressed herein are his own and do not necessarily reflect the positions of the New America Foundation.

COVERAGE: Myths About the Individual Mandate: Affordability

Paul Testa — Tue, 18 Mar 2008 15:00:00 -0400

Myth: An individual mandate would force families to forgo other necessities in order to buy health insurance.

Fact: All existing mandate-centered reform plans include subsidies for low-income people to ensure affordability, and insurance reforms to make health insurance markets work for all Americans.

To date, no policymaker has proposed instituting an individual mandate without addressing affordability, standards and market reforms that protect consumers.
Reform plans that include an individual mandate—such as the Healthy Americans Act sponsored by Senators Wyden, Bennett, and a dozen other cosponsors and that of Representatives Langevin and Shays—also include subsidies that reach as high as 400% of the Federal Poverty Level or $84,000 for a family of four.
John Holahan and Linda Blumberg of the Urban Institute recently noted that under a mandate with generous subsidies "low-income individuals spend less as a percentage of income than higher income individuals."
In a post on the Health Affairs Blog, Patricia Lynch explained why such desirable and popular insurance market reforms as guaranteed issue (not being able to deny people health insurance) would not be possible without an individual mandate to bring everyone into the system.

Check back tomorrow when we'll examine common myths about enforcing mandates. For more in depth discussion, read New America's recent issue brief.

A False Alarm

Ed Policy — Thu, 14 Feb 2008 00:00:00 -0500

Over the last several months, the student loan industry and its allies on Capitol Hill have led a campaign to persuade the news media and policymakers that Congress went too far last year when it cut taxpayer subsidies to lenders that participate in the Federal Family Education Loan (FFEL) program. The lenders and their friends argue that the subsidy cuts and tightening credit markets now are leaving students in jeopardy of losing access to federally guaranteed student loans. Don't believe it.

[slideshow] During debate last week on legislation to renew the Higher Education Act, for example, Congressman Howard (Buck) McKeon (R-CA), a friend of Sallie Mae and the student loan industry, sounded an alarm. “The impact of these cuts have yet to be fully realized, but already borrower benefits have been curtailed, lenders have left the program, and workers have lost their jobs,” he said. “The consequences of program cuts are being exacerbated by a crunch in our financial markets that has produced a loss of liquidity, an increase in financing costs, and uncertainty about the future viability of the federal loan program.”

McKeon didn't mention that JP Morgan Chase bank, for example, is making so much on federal and private student loans even after Congressional action to redirect excess taxpayer subsidies from banks to increased financial aid for students that Chase is voluntarily cutting interest rates and fees on federally-backed student loans and private student loans. He also didn't mention that any curtailed benefits charitably supplied by banks in the past have been redirected by Congress into massively larger Pell Grants and reduced undergraduate Stafford loan interest rates. And he didn't mention, that there is zero risk of federal student loans not being available to any student at any accreditated institution of higher education.

But McKeon we understand. He's got a political job to do. Respected media outlets like The Wall Street Journal that fall for this scare tactic we can't excuse. In a news article last week, The Wall Street Journal speculated that students with less-than-stellar credit “will likely have a harder time getting a government backed federal loan, as lenders tighten their standards and pare back their offerings in response to the credit crunch and recent legislation.”

The fact such a distinguished newspaper as The Wall Street Journal would perpetuate such patently false claims about federal student loans caught our attention and convinced us we need to address head on the lenders’ arguments.

(1) Are Students with Poor Credit in Danger of Losing Access to Federal Loans?

Absolutely Not. Federal Stafford student loans are universally available to students, no matter what their credit scores. In fact, banks are forbidden from denying federal loans to students because of their credit records. Some lenders, like Sallie Mae, have said that they plan to stop offering subprime private, non-federal college loans to students at trade schools. But as we’ve said before, this is actually good news, as disadvantaged students with poor credit ratings should never have been stuck with high-cost private student loans to begin with.

(2) But Haven’t Some Lenders Announced That They Will Stop Offering Federal Loans?

Yes, but only a few and so what? About a half-dozen of the thousands of lenders that participate in the FFEL program have said that they will stop offering federal loans, or limit their participation in the program. The College Loan Corporation, which began as a marketer of consolidation loans, is the biggest lender to drop out so far.

Frankly we don’t find this news to be surprising or alarming. For years, the government, with its overly generous subsidies to lenders, propped up loan companies that did not operate as efficiently as they could have. In the end, this is a business, and lenders should compete to see which companies can deliver government-backed loans at the cheapest cost to taxpayers.

(3) Is it True that Students Don't Have Any Alternative but to Borrow Federal Loans from Commercial Lenders?

No, there is an alternative. Students can obtain federal loans directly from the government through the Direct Loan Program. More than 1,000 colleges currently participate in direct lending, and the program now accounts for about 20 percent of the total student loan volume.

A major advantage of direct lending is that the government does not disciminate between and among borrowers. So if lenders begin to redline -- refusing to provide loans to students at community colleges or trade schools, for example -- colleges can always switch to direct lending to ensure that federal loans remain available to their students.

Another big advantage of direct lending is that the government funds the loans directly from the federal Treasury. As a result, it doesn't sell loans to investors through the securitization market, which is extremely shaky right now, to finance its loans, as do some commercial lenders.

Conclusion

To be perfectly clear, the sky is not falling on federal student loan availability -- no matter what the loan industry and its supporters on Capitol Hill claim. Don't be fooled by attempts to conflate the private student loan and federally-guaranteed student loan marketplace, even if false claims appear as fact in The Wall Street Journal.

In its frenzy to report on the subprime mortgage crisis' impact, old media is getting the student loan issue wrong and alarming parents. Hopefully, other news outlets won't be so easily fooled. Federal student loans are universally available. They will continue to be. And as of this moment, private student loans are widely available well. But the latter could change.

Baby Carrots and Twigs

Ed Policy — Thu, 15 Nov 2007 00:00:00 -0500

Yesterday, a key Congressional education committee took a groundbreaking albeit modest step on a top flight concern of parents and students - ever escalating college tuition.

For years, the federal government's main role in higher education finance has been 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.

Confusing Market Means and Ends in Higher Education

Ed Policy — Tue, 11 Sep 2007 01:00:00 -0400

Responding to our coverage of last week's higher education reconciliation bill, Cato's Neal McCluskey asks, "How can you love an auction because it supposedly uses market forces, while simultaneously supporting the gargantuan market distortion that is the overall federal student aid 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.

Tuition Junction: What's Your Function?

Ed Policy — Wed, 13 Dec 2006 00:00:00 -0500

The New York Times has Higher Ed Watch reconsidering our thinking on why college tuition is going up. Our hypothesis had been that skyrocketing tuition is driven by the combination of: (1) declining state support for higher education, and (2) an "arms race"…

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.

On the Road to Increased College Affordability

Ed Policy — Thu, 30 Nov 2006 00:00:00 -0500

Over the next couple of weeks, Higher Ed Watch will offer Congressional Democrats, Republicans, and the Bush Administration political and detailed policy advice on how to increase college affordability. We begin with a political lay of the land, because it's where policy begins and ends.

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, Tues., Oct. 3rd

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

Bush Signs Bill Limiting "Eligible-Lender-Trustee" Kickback Scheme

On Saturday, President Bush signed the Third Higher Education Extension Act of 2006, H.R. 6138, into law. The extension bill authorizes programs in the existing law until June 30, 2007.…

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.