Low-Income Students

A Maintained Effort

Ben Miller — Wed, 19 Mar 2008 17:29:00 -0400

Behind closed doors, Members of Congress are battling over a key concept in the pending Higher Education Act reauthorization -- a House of Representatives generated requirement that states maintain steady fiscal support for higher education. Not only should Congress ensure this concept makes it through to President Bush’s desk, it should strengthen the requirement to make it more than a toothless accountability measure.

Under the House bill pending in a conference committee with the Senate, states would be required to maintain support for their higher-education systems at a level at or above the average funding for the previous five academic years. States would also have to provide a consistent level of spending on state aid for students attending private colleges within their borders. Failure to meet these “maintenance of effort” standards would result in the loss of some federal funding.

The Senate version of the legislaton doesn't contain a similar provision. As a result. it has become a major source of strife as lawmakers from both chambers meet to work out differences between the two bills. In fact, according to press reports, disagreements over this provision appear to be one of the main obstacles holding up completion of the legislation.

At Higher Ed Watch, we believe Congress should include this important provision in the final reauthorization measure. As we have stated previously, declining state support for higher education is the single most important force driving tuition increases at state colleges and universities, which educate over 75 percent of all post-secondary students. Federal policymakers, who are tired of increasing spending on federal student aid only to see their efforts squandered by large tuition increases, should use whatever leverage they have to make sure that states live up to their obligation to keep college affordable for their citizens.

Frankly, the House's maintenance of effort provision is relatively modest. Under pressure from state officials, House lawmakers agreed to exclude from the requirement both capital and research and development expenditures — funds that were initially included in the legislation. Capital expenses are a massive state expenditure (part of the $53.8 billion in state support for non-operating expenses, according to the latest figures released by the National Center for Education Statistics).

In addition, states don’t even stand to lose much money if they fail to meet the House's maintenance of effort standard. The funds at risk, the newly-created Grants for Access and Persistence, are authorized to receive an appropriation of $200 million. But because an authorized appropriation doesn’t actually compel Congress to provide funds, there is a good chance these grants could end up receiving only a fraction of this total, if anything at all. In other words, the stick is both small at best and far from guaranteed at that.

Still organizations representing state officials, such as the National Governor’s Association (NGA), remain intent on killing the provision. As part of that effort, the NGA has released an analysis claiming that requiring states to maintain consistent funding on higher education would lead to reduced state spending. The group argues that governors and legislators would not propose substantial increases in prosperous years, because they would be afraid that they wouldn’t be able to maintain that level of spending in leaner years. As the analysis put it:

“State higher education funding is cyclical: States freeze or slow the growth in spending during economic downturns, but more than make up for these lean years with significant increases of as much as 10 to 13 percent during good budget times.”

The NGA’s analysis, however, is only half right. States certainly do trim spending on higher education during lean economic times: According to a 2006 report by the Center for Study of Higher Education Policy at Illinois State University, each successive economic recession has led to an increase in the number of states reducing funding in this area. For example, during the 1980 recession, 26 states cut the amount they spent per college student. Ten years later, 38 states reduced higher education funding, and in 2001, 44 states did. If that trend continues, a 2008 recession would likely mean less money and higher tuition in almost every state in the country.

What states haven’t done, however, is return their support to the levels reached before those downturns. As reported recently by Inside Higher Ed, total state spending on higher education in the 2007 fiscal year was 7.8 percent lower than it had been five years ago, despite the fact that the economy did very well for most of that time period. How did public colleges fare in 2007 when the S&P 500 had a return of over 20 percent and the wealthiest college endowments did even better? State support went up a paltry 3.6 percent. If 2007 wasn’t the year for these rumored 10 percent increases, when will be?

Certainly not 2008. The weak economy has already led legislatures and governors in states such in Florida, New Jersey, and Rhode Island to propose or hint at multi-percentage point cuts in college funding, with other states sure to follow as budgets are prepared.

A drop in state funding will undoubtedly necessitate large tuition hikes at public colleges to cover costs. Just look at what happened in Maryland, where tuition increased by as much as 40 percent at some schools because of steep cuts by then-Governor Robert Ehrlich in the early 2000s.

Tuition hikes harm students from all income levels. A sudden increase in sticker price could scare away low-income students from ever enrolling and force those taking classes to drop out. Meanwhile, middle-income students would be forced to take on more and more debt — increasing the likelihood of ending up with a high-interest private loan.

Governors and state legislators have already shown a willingness to place a greater emphasis on tuition rather than state support during good years — education revenue from tuition and fees per full-time student is up 24 percent in constant dollars over the past five years. And that’s with “increased” state support. If that’s the price increase during bullish times, we shudder to think what levels tuition will hit in a bearish economy.

The House at least has already taken some action to address these fears with its maintenance of effort requirement. While the requirement is limited and the penalties are small, it’s at least a start. College students are being asked to pay their share. Congress made a major investment in need-based financial aid year, providing an additional $20-plus billion over the next five years. It’s time to ensure that states keep up their end of the higher education financing system. Budgets ought not be balanced on the backs of students.

A Silver Lining from the Credit Crunch

Stephen Burd — Wed, 05 Mar 2008 03:27:00 -0500

The Los Angeles Times recently provided a disturbing example of how some for-profit trade schools like Corinthian Colleges have been pushing subprime, high-risk students to assume heavy levels of debt that they may never be able to repay. In an article on the credit crunch, the LA Times quoted a 20 year old student, with a 10 month old baby, who is taking classes at Everest College in West Los Angeles to become a medical assistant. To pay for an eight week course at the Corinthian-owned school, this student has had to take out an $8,000 private loan with an 8 percent interest rate. The student, and several friends with similar loans, told the newspaper "that they knew that repayment would be difficult on the $9 an hour or so they expected to earn if they got jobs." The course, they said, gave them "75% to 90% of what they need to get and keep a job."

[slideshow] The students say the loans were worth taking because they gave them an opportunity to attend the school. But they probably won't be so happy when they go into repayment, particularly if those jobs don't materialize. They may be even more disappointed when they discover that they could have gotten the same training for a fraction of the cost at the nearby Pasadena City Colleges, which according to the LA Times, "charges $628 annually in tuition and fees to in-state residents."

If there is a silver lining to the credit crunch, it is that for-profit colleges and loan companies, like Sallie Mae, are being forced to think twice before pushing high-risk borrowers to take on expensive private loan debt that they have little hope of ever paying back.

Of course, this is not the story that the mainstream press is telling. Instead, they are focusing on the sensational story that student loan funds are drying up. That story, which is creating a panic, is misleading at best.

Despite the hysteria, we have not heard of a single case in which a student has been unable to obtain a federally guaranteed student loan as a result of the credit crunch. As we have said repeatedly, students are in absolutely no danger of losing access to federal Stafford loans.

As of now, the borrowers who mainly appear to be in danger of losing access to high-cost private student loans are those with poor credit records attending for-profit trade schools of dubious quality. (Note: we're not saying all trade schools are of dubious quality, but many are.)

Even within the for-profit higher education sector, the impact of the credit crunch has been limited so far. In recent weeks, some trade-school chains, such as Capella University, Devry Inc., Strayer College, and the University of Phoenix, have gone out of their way to assure nervous investors that the credit crunch has had little to no impact on students attending their institutions. "We are really not seeing any impact on our business," Stephen Shank, Capella's chief executive officer, recently told The New York Times.

The companies that are feeling the pinch are those that have aggressively steered financially-needy students to take out high-interest private loans, such as Career Education Corporation, Corinthian Colleges, and ITT Educational Services Inc. According to company disclosures, private loans make up 30 percent of the revenue at ITT, 18 percent at Career Education, and 13 percent at Corinthian. Corinthian has revealed that 75 percent of its private loans go to subprime borrowers.

In contrast, private loans make up just about 4 percent of the revenue of Apollo Group, which is the parent corporation of the University of Phoenix, 3 percent at Strayer, and 1 percent at Capella. A recent report from Investor's Business Daily reveals that only one quarter of one percent of private loans at Strayer go to subprime borrowers.

Of course, some advocates for trade schools argue that cutting off private loans to subprime borrowers attending these institutions will lead to a severe access crisis. But their argument fails to recognize just how dangerous it is to rely on private loans as a college access tool. Because private loan providers price their loans based on students' credit scores, those with the greatest financial need are almost guaranteed to get loans with the highest interest rates, the highest up front fees, and worst conditions. These lenders have proved to be notoriously unwilling to help struggling borrowers find ways to make repayment easier. And the government has made it extremely difficult for borrowers in dire straits to discharge their private loans in bankruptcy.

Our colleague, Erin Dillon at Education Sector, wrote yesterday that pushing a high-interest private loan on "a student with a low chance of graduating or getting a job is more a recipe for life-long indebtedness and a destroyed credit history than it is an educational opportunity."

Erin is right. As a country, we are doing no favors to the most financially needy students by pushing them to take on such expensive debt to attend schools of dubious quality. Perhaps the credit crunch will force policy makers to realize that.

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Roundup: Week of February 18 - February 22

Ed Policy — Fri, 22 Feb 2008 00:00:00 -0500

Career Education Corp. Settles With Pennsylvania A.G.

Private Giving to Colleges Up in 2007

Stanford, Wash U to Increase Financial Aid

Widening Education Gap Hinders Economic Mobility

Career Education Corp. Settles With Pennsylvania A.G.

Pennsylvania Attorney General Tom Corbett announced on Tuesday that he has reached a $200,000 settlement with Career Education Corporation, one of the country's largest chains of for-profit trade schools, over allegations that one of its schools had duped students into taking high-interest private loans, exaggerated career opportunities, and misrepresented options for credit transfer. The allegations against Lehigh Valley College were central to a lawsuit filed by the school's former students in 2005. That lawsuit accused the school of misleading students into thinking that the loans they were receiving "were low-interest, government-guaranteed student loans, when in reality the loans were not government-backed loans and included interest rates in excess of 15%." As part of the settlement, Career Education has promised full disclosure of student aid practices and agreed to pay $50,000 on top of $150,000 to fund a consumer financial awareness campaign. However, as noted by The Morning Call, the Allentown newspaper that first reported on the schools' practices, the settlement will not provide any money to the school's former students who "were misled" and left "with overwhelming debt."

Private Giving to Colleges Up in 2007

Private donations to colleges and universities hit a record level in 2007, but most of the money is going the wealthiest institutions, according to a survey released this week by the Center for Aid to Education. The report found that colleges raised an estimated $29.7 billion in 2007, 6.3 percent more than the year before. Despite the increase, the report found that a substantial share of the money is going to a handful of elite colleges, such as Stanford, which raised $832 million in 2007 alone. All told, the top 20 colleges that received donations -- representing about 2 percent of the more than 1,000 institutions surveyed -- pulled in more than a quarter of all contributions. While donations have increased substantially, the report noted that alumni giving has decreased.

Stanford, Wash U to Increase Financial Aid

Stanford University became the latest elite institution to join the affordability race, with an announcement Wednesday that it will eliminate tuition for students whose families make under $100,000 a year, and significantly increase aid for all other students. Washington University in St. Louis, meanwhile, announced this week that it will eliminate fees for students from families that make under $60,000. The two universities join Harvard, Yale, Dartmouth and others that have spearheaded massive aid expansions in the past few months, though not always for low and middle-incomes students.

Widening Education Gap Hinders Economic Mobility

Economic mobility has been largely stagnant for the last 30 years and could actually decrease due to minority educational attainment gaps, according to a study released this week. The Brookings Institution report, "Getting Ahead or Losing Ground: Economic Mobility in America," found that a poor student who goes to college has a 19 percent chance of moving into the top fifth of the country’s earners, compared to a 5 percent chance if they don’t pursue a higher education. African American students in particular have fallen behind their Asian and white peers in attaining college degrees over the past half-century. The study found that family background still plays a significant role in determining income levels. Students from families in the top fifth of the income bracket have a 54 percent chance of staying at the top if they get a college degree and a 23 percent chance if they don’t.

Roundup: Week of February 11 - February 15

Ed Policy — Fri, 15 Feb 2008 00:00:00 -0500

Michigan Non-Profit Lender Pulling Out of Private-Loan Market

Lawsuit takes aim at study-abroad "home – fees"

More Students Pass AP Exams, but Achievement Gaps are Widening

Michigan Non-Profit Lender Pulling Out of Private-Loan Market

Because of concerns about available capital, the Michigan Higher Education Student Loan Authority announced this week that it would temporarily stop issuing private student loans. Citing, "current and unprecedented capital-markets disruption," the non-profit lender said in a statement on its Web site that it would stop disbursing funds for its private Michigan Alternative Student Loan (or MI-Loan) program, which is used at more than 100 Michigan colleges. The announcement came a day after reports emerged that other companies were having trouble auctioning off their existing private student loans as asset-backed securities to obtain financing to make new loans. Some loan industry officials and their allies in Congress have seized upon the credit turmoil to suggest that Congress went too far last year when it cut taxpayer subsidies to lenders that participate in the Federal Family Education Loan (FFEL) program. In fact, the problems have been almost entirely in the private student loan marketplace, and federal Stafford loans remain universally available to students.

Lawsuit takes aim at study-abroad "home – fees"

While study abroad programs have drawn attention in recent months for alleged conflicts of interest, one parent of a former student is charging that an increasingly common fee structure is "unlawful and deceptive. " James Brady, the father of a recent Wheaton College graduate filed a lawsuit last Friday against his daughter’s alma mater. In the suit, Brady challenges the Massachusetts school’s use of a "home-fee" tuition policy — in which it charges the full price of a semester at Wheaton even if the student is attending a cheaper Wheaton-sponsored study abroad program. Brady claims that this practice resulted in his daughter paying an extra $4,439 to Wheaton above the $17,000 price tag of her study-abroad program in South Africa. The use of blanket "home-fee" policies has proliferated over the past few years, as schools use the higher payments at least in part to help provide low-income students with institutional financial aid so they aren't closed off from participating in these programs.

More Students Pass AP Exams, but Achievement Gaps are Widening

More students are passing Advanced Placement exams, but participation and achievement gaps still persist between white and minority students, according to data released this week by the College Board. The number of students passing at least one AP test increased from 11.7 percent of all high school graduates in 2002 to more than 15 percent for the high school class of 2007. At the same time, minority students are signing up for the courses at a rate slower than their white peers. Black students represent about 14 percent of the high school population, yet comprised only 7.4 of those enrolled in AP courses. Hispanic students were better represented, making up 14 percent of AP enrollees versus 14.6 percent of all high school students. However, their participation in courses other than AP Spanish was just 7.5 percent. In terms of achievement, only about 3 percent of the students who received a passing score of 3 or higher on at least one exam were black. Comparatively, about 66 percent of those students were white.

Subprime Mess Reaches Higher Ed

Stephen Burd — Thu, 31 Jan 2008 00:00:00 -0500

Policymakers and journalists, don't be fooled by the Career College Association's spin. Sallie Mae's decision last week to stop engaging in subprime student lending at some of the most scandal-ridden chains of for-profit colleges is good news for low-income and working class students, not bad.

For years, Sallie Mae and some other lenders have "partnered" with giant publicly-traded, for-profit higher education companies to provide high-cost private student loans, with interest rates and fees of more than 20 percent, to low income and minority students who normally wouldn't qualify for them because of their subprime credit scores. Serious questions have been raised about whether some of these companies such as Career Education Corporation and Corinthian Colleges -- which have both come under scrutiny from federal and state regulators and have faced numerous class action lawsuits by former employees, shareholders, and students over allegations that their schools have engaged in aggressive and misleading admissions tactics -- have duped disadvantaged students into taking on private loan debt without making them aware of their cheaper loan options first.

Just how risky are these loans? According to a leaked Wall Street equity research firm analysis of the for-profit sector, Sallie Mae requires some for-profit higher education companies to take on some of the risk of these loans defaulting because of "high levels of uncollectibility." For example, Career Education has had a "recourse loan" agreement with Sallie Mae that requires the company to pay the lender a fee worth 25 percent of the subprime loans funded at its schools to cover expected losses on the debt. Corinthian's recourse agreement "has historically ranged from 20% to 40%" of the value of the recourse loans funded, the Wall Street equity research firm analysis states. Meanwhile, Senate investigators recently reported that the subprime loans Sallie Mae offered to one such school had an expected default rate of 70 percent.

Why have Sallie Mae and some other loan providers been willing to make these types of loans if they are so risky? These loan companies appear to have viewed these loans as "loss leaders," meaning that the lenders have been willing to risk having a large number of private loans go into default in exchange for becoming the exclusive provider of federal and private loans for the tens of thousands of financially-needy students these huge chains serve. Because federal law makes it virtually impossible for borrowers to discharge private student loans in bankruptcy, subprime borrowers remain on the hook for these loans, whether they have the means to repay them or not.

So how much subprime borrowing has been occuring at these schools? Given the data available, it's difficult to say, but it appears to be substantial. Corinthian Colleges revealed last week that private loans accounted for 13 percent of its U.S. revenue last year, and that 75 percent of these loans went to borrowers with subprime credit scores. Career Education Corp. did not provide comparable data. However, we know from the leaked Wall Street equity research firm analysis that private loans made up 22 percent of that company's revenue stream last year. And In its announcement last week of Sallie Mae's decision to stop providing subprime loans to its campuses, Career Education Corporation estimated that recourse loans to new students accounted for up to $60 million of that revenue.

These numbers are alarming when considering the spotty record with which these relatively high-priced schools graduate students. For example, at American Intercontinental University at Los Angeles, which is one of Career Education Corporation's flagship campuses, only 20 percent of students who entered the school in 2000 graduated within six years, according to data collected by the U.S. Department of Education. Low-income and working class students who are at a high risk of dropping out should never have been stuck with loans with such usurious terms.

Sallie Mae officials are finally beginning to recognize the error of their ways. "Sallie Mae has lent too much money to students who have gone to schools without very good graduation rates," Al Lord, the company's Chief Executive Officer, recently told investors.

The loan giant, however, did not alter its practices, because it had a crisis of conscience. It did so out of economic necessity as the company is spending hundreds of millions of dollars to cover losses on bad loans it should never have made. Sallie Mae and the for-profit higher education companies are now paying the price for their predatory practices. But it is the students who were harmed by these practices who will suffer the most.

Hopefully, when the House of Representatives turns to consideration of the Higher Education Act reauthorization in the next week or so, Congressional leaders will recognize who the real victims are and take at least one very important step to ease their burden.

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.

Pell Grants Cut

Ed Policy — Tue, 18 Dec 2007 00:00:00 -0500

In October and again in November, we warned that Congress might try to cut the Pell Grant program for low-income college students. We argued that after passing a new law in September that rightly whacked excess student loan bank subsidies to increase Pell Grant funding, Congress might later…

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.

Roundup: Week of December 3 - December 7

Ed Policy — Fri, 07 Dec 2007 00:00:00 -0500

Dodd Bill Proposes to Make Private Loans Dischargeable in Bankruptcy

Democratic presidential hopeful Sen. Chris Dodd (D-CT) announced last week that he plans to introduce legislation that would allow private student loan borrowers who have taken on unmanageable…

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.

A Good Year for Pell Grants, A Great Year for Earmarks

Ed Policy — Thu, 29 Nov 2007 00:00:00 -0500

When Congress returns from its recess next week, unfinished fiscal year 2008 education funding legislation will be high on the agenda. Fiscal year 2008 began on October 1 and funding subject to appropriations for the fiscal year has…

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.

Roundup: Week of November 5 - November 9

Ed Policy — Fri, 09 Nov 2007 00:00:00 -0500

More Questionable Spending Uncovered at PHEAA

Gummy brains, brass clocks, and peppermint candies were among the promotional giveaways the Pennsylvania Higher Education Assistance Agency (PHEAA) spent $2.2 million on over a five-year period, the Patriot-News 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.