Department of Education

Guest Post: A Better Solution for Campus-Based Aid

Ed Policy — Wed, 13 Aug 2008 15:18:00 -0400

By Rupert Wilkinson

The Bush administration has repeatedly called for simplifying the federal student aid system by eliminating two of the main "campus-based" aid programs, which provide colleges with federal funds for needy students that they allocate themselves. Under the administration's plan, funds from the Supplemental Educational Opportunity Grant and Perkins Loan programs would be transferred into expanded Pell grants, the government's main source of grant aid for low-income students.

A better solution would be to restructure the campus-based aid programs so that they do a better job of leveraging college support for students who are promising but disadvantaged.

In America's decentralized higher education system, the ultimate responsibility for meeting (or not meeting) student financial need lies with the college itself. Outside an elite band of well-endowed institutions, most four-year colleges do not meet all need -- because they are either unable or unwilling to use their own grant aid to fill the gap between the cost of attendance and the family resources and financial aid (including federal loans and a reasonable amount of College Work-Study employment) that students are able to cobble together. Estimating that gap is tricky, but it is the widest for poor students -- probably well over 20% of what they need.

Expanding the Pell Grant program won't close the gap because unfortunately, each added Pell dollar does not necessarily produce an extra dollar for Pell recipients. Many four-year colleges use Pell grants as budget relief, diverting their own aid to middle- and even upper-income students. In fact, at some less selective private colleges, rich students actually get bigger institutional aid awards (in the form of "merit" aid) than poor ones. Of course, this isn't true at smaller state colleges that don't offer student aid of their own. But a study of state universities by Michael J. Rizzo and Ronald G. Ehrenberg has found that the these institutions tend to cancel out the value of increased Pell grants by raising their prices.

Instead, what are needed are new federal "student-program" grants to colleges aimed at encouraging them to give more of their own money to low-income students, while recognizing that these students need more than financial aid to help them persist. Colleges would be required to spend a certain proportion of the money they receive on financial aid for low-income students. The rest of the money could then be spent on academic back-up and support services for these students. The academic programs should be especially relevant to disadvantaged students but need not be confined to ‘remedial' tutoring. They could include, for example, courses in writing and argument that could benefit other students as well.

Funding for these grants would be allocated to colleges based on two criteria: the number of low-income students enrolled and the institutions' own effort to support them. Allocations, at least for four-year institutions, might be weighted according to the proportion of a college's total budget spent on institutional aid to Pell Grant recipients.

The new grants would not dry up college aid to middle-income students (who are also the main beneficiaries of federal tuition tax credits). In modern market conditions, affecting public as well as private colleges, the incentive to use some aid to buy advantaged, high-scoring students is not easily dislodged. And many colleges, especially under-enrolled private ones, would continue using aid as a form of price discounting to get more students, needy or not. The new grants, however, would create a counterveiling incentive for colleges to seek more economic diversity.

The grants would have something in common with existing state programs such as New Jersey and New York's "opportunity" grants, given to colleges for supporting disadvantaged students with financial aid and academic back-up. The "student-program" grants would also fit in well with the new College Access Challenge Grant program, which provides federal matching grants to states for aid and outreach to "underserved populations." Congress created the program last year as part of the College Cost Reduction and Access Act.

The whole idea of matching grants -- giving money to other players in return for their own contribution -- is an old tradition in America. With the exception of the GI Bill, almost all federal student aid until the 1970s was campus-based and involved matching grants. One problem with federal matching grants is how to ensure that the federal funds bring in new, added money that would not have been contributed anyway. On this and other grounds, the new student-program grants could do a better job than the current SEOG program.

To suggest replacing SEOG with this new grant program is to enter a potential bear pit, reopening past acrimony between defenders of the campus-based aid programs and their critics. But that is true of any proposal to terminate or radically revise a federal student aid program. One reason why federal aid programs have proliferated over the years is that each has acquired its own impassioned constituency with supporters in Congress. That makes it easier to add a new program than axe an old one.

SEOG consists solely of financial aid; there is no subsidy to the college for academic programs (the original Pell grant legislation actually provided for that but it was deleted). The supplemental grants are supposed to go to students with "exceptional financial need" and colleges have to give recipients one dollar for every three that they get from the government. But this contribution can include state student aid and outside scholarships obtained by students from private donors. More importantly, as Higher Ed Watch noted yesterday, the grants are allocated to colleges on historical and biased formulas that tend to give the most aid per student to elite institutions (private and public) that have relatively few low-income students.

The future demographics of higher education -- involving many more lower-income students -- require a new and better targeted campus-based grant program. Not just more money for Pell Grants.

Rupert Wilkinson is the author of Aiding Students, Buying Students: Financial Aid in America (Vanderbilt University Press, 2005), a wide-ranging history of student aid in America, including recommendations for making the programs more equitable. His views are his own and do not necessarily reflect those of the New America Foundation.

Targeting Campus-Based Aid

Stephen Burd — Tue, 12 Aug 2008 18:34:00 -0400

Now that Congress has completed work on legislation to reauthorize the Higher Education Act, momentum is growing among student-aid experts and some policymakers for a fundamental redesign of the federal student aid system. A key question they are asking is whether the federal campus-based student-aid programs are still needed.

The campus-based programs -- College Work-Study, Perkins Loans, and Supplemental Educational Opportunity Grants -- are intended to supplement Pell Grants for low-income students and to provide aid for students who just miss the cutoff for the grants. Unlike Pell Grants, which are awarded directly to students, campus-based aid is distributed to colleges, which add their own dollars to the programs and then give the money to students.

By requiring colleges to provide matching funds, these programs have long played an important role in enticing colleges to spend their own money to help support low- and moderate-income students. The programs, however, are no longer serving the neediest students well. The formula the government uses to distribute the aid overwhelmingly benefits elite private colleges and public flagship universities, even though low-income students predominantly attend community colleges, state colleges, and trade schools.

Of particular concern are the disparities among colleges participating in the SEOG program, which is meant to supplement Pell Grants for the most financially-needy students. Under the program, which received $758 million from Congress this year, colleges are required to award SEOG funds first to Pell Grant recipients who need more money to pay for school and then to other students who are deemed to have "exceptional need." Because they receive a disproportionately small share of funding, many community colleges are forced to ration SEOG funds -- and often run out of money before they are able to provide awards to all their students who are eligible for the maximum Pell Grant. In contrast, wealthier schools sometimes have to return excess SEOG funds to the government because they don't have enough students on their campuses who fit the "exceptional need" designation. [In 2003, a group representing 31 elite private colleges tried to persuade Congress to relax the rules so that they could use the money to provide awards to less needy students.]

The roots of these disparities date back over 40 years. In the campus-based aid programs' first couple of decades, the federal government set aside money for each state. Regional boards reviewed applications submitted by colleges for the funds and made decisions based on the students' financial need as reported by the schools. Over time, federal officials became concerned, however, that wealthier institutions were benefiting disproportionately because they tended to employ savvy aid administrators who were particularly skilled at grant writing.

To address these concerns, Carter administration officials called for a new method of allocating the funds. That plan, dating to the late 1970s, phased out institutional shares, or "base guarantees." The entire pool of money was to be awarded based solely on the financial need of the students attending the colleges

But this new method threatened high-priced private colleges and public flagships that were poised to lose significant sums. So lobbyists for these schools pushed Congress in 1980 to reverse the Carter administration's action and to guarantee that participating institutions would continue to receive the same proportion of aid money they had received since the start of the program.

The results of this law continue to be felt today. Because funds are distributed based largely on the formula set in 1980, a choice group of institutions, many of them wealthy and elite, benefit the most. An astounding two-thirds of funds appropriated each year for SEOG go to colleges that have dominated the programs for decades, leaving little money for the schools that enroll a much larger share of low-income students. This problem has been compounded in recent years, as the program's budget has stagnated.

For these reasons, the SEOG and Perkins Loan programs are attractive targets for those looking to redesign the federal student-aid system to make it more equitable.

Leading the charge are Bush administration officials in charge of the U.S. Department of Education. They have told college leaders that they hope to issue recommendations for overhauling the federal student aid programs before President Bush leaves office. Speaking last month at a Department summit on higher education, Sara Martinez Tucker, the under secretary of education, said that the recommendations would include proposals to eliminate the SEOG and Perkins Loan programs and use the money saved to increase spending on Pell Grants. According to Inside Higher Ed, she estimated that the savings derived from terminating these programs, as well as others, would be enough to raise the maximum Pell Grant, which is currently $4,731, by $370.

Also considering these issues is a group of higher-education researchers and student-aid experts, known as the Rethinking Student Aid Study Group, that has been meeting for about 18 months to develop recommendations for revamping the federal financial aid programs. The group, which was assembled by the College Board, plans to release a report in October outlining its proposals. It's unclear whether these analysts will back the Bush administration's proposal to eliminate the two campus-based aid programs, but it's widely assumed that the group will call for an overhaul of these programs.

At Higher Ed Watch, we certainly believe that the federal student aid programs need to be made more equitable. But we're not sure that the Bush Administration's plan is the best way to go. After all, a $370 increase in the maximum Pell Grant doesn't seem like a big enough bang for the buck.

Tomorrow, guest blogger Rupert Wilkinson, author of Aiding Students, Buying Students: Financial Aid in America, will offer an alternative proposal for revamping the campus-based aid programs that we believe is worthy of consideration. Stay tuned.

Higher Ed Roundup: Week of August 4 - August 8

Ed Policy — Fri, 08 Aug 2008 21:01:00 -0400

IG Faults Dept. of Ed's Management of Grant Programs

Shareholders Suffer Setback in University of Phoenix Lawsuit

Massachusetts Governor Asks Colleges to Help Save Lender

IG Faults Dept. of Ed's Management of Grant Programs

The U.S. Department of Education has not done enough to promote and oversee two relatively new federal grant programs that aim to reward low-income students who take academically-challenging courses, according to the Department's Inspector General. In an audit report released last Friday, the Inspector General said that the agency needs to do a better job of ensuring that colleges that are required to offer Academic Competitiveness Grants (ACG) and National SMART grants are doing so. According to federal law, all colleges that take part in the Pell Grant program are required to participate in the ACG and SMART grant programs, which Congress created in 2006 as part of the Higher Education Reconciliation Act. Some colleges have been reluctant to offer the programs, which they say the Department has made too difficult to administer. The IG report urged the Department to do more to verify claims by non-participating institutions that they are ineligible for the program and to penalize those that are willfully non-compliant. The grant programs, now entering their third year, have suffered from low uptake, as barely half of the grant money available for the 2006-07 school year was actually disbursed.

Shareholders Suffer Setback in University of Phoenix Lawsuit

Shareholders in a lawsuit against the University of Phoenix, the largest for-profit university in the country suffered a major setback this week, when a federal judge in Arizona overturned a $280-million jury verdict against the Apollo Group, the university's parent company. In January, a federal jury found the company guilty of securities fraud for having withheld crucial information from investors. At issue was the failure of the trade school chain to disclose in its Security and Exchange Commission filings and in its conference calls with financial analysts the existence of a U.S. Department of Education review that blasted its student recruiting practices. That report, which found that the university had violated a federal law that bans colleges from compensating admissions officers on the basis of enrollments, became public only after the university reluctantly agreed to a $9.8-million settlement with the Department in which it denied any wrongdoing. In his ruling overturning the jury's action, Judge James Teilborg of the U.S. District Court of Arizona said that while Apollo Group "misled the market in many ways," evidence presented at the trial "was insufficient to support the jury's finding" that investors suffered significant harm as a result of the company's actions.

Massachusetts Governor Asks Colleges to Help Save Lender

Just in time for classes to start, Massachusetts governor Deval Patrick called upon the state's largest universities and state pensions program to help rescue the state's nonprofit lender, the Massachusetts Education Finance Authority (MEFA), after the loan provider stopped issuing federally backed loans on July 1. Gov. Patrick's proposal asks the state pensions fund, Harvard University, Boston University, the University of Massachusetts system, MIT, and other schools to invest in the upcoming $425 million bond sale by MEFA, which issued $110 million in federally backed student loans last year. Massachusetts state legislators have been pressuring Patrick to loosen up funds for MEFA after more than 40,000 students were left scrambling to find other lenders after the loan provider decided to stop lending.

National associations representing colleges and universities expressed reservations about establishing financial relationships between colleges and lenders in the wake of the high-profile 2007 investigations by New York State Attorney General Andrew Cuomo and ensuing student loan scandal. "It would be risky for a college to invest in a student-loan organization given the charges of conflict of interest that would surely follow," Terry Hartle, senior vice president for government and public affairs at the American Council on Education, told The Chronicle of Higher Education. A representative for Harvard University and the pensions fund said that they will consider the proposal.

Contract Out Student Loans

Jason Delisle — Thu, 07 Aug 2008 15:20:00 -0400

Recent developments in the financial markets have brought to light a major problem with the Federal Family Education Loan (FFEL) program, the main delivery system for federal student loans. Though the program relies on private lenders to make loans to students on the government's behalf, it does not include any commitment from lenders that they will follow through and make all (or any) of the loans to which students are entitled.

Congress, schools, and students are naturally concerned when private and non-profit lenders say they won't make loans anymore, due to credit market disruptions, and, to some extent, reductions in lender subsidies enacted over the last several years by both Republican and Democratic Congresses. Similarly, there is unease over lenders cherry picking colleges with profitable loan volume and bypassing others, leaving students to find another FFEL lender.

Oh Please Make Loans

In April, Congress passed the Ensuring Continued Access to Student Loans Act to prevent any disruptions in the availability of FFEL loans for the 2008-2009 school year. The measure does policy somersaults to provide more subsidies to lenders so they can make loans using funds from federal coffers (never mind the fact that lenders vehemently oppose the Treasury-financed Direct Loan program). Despite its efforts, Congress now can only hope these new subsidies will be sufficient to get lenders to lend, but it has no assurances.

Federal lawmakers are considering taking additional steps to prevent lenders from redlining schools. Sen. Christopher Dodd (D-Conn.) has introduced legislation (and the National Association of Student Financial Aid Administrators has endorsed it) that would bar lenders from refusing to provide federal loans to students based on the type of institution they attend.

Negotiate a Contract (and a Subsidy) To Lend

Unfortunately, these efforts are treatments for symptoms, but do not address the root problems in the FFEL program's design. As currently constructed, the FFEL program never secures a contract from lenders that commits them to make loans for an upcoming school year. Loan companies, however, would likely resist efforts for a lending requirement without some added incentive. The solution? Lenders should be allowed to set their own subsidy rate in exchange for signing a contract. This is how the federal government administers a number of programs. It establishes the benefits and services that a program will provide, and then asks private companies to submit bids on what they would charge to operate the program. The winning bidder (or bidders) then signs a contract to provide the service.

Under such an arrangement for FFEL, Congress would no longer have to worry whether a subsidy rate it made up years ago will be sufficient to encourage lenders to make loans in future school years. Likewise, the government would reduce its risk of providing overly high subsidy payments that encourage more lender participation than is necessary to get loans to all students. And, as an added benefit, the contract would commit lenders to make loans to students at all schools. In short, lenders would make subsidy bids high enough to cover their costs and earn a profit, while competition between lenders to win the contract would guard against excessive federal payments to loan companies.

PLUS Loan Auction Uses Contracts

The PLUS loan auction program set for the 2009-2010 academic year is modeled on such an approach. Under the auction, the two lenders that submit the lowest subsidy rate bids to the Department of Education will enter into a contractual agreement with the federal government to make all PLUS loans within a given state. [More details on the auction are available here on our Federal Education Budget Project website.]

Certainly, the current form of the PLUS auction isn't perfect. It will restrict borrower choice to the two PLUS lenders that win the contract. This is indeed one of the tradeoffs for having a competitively set subsidy rate and a contractual obligation from lenders to make loans. Additionally, the cap on subsidy bids (currently set at 1.79 percentage points) probably needs to be modified to allow for robust bidding in a variety of market and financial conditions. Nevertheless, the auction framework does ensure more appropriate subsidy rates for lenders, and by establishing a contract between the lender and the government, the auction should lessen the chance that students and schools face disruptions in the availability of FFEL loans in the future.

Our Biggest Disappointments (With Final Higher Ed Bill)

Ed Policy — Thu, 31 Jul 2008 21:23:00 -0400

By Ben Miller, Stephen Burd, and Sara Mead

Yesterday, Higher Ed Watch highlighted our favorite provisions in the final version of legislation to reauthorize the Higher Education Act. With Congress poised to approve the bill today and send it to President Bush for his signature, we take a critical look at the parts of the legislation that fail to close loopholes, open new areas for potential exploitation, and weaken existing accountability frameworks.

Easing Restrictions on Trade Schools

For-profit colleges' lobbyists are exuberant about the reauthorization legislation. And who can blame them? Congress has gutted a key consumer protection provision that the career college lobbyists have been trying to kill since it was first introduced in 1992. The provision, which is known as the "90-10 rule," was intended to crack down on unscrupulous trade schools. It requires proprietary institutions to receive at least 10 percent of their revenue from sources other than federal student aid in order to participate in the aid programs. Congress' legislation would keep the requirement in place, but takes all the teeth out of it.

The bill substantially increases the sources of funds that proprietary institutions can count toward the 10 percent threshold, including institutional need- and merit-based scholarships and loans the schools make to their students. In addition, schools that violate the rule would no longer become automatically ineligible to participate in the federal student aid programs. Instead, they would now have to exceed the threshold for two consecutive years before being penalized. (The bill gives the Education Secretary the option of removing such institutions from the aid programs but does not actually require it.) The legislation would also temporarily exempt from the 90-10 calculations recent federal loan limit increases Congress approved as part of the Ensuring Continued Access to Student Loans Act. This means some federal student aid will not count toward the 10 percent cap.

We find it extremely troubling that lawmakers would consider weakening the government's limited tools for protecting students and the integrity of the aid programs at a time when trade schools recruiting practices are coming under so much scrutiny from federal and state regulators.

Taking the Truth Out of Tuition Calculations

The House of Representatives' version of the higher education reauthorization contained a bipartisan provision called "Truth in Tuition," which the New America Foundation has long favored. Designed to provide parents and students with a better idea of future charges, this provision would have required colleges to provide all incoming freshmen with a four-year schedule of expected tuition and fees. While schools could raise tuition from one year to the next, the schedule would help students prepare for the possibility of large cost hikes in future years. Unfortunately, instead of requiring colleges to help their students plan ahead, the bill requires the Department of Education to develop a multi-year tuition calculator, which bases its estimates solely on colleges' past increases. In essence, the calculator takes the responsibility away from schools to provide earnest and thoughtful estimates of future fees, and replaces it with a tool of questionable predictive value. As a result, most students will likely remain in the dark about what lies ahead.

Keeping a Veil on Institutional Aid Policies

Lobbyists for traditional colleges have fought vigorously Congressional efforts to shed more light on institutional financial aid practices, and it appears they have been victorious. The final bill requires colleges to report the average amount of grant aid they provide their students out of their own coffers. It doesn't, however, require them to disaggregate the data by family income of student recipients, as the original House version of the bill did. While the legislation requires colleges to disclose the average net price (the sticker price minus all financial aid a student receives) charged to students, broken down by income, it directs colleges to include only students who have received federal financial aid in its calculations. As a result, colleges will not have to reveal the extent to which they provide non-need-based "merit" aid to students from affluent families.

The government, as we have previously said, has a right and responsibility to know whether colleges are helping or hindering public policy goals. Specifically, are they using federal student aid dollars to supplement their own institutional financial aid to insure that low-income students don't have unmet financial need? Or are they using federal funds to replace institutional aid dollars they would have spent otherwise on needy students, and using that money to attract better, and often wealthier, students? Unfortunately, this bill won't provide policymakers with those answers.

Growing Guarantor Roles

Student loan guaranty agencies are no longer needed to serve their original purposes, so they are increasingly branching out into new roles to justify their existence. As we wrote recently, advocates for guarantors convinced lawmakers in 2006 to add language to a budget reconciliation bill that explicitly required the agencies to promote college access efforts. Now, in the reauthorization legislation, Congress goes a step further and involves guarantors in colleges' efforts to promote better financial literacy. Under the bill, guaranty agencies would be required to develop materials for parents and students on "budgeting and financial management, including debt management and other aspects of financial literacy, such as the cost of using high interest loans to pay for postsecondary education." These are certainly worthy goals, but do we really need guaranty agencies to do them? The agencies would be directed not only to engage in these activities, but they would also be allowed to count these efforts towards the default reduction activities they are required to carry out. Moreover, the legislation doesn't include any mechanisms for measuring the effectiveness of the guarantors' efforts.

We are also perplexed by a requirement in the legislation that guarantors be included in the pilot PLUS loan auction. Under the bill, winning lenders will receive a 99 percent guarantee against default by guaranty agencies -- rather than from the Education Secretary, as the initial legislation mandated. The federal government is already responsible for the cost of defaults anyway, so why do we need to insert a middleman?

Leaving States to Define "Low-Performing" Teacher Prep

While the reauthorization bill takes some positive steps to improve accountability for teacher preparation programs, it fails to accurately target "low-performing" prep programs. Like the 1998 Higher Education Amendments, the legislation does require states to identify "low-performing" teacher prep programs, which can then be subject to penalties. Unfortunately, this measure, like the 1998 law, leaves it solely to the states to define the criteria by which they will judge programs to be "low-performing." As we've seen over the past decade, most states have set laughably low standards that hold few or no programs accountable. By not mandating any parameters for how states define and judge teacher prep programs, the legislation continues to let lousy programs off the hook.

Ensuring that Default Rates Remain Toothless

The version of the reauthorization legislation that was approved by a key House committee last November contained a promising provision to increase the measurement window for student loan cohort default rates -- a metric used to hold schools accountable if too many of their students don't repay their loans. Unfortunately, by the time it got to the final bill, that provision was substantially weakened. Like the committee's version, the final bill would include in the cohort default rate all students who don't make payments on their loans within three years of leaving college, rather than two, as is in current law. That's a good change. The bill, however, would also increase the default rate threshold at which sanctions kick in. Under the new law, a school would be penalized only if 30 percent of its former students defaulted on their loans within three years, instead of 25 percent, as is currently the case. While the longer window will more accurately capture defaults, the higher threshold will make it easier for schools to avoid sanction. The legislation further weakens the measurement by allowing schools to get out of sanctions due to "mitigating circumstances," such as enrolling a substantial number of low-income students. In addition, the bill increases the minimum percentage of student borrowers a school must have to be subject to penalties. The net result of these actions is that Congress has made an accountability measure that was already pretty toothless even weaker.

Next week, Higher Ed Watch will take a closer look at other parts of the bill, including our views on provisions attempting to remove "pay for play" conflicts of interest from the student loan programs. Stay tuned.

A Few of Our Favorite Things (From Final Higher Ed Bill)

Ed Policy — Wed, 30 Jul 2008 17:27:00 -0400

By Ben Miller, Stephen Burd, and Sara Mead

A decade after its last reauthorization and five years since an updated version was due, a new version of the Higher Education Act is finally ready for Congressional passage. With both chambers set to vote on the bill this week, Higher Ed Watch will take a closer look at various parts of the legislation over the next two days. Today, we praise lawmakers for doing the following:

Putting Teeth Into Loan Auctions

Last year, Congress created a groundbreaking pilot auction program that uses market forces to set student loan subsidy rates for lenders making federal PLUS loans to parents and graduate students. With about a year left to enact the pilot project, lawmakers have added penalties for lenders who win an auction and then back out. The bill allows the Education Secretary to punish lenders that violate the terms of the auction agreement by one of the following methods: fining the lender for any additional costs needed to find and subsidize a replacement PLUS loan lender; banning the offending lender from future auctions; or, kicking them out of the Federal Family Education Loan (FFEL) program entirely. We particularly like the fact that the Secretary can retrieve the fine by reducing subsidies paid to the lenders on other FFEL loans or having another federal agency garnish other subsidies the lender might receive. While we have some complaints about the language (it doesn't, for example, address the PLUS loan auction bidding cap, which needs to be more flexible to encourage robust bidding in a range of financial market conditions), overall, we believe that this provision is an important step forward in getting this pilot program off the ground.

Adding Key Protections for Private Loan Borrowers

The reauthorization legislation takes a stab at addressing concerns that students borrowing high-cost private loans frequently don’t understand the terms and conditions of these loans before taking them out. Under the bill, lenders would be required to provide clearer information about the interest rates and fees they charge and to inform potential applicants about the availability of cheaper, safer federal loans. Borrowers would have up to 30 days, after a private loan offer is made, to decide whether or not they want to take out the loan, and another three days, after the loan is consummated, to cancel it. In addition, the measure would ban lenders from branding private loan products with a college’s name or logo in a way that implies the school has endorsed the loan. The measure would also bar lenders from penalizing borrowers who pay off their private loans early. These are all good provisions. The bill, however, does not goes far enough in addressing the fact that large numbers of students take out private loans without exhausting their federal student loan eligibility first. We also are extremely disappointed that the measure doesn’t do anything to help financially-distressed borrowers carrying unmanageable levels of private loan debt. Still, this legislation makes a good-faith effort to confront this problem. And that’s a start.

Banning Opportunity Loan Deals

The legislation would forbid colleges from entering into sweetheart deals with lenders in which loan companies agree to waive or loosen credit requirements on private student loans in exchange for becoming the school's exclusive federal student loan provider. These types of harmful "opportunity loan" arrangements give lenders a major incentive to provide subprime private loans to high-risk borrowers. The damage has been particularly grave at some of the most scandal-ridden chains of for-profit colleges, where disadvantaged students with poor credit ratings have been stuck with loans with interest rates and fees exceeding 20 percent. Now many of these borrowers are in default and wishing they had never pursued a post-secondary education in the first place. While this legislation won't do anything for those borrowers, it will hopefully prevent students from being victimized by such predatory lending practices in the future.

Maintaining a Watchful Eye on College Costs

The legislation has two tactics for targeting the rising cost of college: penalizing states that don't live up to their end of the bargain and shaming colleges that raise their prices too high. The bill holds states accountable through a "maintenance of effort" (MOE) provision, which withholds funds from states that fail to maintain their levels of spending on higher education. States in violation of MOE would be ineligible for College Access Challenge Grants, a new $66 million program included in the College Cost Reduction and Access Act that is only funded through fiscal year 2009. With falling state support a major driver of massive tuition hikes and questionable revenue deals, the MOE provision, albeit an extremely weak one, should provide at least a small incentive for states to avoid slashing higher education funding.

The bill also tackles college costs by requiring the Education Department to publish an annual list of the top 5 percent of colleges with the highest tuition and fees and net price, along with those with the largest percentage change in tuition and fees and net price over the preceding three years. Lists would be disaggregated by type of institution, though not by region. Colleges with the highest percentage increases would have to provide the Education Secretary with a report explaining factors behind those price increases, and steps they plan to take to limit them in the future . These lists would provide students with an idea of which schools are likely to hike tuition, but also make colleges think twice before jacking up their prices. The provision is more thoughtful than previous efforts because it would not penalize state colleges that don't have any control over setting their tuition rates.

Curbing Textbook Prices

At an average annual cost of $900, textbooks are a major expense for students who are already struggling to keep up with ever-rising college prices. This legislation aims to drive down textbook prices by helping colleges and students make better-informed decisions. The bill would require publishers to disclose any major revisions in new editions of textbooks to individuals making purchasing decisions. This should help colleges decide whether it makes sense to order the latest editions, which are more expensive and less likely to be available used. Publishers would also be required to sell supplementary materials and textbooks separately. Separating out bundled materials should decrease student costs by allowing individuals to purchase a book without having to also pay for expensive companion items. The bill also requires colleges to tell students the name and cost of textbooks used in a given course by posting such information on online course schedules. Providing this information before classes start gives students time to look for copies of the books online, where they can often be purchased for less. We are hopeful that these changes will bring some relief to students.

Making Teacher Preparation Programs More Accountable

When Congress passed the Higher Education Amendments Act of 1998, it took unprecedented steps to improve the quality of teacher preparation programs operated by institutions of higher education. This included providing funding for teacher quality enhancement and requiring teacher preparation programs to report annual pass rates for their students on state teacher licensure exams. Unfortunately, the law's accountability provisions, as implemented, contain an enormous loophole that allows many institutions of higher education to report pass rates of 100 percent by only counting students who have already passed the tests as "program completers." The proposed legislation takes steps to close that loophole, by requiring teacher preparation programs to report on "the percentage of students who have completed 100 percent of the nonclinical coursework and taken the assessment who passed such assessment," and "the percentage of all students who passed such assessment." The legislation would also require teacher preparation programs to report on the average scale score their students obtain on teacher licensure exams. Because teacher licensure exams are not especially rigorous, these are modest steps to improve accountability for teacher preparation programs, but they are steps in the right direction. As the only federal policy that seeks to measure the educational outcomes of higher education programs, it provides a potential foot in the door for broader accountability in the future.

Preventing Rip-Offs by the Department of Education

The legislation would require the U.S. Department of Justice to review any settlements made by the Education Secretary that exceed $1 million. This provision, which was first introduced as an amendment to the House of Representatives version of the legislation by Rep. Tom Petri (R-Wisc.), is meant to help prevent the kind of abuse of taxpayer funds that occurred last year when Education Secretary Margaret Spellings allowed the loan company Nelnet to keep $278 million in subsidy payments that it had illegally billed the agency as part of the 9.5 percent student loan scam. Such a provision would also have been helpful back in 2004 when the Education Department gave the University of Phoenix a slap on the wrist, even though it found the for-profit higher education giant guilty of violating a law prohibiting colleges from giving "any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments." We applaud Congress for trying to inject some accountability back into the Education Department.

So what did Congress get wrong with the bill? Tune in tomorrow to find out.

Undermining a New Effort to Promote Public Service

Stephen Burd — Wed, 23 Jul 2008 14:43:00 -0400

Is the U.S. Department of Education deliberately trying to undermine a new program created by Congress to encourage students to pursue careers in the public service?

That question came to mind as we reviewed the Education Department's proposed regulations for enacting the Public Service Loan Forgiveness program that Congress created in September as part of the College Cost Reduction and Access Act (CCRA).

Under the program, the federal government will forgive the remaining debt of Direct Student Loan borrowers if they make 120 payments on their loans while holding a low-paying, full-time public service-oriented job. Borrowers with loans through the competing Federal Family Education Loan program can take advantage of this benefit by consolidating their debt into Direct Lending.

The program is a reaction to reports that student loan borrowers are increasingly shying away from pursuing public-service careers, such as teaching and social work, and is designed to provide incentives to get college graduates to enter these fields and reward them for their service.

But don't take our word for it. Listen to what Rep. John Sarbanes (D-Md.), one of the authors of that provision, had to say about the program last fall. "With daunting student loan debt, there is not enough incentive for new graduates to choose a life of public service," he said in a news release touting the CCRA's passage. "This will make it easier for many graduates to pursue a career of service."

In the same news release, Rep. George Miller, the California Democrat who was the CCRA's primary author in the House of Representatives, echoed Sarbanes' remarks. "This bill rightfully encourages and rewards the vital public service members of our workplace," he stated.

Sounds pretty straightforward, right? So imagine our surprise when we learned that the Department doesn't intend to let people know whether they qualify for the loan forgiveness until after they have made the 120 required payments. In other words, borrowers working at low-paying jobs will have to wait at least 10 years to find out whether or not they are eligible for the new benefit. What kind of incentive is that? It's hard to imagine people rushing to change their career plans as a result of the law without having some guarantee that their remaining debt will be forgiven.

Our colleagues at the Project on Student Debt have expressed dismay over the Department's plan and offered a more promising alternative. In a letter to the Department, project officials recommended that it develop "a system that lets borrowers confirm and track their eligibility for this form of loan forgiveness." [Disclosure: The Pew Charitable Trusts finances Higher Ed Watch through a subgrant provided by the Institute for College Access and Success, which runs the Project on Student Debt.]

"Giving borrowers clear, 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," project officials wrote.

The Education Department doesn't appear to be interested in adopting such an approach. In the introduction to its proposed regulations, the Department wrote that "tracking and reviewing documents on an annual basis for potentially thousands of borrowers, many of whom might not remain in public service employment or who may never meet the eligibility requirements for final loan forgiveness, would be a complex and costly administrative process."

We don't have any reason to question the sincerity of the Department's stance. Keeping track of a borrower's career choice over a significant period of time would probably be a challenging undertaking for the agency. But does that added burden negate the Department's responsibility to carry out the will of Congress and abide by both the letter and spirit of the law?

While some will assume that this is a deliberate attempt by the Bush administration to sabotage a program that could be a boon to Direct Lending, we are not convinced. More likely it's a classic case of bureaucratic inertia -- resisting new solutions to longstanding and seemingly intractable problems, such as the growing indebtedness of students, because they require significant administrative changes.

Nevertheless, if the Department refuses to budge from its current position, it will be setting up this promising new program up for failure. And that would be unfortunate because we certainly could use more people looking out for the public good.

Higher Ed Roundup: Week of July 7 - July 11

Ed Policy — Fri, 11 Jul 2008 20:53:00 -0400

California Halts State Oversight of For-Profit Colleges

Ties Between Sallie Mae and Guarantee Agency Come Under Renewed Scrutiny

Student Loans Still a Problem, Says Outgoing Ed. Dept. IG

California Halts State Oversight of For-Profit Colleges

State oversight over for-profit trade schools in California came to a grinding halt on July 1, when a temporary law regulating proprietary institutions in the state expired. In a last-minute attempt to thwart the deadline, Democratic legislators tried unsuccessfully to pass an emergency measure creating a new regulatory system for monitoring the schools. Republicans, siding with the for-profit higher education industry, voted against the legislation, arguing that it would impose overly-burdensome requirements on their institutions. Democrats and consumer groups denied that characterization, saying that the measure had been significantly watered down to address the schools’ complaints. As a result of the impasse, the state will have no oversight authority over the sector until at least January, when the legislature is expected to bring the bill up for a vote again. In addition, schools are no longer required to contribute to a state tuition recovery fund that reimburses students who attend schools that unexpectedly shut down, leaving little money for those left in the lurch.

Ties Between Sallie Mae and Guarantee Agency Come Under Renewed Scrutiny

A controversial 2004 decision by the U.S. Department of Education to bless a lucrative arrangement that exists between the student-loan giant Sallie Mae and the USA Funds, the country's largest guarantee agency, has come under renewed scrutiny after a copy of a contract between the two companies was leaked on the Internet late last month. A former top Department official, who reviewed the contract after it was leaked, said that the arrangement clearly violates the law, which forbids for-profit lenders from owning nonprofit entities such as guarantee agencies. "The contract is saying that USA Funds is the guarantor in name only," Larry Oxendine, who was the Department's director of student aid policy and analysis until he retired last summer, told The Chronicle of Higher Education. "Sallie Mae does everything and makes all the decisions on behalf of USA Funds." Responding to the criticism, Department officials reaffirmed the 2004 ruling -- which was made by Matteo Fontana, a former Sallie Mae official who was in charge of overseeing the Federal Family Education Loan (FFEL) program at the time -- but said it was interested in learning more about potential conflicts of interest that may exist between guarantors and lenders. In that spirit, the Department sent a letter to the leaders of the 35 guarantee agencies, requesting detailed information about any contractural arrangements they may have with loan providers.

Student Loans Still a Problem, Says Outgoing Ed. Dept. IG

The Federal Family Education Loan (FFEL) program remains extremely vulnerable to waste, fraud, and abuse, says John Higgins Jr., the Department of Education's outgoing Inspector General. In a recent interview with The Chronicle of Higher Education, Higgins, who is retiring this month after serving in the government for 40 years, said that because the FFEL program is so complex, the Department often turns to people inside the student loan industry to regulate it. Putting lenders in charge of overseeing the loan program almost inevitably leads to potential conflicts of interest, he said. Under Higgins' watch, the IG's office has often criticized the Department's lax oversight over the lenders and guarantee agencies that participate in FFEL. He also found himself at odds with the Department's political leaders over his recommendations to require lenders to return hundreds of millions of dollars they received in improper 9.5 percent subsidy payments. An investigation his office conducted into the student loan company Nelnet's efforts to overbill the U.S. Treasury won the Alexander Hamilton Award, a prize the government gives to inspector generals for "outstanding achievements in improving the integrity, efficiency, and effectiveness of Executive Branch agency operations."

Attention GAO: Aid Programs are Still at Risk

Stephen Burd — Thu, 10 Jul 2008 18:02:00 -0400

If the events of the last two years have taught us anything, it's that the U.S. Department of Education's oversight of the Federal Family Education Loan (FFEL) program has been unconscionably lax. The recent revelations that the Department had inadvertently allowed convicted felons to become eligible FFEL lenders is just the latest example of the agency's negligence.

Why then, despite all evidence to the contrary, does the Government Accountability Office (GAO) no longer consider the FFEL program to be at a "High Risk" for waste, fraud, and abuse?

Every two years the GAO, the investigative arm of Congress, puts together the "High Risk" list, an official compilation of federal programs it considers to be the most vulnerable to exploitation. Started in 1990, the goal of the list is to help set the oversight agenda for each new Congress. For 15 years, the federal student aid programs stood at the top of the list, along with other notorious trouble areas such as the Defense Department's contracting practices, and the IRS's efforts to police tax law violations.

Among the government's financial-aid programs, the GAO expressed the most serious reservations about the FFEL program. For instance, a January 1999 update to the report noted that the guaranteed loan program was "particularly vulnerable because of its size, the large number of participants, and the federal guarantee under which the federal government bears most of the risk when students default on their loans."

From its start, the Bush administration made getting the student-aid programs off the list among the Department's highest priorities. The Department's political appointees knew they could score easy points by focusing on this area -- as the Clinton administration had taken a lot of political heat from Republican lawmakers over allegations that it had mismanaged the student aid programs and left the agency's finances in shambles.

From 2001 to 2005, Education secretary Rod Paige and other top Department officials applied constant pressure on the GAO to reconsider the designation. At one point, when the prodding became particularly intense, the comptroller general (who heads the GAO) gently admonished Paige -- reminding him that "it is not our policy to address high-risk designations 'out of cycle.'" Providing "an out of cycle assessment for the Department of Education," he explained, "would set a precedent that would result in other agencies asking for such interim determinations." In other words, if we do it for you, we'll have to do it for everybody.

What all the pressure did succeed in doing was to get the GAO to significantly narrow the criteria it used to judge the Department's management of the programs. As long as the Department met certain quantifiable goals -- such as obtaining "clean audits" on its financial records and making sure the student loan "cohort" default rate continues to drop -- it would eventually get its way.

In 2005, the GAO relented and removed the aid programs from the list. In retrospect, the decision was a big mistake. Just look at everything we've learned about the Department's management of the federal student aid programs in recent years:

The Department looked the other way as lenders systematically overcharged the federal government hundreds of millions of dollars in improper 9.5 percent loan subsidy payments. Margaret Spellings, the education secretary, acknowledged that the Department shared "some responsibility" for allowing lenders to bilk taxpayers, but has steadfastly refused to calculate the cost of or demand reimbursement for the overpayments. The Washington Post, however, conducted its own analysis, using subsidy payment data it obtained from the Department, and calculated the government's total losses to be about $600 million.

The Department turned a blind eye while student loan providers routinely violated a federal law forbidding lenders from providing "illegal inducements" to colleges and financial aid administrators in exchange for getting the schools to steer borrowers their way. For years, the Department's top political appointees, many of whom came from the loan industry, ignored concerns about these "pay for play" practices, even from the agency's own Inspector General and lenders who complained about their competitors' activities. Last July, the GAO blasted the Department for its complete failure to oversee the activities of lenders, noting that the agency had "not developed any oversight tools" to help it determine whether lenders offered improper inducements to colleges and students to win student-loan business, and that it failed to heed repeated requests for clearer guidelines on acceptable lender behavior.

Department officials allowed lenders specializing in offering consolidation loans to mine the National Student Loan Data System (NSLDS) to collect personal information about borrowers for marketing purposes. While civil service employees at the Department had loudly complained about these practices, the agency's leaders didn't do anything about it until Higher Ed Watch broke the story and the national news media picked up on our coverage.

The Department has done little to look into widespread allegations that some of the largest publicly-traded for-profit higher education companies have knowingly violated the federal student aid law prohibiting colleges from giving "any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments." In fact, it remains unclear whether the Department ever even punished the agency official who leaked to the University of Phoenix the entire legal strategy of a pair of whistleblowers who had sued the school for violating the incentive compensation ban.

The GAO will release the latest version of its High Risk report early next year. With a new administration taking over, we believe it's absolutely vital for the agency to use this opportunity to admit its mistake and put the student-aid programs back on the list. The next president needs to understand how important it is to protect the integrity of these programs -- for the sake of the students who depend on them, and the taxpayers who finance them.

Where in the World is Matteo Fontana?

Ed Policy — Tue, 08 Jul 2008 21:25:00 -0400

We hope you all enjoyed your Fourth of July vacation. While it’s nice to have the occasional hard-earned day off, we know someone else who has been on a very long paid break.

It has been 459 days since Matteo Fontana, the then-general manager of Financial Partners Division of the U.S. Department of Education’s Federal Student Aid office, was placed on administrative leave. The Department took this action after Higher Ed Watch revealed that he held at least $100,000 worth of insider stock in the student-loan company Student Loan Xpress. At the time, Education Secretary Margaret Spellings promised that she was taking the matter “very seriously.” But as far as we can tell, the Department hasn’t done anything beyond giving Fontana his regular paycheck and telling him to disappear.

It is clear that Fontana’s purchase and subsequent sale of the stock represented a substantial conflict of interest -- he was, after all, responsible for overseeing the lenders and guaranty agencies that participate in the Federal Family Education Loan (FFEL) program. In addition, at the time he received the stock he was in charge of the National Student Loan Data System (NSLDS), a national database that keeps track of the student aid awards of tens of millions of students. Last year, the Department was forced to shut it down temporarily because, as Higher Ed Watch also revealed, student-loan companies had been mining it to collect personal information about borrowers for marketing purposes.

The stock holding wasn’t Fontana’s only controversial action -- he also overruled the Department’s Inspector General (IG), over the question of whether a lucrative arrangement that exists between Sallie Mae and USA Funds, the country's largest guarantee agency, violated the law and needed to be severed. Fontana’s decision in December 2004 to bless the arrangement essentially cleared the way for Sallie Mae to achieve its long-sought goal of becoming a fully privatized corporation.

But there are still many unanswered questions surrounding Fontana.

First, how much did the Department know about Fontana’s stock holdings? Fontana appears to have disclosed that he owned stock in the company, but was he upfront about all the shares he owned? Did he buy new stock after initially selling some of it? And why hadn’t his ownership and sizeable sale of the stock raise any red flags at the Department?

Federal rules appear to have required Fontana to receive a Departmental waiver before working on anything connected to Student Loan Xpress. Did Fontana receive such a waiver? If so, why hasn’t it been produced? If there was no waiver, this seems to be yet another example of the Department being asleep at the switch.

Also, has the Department even bothered to investigate whether Fontana actively helped loan companies, such as Student Loan Xpress, mine NSLDS to help market their products to potential borrowers?

Then there’s Fontana’s ruling on Sallie Mae's relationship to USA Funds. Why why was a former Sallie Mae employee ever in the position to rule on a matter of such importance to the company and its shareholders?

Finally, why has there been such a long delay in making a decision over his status? Is his case really so complicated that it requires a 15-month investigation by the Department’s Inspector General? Given that Fontana is still collecting his $142,227 salary more than a year after being placed on paid administrative leave, we’re left to wonder whether the Department actually found wrong-doing on his part, or is simply using him as a scapegoat to cover up for its own negligence.

While we don’t know the answers to any of these questions, there’s one thing we’re certain of. It’s time for the Department to stop dragging its feet. Even European countries don’t give vacations this generous.

Department of Education

Guest Post: A Better Solution for Campus-Based Aid

Targeting Campus-Based Aid

Higher Ed Roundup: Week of August 4 - August 8

IG Faults Dept. of Ed's Management of Grant Programs

Shareholders Suffer Setback in University of Phoenix Lawsuit

Massachusetts Governor Asks Colleges to Help Save Lender

Contract Out Student Loans

Oh Please Make Loans

Negotiate a Contract (and a Subsidy) To Lend

PLUS Loan Auction Uses Contracts

Our Biggest Disappointments (With Final Higher Ed Bill)

Easing Restrictions on Trade Schools

Taking the Truth Out of Tuition Calculations

Keeping a Veil on Institutional Aid Policies

Growing Guarantor Roles

Leaving States to Define "Low-Performing" Teacher Prep

Ensuring that Default Rates Remain Toothless

A Few of Our Favorite Things (From Final Higher Ed Bill)

Putting Teeth Into Loan Auctions

Adding Key Protections for Private Loan Borrowers

Banning Opportunity Loan Deals

Maintaining a Watchful Eye on College Costs

Curbing Textbook Prices

Making Teacher Preparation Programs More Accountable

Preventing Rip-Offs by the Department of Education