Federal Grants

EZ FAFSA: Read the Fine Print

Ed Policy — Thu, 14 Aug 2008 16:17:00 -0400

By Christina Satkowski and Stephen Burd

You can't always believe what you read in the papers. That old saying has gained new currency this year with all of the misleading and panicked news coverage of the student loan credit crunch. Unfortunately, the same can be said of recent reports about Congressional efforts to simplify the process of applying for financial aid.

At issue are news stories reporting on a provision in the recently-passed Higher Education Act reauthorization legislation that requires the U.S. Department of Education to create a new "EZ FAFSA," a shorter version of the Free Application for Federal Student Aid (FAFSA) that tens of millions of students fill out each year to determine their aid eligibility. Recent articles in Congressional Quarterly, Education Week, The New York Times, and other publications leave the impression that the new bill streamlines the FAFSA -- from seven pages to two -- for all students.

But that's not the case. While the legislation introduces an EZ FAFSA, it makes it available to only those students whose family income is low enough that they already qualify for an expedited review of their finances when applying for federal financial aid. As a result, most aid applicants will still be stuck with the longer form.

Under the new law, students who will be eligible to use the EZ FAFSA include those whose families earn earn less than $50,000 a year and either are not required to file the long version of the 1040 federal income tax return or receive certain federal means-tested benefits such as welfare payments or food stamps. The federal government doesn't take into consideration the assets of families of students who meet these criteria.

Some student aid experts -- including our colleagues at the Institute for College Access and Success -- have questioned whether the new, shorter form will even make the process of applying for aid that much easier for the students it's supposed to serve. The EZ FAFSA is designed to eliminate questions that don't apply to the lowest income students, primarily ones about family assets. But first these students have to figure out if they qualify to use the short form, and the only way to do that is to answer certain difficult and error-prone questions that make the regular FAFSA form so challenging. In the end, having to determine which FAFSA form to use could lead to more complexity and confusion for low-income students, not less.[Disclosure: Higher Ed Watch is supported in part by the Institute for College Access & Success, with funds provided by the Pew Charitable Trusts.]

So how did so many reporters get the story wrong? It appears that they lifted verbatim from a press release that Senate Democrats issued shortly after legislation gained final approval from Congress. Touting the bill's most significant achievements, the release proudly declares that it "replaces the complex, 7-page Free Application for Federal Student Aid (FAFSA) with a 2-page 'EZ-FAFSA.'" Only lower down in the text does it add that the new form is "for-low income students."

An innocent mistake? Doubtful. It appears that the bill's sponsors were all too eager to make it sound like the measure was more far-reaching than it is. Take, for example, comments that Sen. Barbara Mikulski (D-Md.) made to The New York Times the day after the bill passed. Mikulski, who played a pivotal role in ushering the legislation through Congress, was already speaking about the longer FAFSA in the past tense. "Though it was only a seven-page form, you had to hire a financial services outfit to do it," she stated.

Because the reauthorization legislation doesn't actually include a lot of tangible benefits for students (besides a year-round Pell Grant), politicians may have had more incentive than usual to overstate their accomplishments. In a way the lawmakers are a victim of their own success. Last year, they pushed through Congress a major expansion of federal financial aid as part of the College Cost Reduction and Access Act. Without having much else to offer in terms of student aid funds, they had to find other things to boast about.

It's also understandable that journalists would be confused. The reauthorization bill is 1,158 pages of dense legislative language. Operating on very tight deadlines, it's tempting for reporters to take at face value what they are fed.

But this case shows the pitfalls of that approach. In a year when there is so much misinformation being spread about the availability of student loans, it seems particularly cruel to raise students' expectations falsely. Because the truth is, for most students, the FAFSA will remain as cumbersome as it has always been, standing as one more hurdle on the application-paved road to higher education.

Guest Post: GI Bill Battle Only Half Won

Ed Policy — Wed, 06 Aug 2008 19:21:00 -0400

By Jon Oberg

Congress deserves ample credit for approving a significant expansion in the GI Bill education benefits that veterans can use to pay for college. But as a veteran myself, I fear that the benefits are being oversold. Take a recent statement about the GI Bill made by a representative of the Iraq and Afghanistan Veterans of America: "It made going to school your full-time job. You worry about getting into school and you worry about getting as many degrees as you can but the government will worry about paying for it."

Fellow veterans: don't count on it. Although billions more will be spent annually in your name, you may not get as much help as you think. A lot of the money will disappear before you see it.

I used data from the most recent student aid databases (the 2004 National Postsecondary Student Aid Study) to see how veterans fared at four-year public and private colleges, as compared to other undergraduates. The results confirmed my suspicions that despite the government's help, most veterans have been stuck with large amounts of student loan debt and received little in the way of institutional financial aid (the country's largest source of grants) from the colleges themselves.

In short, many colleges have treated veterans as an afterthought. Some institutions have clearly used veterans' GI benefits to replace institutional aid dollar-for-dollar, and shifted the money they saved into merit aid for the kind of high-achieving students that improve their rankings. In such situations there has been no remedy for veterans, as the federal government has largely looked the other way. Many veterans have gotten the message and lowered their educational ambitions.

For the upcoming academic year, Congress has given current veterans' benefits a healthy boost, as a transition to implementing the new GI Bill. But this will not necessarily translate into less debt. I am not aware of any studies that show student debt going down at four-year colleges when spending on federal grants goes up. Other numbers - institutional prices, grants, discounts -- will change, but debt will remain high. That is the way the current "enrollment management" system, in fashion throughout much of higher education, works.

In 2009 and beyond, when the new GI Bill is completely in effect, full-time student veterans will have their tuition fully covered (within certain limits) and will receive a stipend for books and housing, the combination of which should minimize debt. But these generous benefits will be available only to those veterans who have earned full coverage and attend full time. Veterans who have less than 36 months of military service will see their tuition benefits proportionately reduced. Those who attend college only part-time will not receive housing benefits. As a result, a great number of veterans will again find themselves at the mercy of a financial aid system that is decidedly unfriendly to them.

Veterans and non-veterans alike look back fondly at the original World-War II GI Bill that increased higher education access for a whole generation of veterans, many at our nation's top public and private colleges. The influx of veterans also changed many institutions for the better. But that was before the establishment of the current financial aid system. The time has come to acknowledge that the system is not working, considering that Congress, since the Nixon administration, has tried to increase access for low-income students only to see the access gap continue to be as wide as ever.

To be sure, not all veterans will have trouble finding quality colleges friendly to them. States may increasingly step up for veterans. Some private colleges may also reset their priorities to take part in the "Yellow Ribbon Program." Under that excellent provision in the new GI Bill, the Department of Veterans Affairs will match colleges' institutional aid awards dollar-for-dollar, creating a much-needed partnership between the federal government and colleges on behalf of veterans. But for every institution that bravely tries to break away from the loan-obsessed, merit-dominated hegemony of the current system, others have decided that they cannot, and will not, unilaterally disarm. I fear that many institutions will be looking at veterans as an easy mark, carrying a lot of federal cash to convert to their own priorities.

Congress could fix matters by making sure that the federal government and colleges start working together for the benefit of targeted populations, be they veterans or low-income students or both. It would not be the first time Congress has had to step in: lawmakers held hearings and changed the original GI Bill in 1952 to prevent benefit manipulation. I doubt this Congress will act, however, unless veterans fight an even tougher battle than the one that got the new GI Bill passed. In higher education, Congress and the executive branch find it easier to spend than to make programs work, and this new effort may only be the latest in a long list of casualties.

Jon Oberg served as a Navy officer in USS Rainier, USS Arlington, and at the Defense Communication Agency-Europe. He is a former higher education executive and state and U.S. Department of Education official. His views are his own and do not necessarily reflect those of the New America Foundation.

A Cause for Celebration

Ben Miller — Thu, 26 Jun 2008 20:27:00 -0400

To celebrate Independence Day, Higher Ed Watch will be going on hiatus next week. But before we go dark, we thought we'd remind you of some important changes coming to federal student aid that will save students money and hopefully eliminate some of the worst abuses that have occurred in the Federal Family Education Loan (FFEL) program in recent years.

Most of these changes are the result of two pieces of legislation enacted in the past year: the College Cost Reduction and Access Act (CCRA) and the Ensuring Continued Access to Student Loans Act of 2008 (which we will refer to as the "bailout bill"). Both contain provisions that go into effect on July 1.

The most substantial changes are to the federal student loan programs and the interest rates charged on these loans.

Under CCRA, the interest rate on subsidized Stafford Loans -- which generally go to students from families making less than $80,000 and accrue no interest for the borrower while in school -- will halve over the next four academic years. As a result, borrowers taking out a subsidized Stafford Loan after July 1 will have a fixed interest rate of 6.0 percent, 0.8 percentage points lower than available today. [Borrowers with unsubsidized federal loans will continue to pay a 6.8 percent fixed rate] In subsequent years, interest rates will drop to 5.6 percent, 4.5 percent, and then 3.4 percent by the 2011-2012 academic year. After that, absent any further Congressional action, rates will return to the previous level of 6.8 percent.

As we've written before, the actual amount borrowers will save from these cuts varies. An incoming freshman this fall will receive up to $3,900 in total savings over the lifetime of their loans -- roughly $22 a month. Member of the class of 2009, however, will see only about $424 in total savings, or $2 a month. (Click here for an excel spreadsheet showing the maximum benefits of the rate cut for students graduating in the years 2009-2016. U.S. PIRG also released a study showing average expected borrower savings by state).

While only some borrowers will benefit from the interest rate cuts, a provision enacted in the bailout bill will allow all borrowers to take out an additional $2,000 in unsubsidized Stafford loans. This increase in loan limits means dependent freshmen will now be able to take up to $5,500 in Stafford loans, sophomores $6,500, and upperclassmen $7,500. This additional $8,000 in borrowing over the course of a student's enrollment should help lessen the need to take out high-cost private student loans.

The bailout bill also included changes to the repayment terms of federal PLUS loans for parents. Borrowers now have the option to begin repaying PLUS loans six months after their child graduates, rather than having to do so 60 days after disbursement, as is currently the case. The change is meant to allay parents' concerns about having to immediately repay the loan in a time of economic uncertainty and thus encourage them to take out PLUS loans rather than encouraging their children to take out more expensive private loan debt.

Borrowers in repayment will also have some new opportunities. As we wrote two weeks ago, members of the class of 2008 will be able to consolidate their variable rate federal loans into a 3.61 percent fixed-rate loan. This could allow borrowers to save as much as $2,542 over the course of repayment. Those who have already refinanced their federal loans, meanwhile, will have the option to consolidate their debt into the Direct Loan program, making them eligible for Public Service Loan Forgiveness -- a program that forgives borrower's debt if they make 120 payments on their loans while holding a full-time public service-oriented job.

Student loan borrowers are not the only ones who will see changes on July 1. Grant recipients will also see increases in their benefits. First, the maximum Pell Grant award is set to rise to $4,731, a $421 increase over the current level. This increase is primarily financed using mandatory money provided by the CCRA. Second, students will now be eligible for additional aid known as TEACH grants. This program provides students $4,000 a year in grant aid if they promise to go into teaching in a high-need area for four years. As both Higher Ed Watch and others have noted, however, there are some concerns about these grants. Most troublesome is that they convert to unsubsidized loans if students don't fulfill their four year commitment or their school is no longer deemed high need. That is worrisome, but it would still be preferable to see a student take on an additional $16,000 in federal loans rather than having to rely on private loans.

Finally, July 1 also marks the day that Department of Education regulations on inducements and preferred lender lists officially go into effect. (Secretary of Education Margaret Spellings asked colleges to adopt these regulations last August, but doing so was voluntary.) The changes include prohibiting lenders from offering financial aid officers any gifts worth more than a nominal value, performing student-aid functions at colleges, and offering payments to get on a preferred lender list. College aid officials, meanwhile, are subject to similar requirements, but also must include multiple loan companies on any preferred lender list (originally three, but temporarily loosened due to the credit crunch). They also must disclose the criteria they used to select the lenders they recommend.

So sit back, enjoy the fireworks and the day off and know that increased student benefits are on their way. We'll see you in a week.

UPDATE: The Institute for College Access and Success has a guide for borrowers detailing all the July 1 changes. It can be found here.

Guest Post: Six Principles for Financial Aid Reform

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

By Art Hauptman

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bush Budget Questions

Ed Policy — Tue, 05 Feb 2008 00:00:00 -0500

Higher Ed Watch has some questions for the Bush administration about its Fiscal Year 2009 higher education budget: [slideshow]

1) The Federal Family Education Loan (FFEL) program and the Direct Loan program show similar per loan costs for 2008 and 2009, with the FFEL program showing a slight cost advantage for the first time. However, page 364 of the Budget Appendix notes that costs are higher for the Direct Loan program, because it holds nearly 100 percent of student loans that have defaulted (under FFEL and Direct Loans) and have been rehabilitated through consolidation.

Can per loan program costs be accurately compared when high-default risk FFEL loans are dumped into the Direct Loan program? If OMB and the Department of Education corrected cost estimates for this bias, how would the costs change? Which program would be cheaper for taxpayers if costs were controlled for borrower differences?

2) Federal funds held by state guaranty agencies used to pay loan default claims under the Federal Family Education Loan (FFEL) program nearly doubled to $1.1 billion in 2007 from $579 million in 2006. Are the federal funds held by guarantee agencies in excess of what is needed to pay default claims, and if so, would the administration recommend recalling those funds?

3) The budget proposes a change in the eligibility rules for the new Loan Forgiveness for Public Service Employees program created under the College Cost Reduction and Access Act last year. Borrowers who pursue public service careers and begin loan repayment after October 1, 2007 are eligible to have the remaining balance of their loans forgiven after 10 years. The benefit is available to Direct Loan borrowers and Federal Family Education Loan (FFEL) borrowers who refinance into direct lending.

The budget request would limit eligibility to new borrowers who take out loans after October 1, 2009. If the proposal is enacted, how many borrowers now eligible for public service loan forgiveness will lose eligibility? And what types of shifts in the loan volume does the administration foresee between direct lending and the program that the administration cites as the need for the change in eligibility rules?

4) The loans for short-term training proposal would create a new and relatively small loan program, subsidizing $362 million in loans in 2009 to help dislocated and unemployed workers obtain training. Given the administration’s overarching goal of reducing smaller and duplicative education programs, why not use existing student loan programs for the goal of helping workers access short-term training instead of establishing a new program administered by two agencies (the Departments of Labor and Education)?

5) The budget includes a $652 million cancellation of the $960 million Congress has made available for the Academic Competitiveness and SMART Grant programs, citing insufficient program participation rates. Why are participation rates in the ACG and SMART grant programs not high enough to use all available funding, and does the administration recommend any action to increase participation? Also, the programs expire after the 2010-11 academic year. Does the administration have a position on whether they should be extended?

6) The administration is proposing a new higher education tax credit worth up to $1,000 annually on contributions to 529 college savings plans, while maintaining other overlapping higher education tax benefits. Four years ago the administration wanted to "revise and simplify" rules regarding the three largest existing higher education tax credits. Why has the administration abandoned the goal of tax credit simplification, and what steps will be taken to ensure the 529 credit does not make the interaction between the higher education tax credits more confusing?

Bonus Question

** Did Senator Pell's family consent to use of his name on a private school voucher proposal? Were they even asked?

For all of the New America Foundation's Federal Education Budget Project questions on the FY09 Bush Education Budget, 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 October 8 - October 12

Ed Policy — Fri, 12 Oct 2007 01:00:00 -0400

Hillary Clinton Includes Two New America Policy Proposals in Her Education Plan

Two New America policy proposals: required multi-year tuition levels and greater use of endowments to

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

Paging Dancing with the Stars: Federal Student Aid Needs Help

Ed Policy — Thu, 11 Oct 2007 01:00:00 -0400

There's been discussion in Congress recently about how the tax code can be better used to encourage college attendance among low-income students. One proposal being considered by the Senate Finance Committee is to make higher education tax credits refundable - and thus available to people who now do not benefit…

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.

Pell Grant Funding Up in the Air

Ed Policy — Thu, 04 Oct 2007 01:00:00 -0400

While the threatened showdown between Congress and President Bush over the College Cost Reduction Act never materialized, a different fiscal fight between the two branches of government is looming, this one over annual appropriations spending bills.

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.

Tough Choices Ahead on College Aid Plan

Ed Policy — Thu, 20 Sep 2007 01:00:00 -0400

The massive college aid bill that Congress passed earlier this month is headed to the President for signature. As the newest member of the Higher Ed Watch team and a budget hawk, I thought I would point out some of the loose ends that are going to have to be…

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