Student Aid

[Editor's Note: Last month, George Miller, the Democratic chairman of the House of Representatives Committee on Education and Labor, created a furor when he included a provision in a student loan reform bill that would have eliminated the in-school interest subsidy on federal Stafford loans for graduate and professional students. Warning that the provision was a "deal breaker," lobbyists for colleges and advocates for graduate students forced Miller to reverse course and remove the offending provision from the bill. In this guest post, student-aid expert Sandy Baum explains why eliminating the in-school interest subsidy for both undergraduate and graduate students -- and redirecting the savings to help financially distressed borrowers repay their debt -- is a worthwhile public policy endeavor.]

By Sandy Baum

In these difficult economic times, the struggles of many students both to pay for college and to repay their student loans are all too visible. It is no surprise that suggestions to eliminate the in-school subsidy on Stafford Loans elicit strong objections from many people concerned with these struggles. But particularly in these difficult economic times it is vital that we find the best ways to help students -- ways that are equitable and that use limited funds as efficiently as we can to make college affordable for as many students as possible.

Students with documented financial need are eligible for subsidized Stafford Loans, for which the government pays the interest while the student is in school, for six months after the student leaves school, and during qualifying periods of deferment. Students without documented financial need and those who have borrowed the maximum amount of subsidized loans for which they are eligible can borrow unsubsidized Stafford Loans, on which the interest accrues while they are in school and during other periods of non-payment. The interest rate on subsidized loans is now lower for the life of the loan than the interest rate on unsubsidized loans.

By Travis Reindl

For those of us who work in or follow higher education policy, the past six months have been eventful. A new administration came into office, naming education as one of its top policy priorities and setting a goal for reclaiming world leadership in college attainment by 2020. Congress is now debating whether to end the bank-based student loan program and pump $40 billion into the Pell Grant program. That's a decent amount of movement, even for the biggest cynic.

But lest you fear that the higher education policy agenda will move too far, too fast, rest assured -- the guardians of the status quo in the higher education lobbying world are alive and well in the era of "change we can believe in."

Last month, President Obama announced the American Graduation Initiative, a ten-year, $12 billion effort designed to boost the number of community college graduates by five million over the next decade. The program includes a competitive grant program for states to build stronger community college linkages to K-12 education and the workforce; funding for efforts to increase college completion at these institutions and others; and capital for updating or expanding facilities. Reaction to the proposal has been largely positive, though some, including the American Council on Education, have expressed the entirely legitimate concern that states could use the new federal funds to supplant, rather than supplement, their support for postsecondary education.

We'll be back tomorrow at our usual time. But in the meantime, check out this post on our sister blog Ed Money Watch. In this item, our resident federal budget expert Jason Delisle explains how the new Pell Grant funding formula included in the student-loan reform legislation the House Committee on Education and Labor approved last week wouldn't necessarily guarantee students a rising Pell Grant each year. President Obama had proposed financing the program entirely through mandatory funding, meaning that spending for the program would no longer be determined through the annual appropriations process. The House bill, however, would ultimately continue to leave it up to appropriators to determine most Pell Grant funding as well as the maximum grant each year.

Stay tuned for more coverage of the House bill in the days ahead.

 By Deanne Loonin

The new Income-Based Repayment program (IBR), which went into effect this month, is a very positive development for borrowers with low incomes who have taken on too much federal student loan debt. IBR is more broadly available than the existing (and still alive) Income Contingent Repayment option (ICR) in the Direct Student Loan program. The formula for determining eligibility for IBR is simpler than that for ICR and in most cases will result in lower payments for struggling borrowers. 

Under IBR, borrowers who have a pre-tax income below 150 percent of the poverty line will not have to make any payments until their incomes rise over those levels. Those with higher pay will not be asked to devote more than 15 percent of the portion of their income above that threshold to student-loan repayment until they are earning enough to make regular payments. Any debt remaining after 25 years of payment through the IBR program will be forgiven by the federal government.

Still, as beneficial as this new program will be, we need to be careful not to oversell it. After all, there are some flaws with the program's design that will limit the amount of help it can provide the most financially distressed student loan borrowers. Fortunately for borrowers, the Department has already agreed to fix a few key problems that were included in the original regulations -- such as one that would have required married borrowers to make much higher monthly loan payments than unmarried ones in identical circumstances. But more needs to be done.

In 2007, Congress created two new programs aimed at making it easier for students to repay their federal student loans and encouraging them to pursue careers in the public service. As we wrote yesterday, one of those programs -- Income-Based Repayment -- goes into effect today. The other one -- Public Service Loan Forgiveness -- is already up and running but may not live up to its full potential unless changes are made to the regulations governing it.

Under the loan forgiveness program, which Congress included in the College Cost Reduction and Access Act, the federal government will forgive the remaining debt of Direct Student Loan borrowers who have made 120 payments on their loans while working in a public service occupation. Borrowers with loans through the Federal Family Education Loan (FFEL) program can take advantage of this benefit by consolidating their debt into Direct Lending.

Lawmakers created the program in reaction to reports that student loan borrowers were increasingly shying away from pursuing public-service careers, such as teaching and social work, because of their heavy debt loads. By providing loan forgiveness, the bill's authors hoped to provide incentives to college graduates to enter these fields and reward them for their service.

Sounds pretty straightforward, right? Unfortunately, the program is not operating in the way lawmakers envisioned. That's because the U.S. Department of Education, under its previous leadership, decided to keep people in the dark about whether their chosen jobs qualify them for the benefit. Under regulations the Department issued in October, student loan borrowers will not know whether they qualify for the loan forgiveness until after they have made all 120 required payments.

Some big changes are coming to the federal student aid programs tomorrow that will save students money and make it easier for struggling borrowers to repay their government-backed student loan debt.

Most of these changes are the result of three pieces of legislation that have been enacted over the last several years: the Deficit Reduction Act of 2005, the College Cost Reduction and Access Act of 2007, and the American Recovery and Reinvestment Act of 2009. All contain provisions that go into effect on July 1. These include:

• A $619 increase in the maximum Pell Grant, to $5,350 for the 2009-10 academic year.

• A 0.4 percentage point reduction in the fixed interest rate charged on new federally subsidized Stafford loans to 5.6 percent.

• A one-half percentage point decrease in the origination fees that borrowers must pay on their federal student loans to 1.5 percent of total amount borrowed.

Meanwhile, borrowers with variable-rate Stafford Loans originated before July 1, 2006 will see their rates drop to 2.48 percent on Wednesday. That's two percentage points lower than the current 4.21 rate on these loans. Members of the Class of 2009 can lock in an even lower rate of 1.88 percent if they consolidate their variable rate loans during the sixth month grace period before they enter repaym

Every year the federal government provides billions of dollars worth of grants, loans, and other forms of assistance through mandatory funding to students pursuing a postsecondary education. Yet, according to the president's 2010 budget request, total mandatory funding (funding not provided through the appropriations process) for education programs in 2009 is negative $20.3 billion. Although a negative funding level is counterintuitive, it can be explained by the budgeting methods required for federal student loan programs.

The way the federal government reports the costs of new student loans makes up part of the negative 2009 funding figure. Most spending in the federal budget is accounted for on a cash basis -- that is, money appears in the budget as it is made available and spent. Loan program costs, however, are presented as the subsidy conferred by the federal government to borrowers and private lenders administering the loans. Even though the federal subsidy will be conferred to borrowers and lenders over the life of the loan, its total value shows up in the budget all at once, in the year the loan is made.

Yesterday, at Higher Ed Watch, we urged Democratic Congressional leaders to keep their eye on the ball and move forward with President Obama's plan to make Pell Grants into a true entitlement for low-income students.

But what if eliminating the Federal Family Education Loan (FFEL) program doesn't produce enough savings for Congress to achieve this lofty goal (as recent media reports suggest)? Or what if opposition to creating a new Pell Grant entitlement program is strong enough among fiscally conservative Democrats and appropriators to kill the proposal? What then should be done with the tens of billions of dollars the government would save by providing loans entirely through the Direct Loan program? 

We have a few ideas at Higher Ed Watch about how that money could be spent -- none of which involve extending the interest rate reduction that we wrote about yesterday.

When it comes to student aid, President Obama has made his wishes clear: he wants Congress to use the savings it derives from eliminating the Federal Family Education Loan (FFEL) program to make Pell Grants a true entitlement for low-income students. But as Democratic Congressional leaders take up legislation to enact the President's plan, they are likely to have other ideas about how this money should be spent.

Some lawmakers will surely be tempted to take advantage of this opportunity and push for an extension of an interest rate reduction Congress approved in 2007 on subsidized federal student loans. Doing so would prevent a sudden rise in the student loan interest rate -- from 3.4 to 6.8 percent -- at the tail end of Obama's first term, when the rate cut is set to expire.

At Higher Ed Watch, we recognize that allowing the rate reduction to expire in 2012 would be a politically risky move. Nonetheless, we would strongly urge Congressional leaders to stay faithful to Obama's plan. The administration has handed them a once-in-a-lifetime opportunity to put the Pell Grant program on a firm financial footing by financing it entirely with mandatory funds. Diverting funds to pay for an interest rate cut could cripple this effort, without providing much of a public policy benefit.

[Today, Higher Ed Watch is running a guest post from our colleagues in New America's College Savings Initiative responding to recent criticism of 529 college savings plans and their ability to benefit low- and moderate-income families. The author of this post is Mark Huelsman, a Program Associate with the College Savings Initiative, a joint project between New America and the Center for Social Development at Washington University in St. Louis.]

By Mark Huelsman

Recently, 529 college savings plans have come under criticism. Like many stakeholders in the economy, 529 plan owners have not been isolated from financial pain, and many critics have used recent market volatility and plan underperformance to call for reform. Others, however, have gone further and called for policymakers to abandon 529s in particular, and savings overall, as a plausible conduit to help families afford college. As New America's recently launched College Savings Initiative is charged with examining and improving 529 plans, we feel that it is important to respond to some of these arguments.

To their credit, many critics of these plans share our general goal -- to increase postsecondary access and affordability for low- and middle-income students. We simply differ over whether or not 529 plans provide a promising tool for helping students attend and complete college who could not otherwise afford to go.

Consider this: A recent Gallup survey from Sallie Mae indicates that, while 62% of parents are saving for college, only 32% of those making less than $35,000 have put any money aside for this purpose. Furthermore, half of those low-income families are saving even less (or in some cases not at all) in light of the recession. This is, quite obviously, cause for concern. But is encouraging savings -- and college savings plans as vehicles to do so -- really the answer? We believe so.