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On Tuesday, the Illinois Senate voted to become the eighth state to eliminate its TANF asset test—and the second state thus far in 2013. This development reflects a longstanding trend initiated by the states to reform their programs’ asset limits to better support families’ long-term financial stability—while saving time and money in the process. Yet in the current Farm Bill debate happening at the federal level, House Republicans are proposing changes that would completely undermine this wave of progress. Let’s take a look at some key lessons from Illinois about why asset limit reform makes so much sense.

Nearly every state is overhauling its teacher evaluation system, implementing new teacher observation tools and incorporating measures of student achievement. Why?

In a recent report, leading financial aid researchers Susan Dynarski and Judith Scott-Clayton review what is known and not known about the effectiveness of student aid programs. While evidence suggests that lowering the price of college can improve college access and completion, the authors argue that the complexity of aid programs and the way the aid is awarded and distributed can mitigate the impact on enrollment and persistence. The report looks at the last few decades of student aid programs and analyzes the extent to which these programs have been researched and improved student outcomes.

Among the report’s findings:

• The effect of financial aid can be difficult to separate from the effect of other factors based on student demographics and background.
  • For instance, those who are eligible for Pell are less likely to go to college for reasons other than Pell eligibility (e.g., weaker academic skills, less likely to have parents who went to college, attended lower quality high schools).
  • Those who are eligible for state merit-based grants, typically used to attract high achieving students, are very likely to go to college regardless of grant awards.
• The report’s authors outline four major lessons from the research on financial aid effectiveness.
  • When students know they will receive a tuition discount, enrollment rates increase.
    • Research has shown that a $1,000 decrease in tuition can increase attendance by 3 to 5 percentage points, while a $1,000 increase in grant aid can increase enrollment by 4 percentage points.
  • The aid programs that are the most effective tend to have simple, easy-to-understand rules and application procedures.
    • This may help explain why studies have found little conclusive evidence regarding the impact of the Pell Grant, which requires students to complete the FAFSA to establish eligibility. Not only is the FAFSA complex, but after completing it students still do not how much student aid they are eligible to receive.
  • If financial aid is contingent on a student’s academic performance or college completion, it can increase achievement, persistence, and graduation rates.
    • In one study of the West Virginia PROMISE program, once the achievement incentives were removed in the final year of the program, the program’s effect disappeared.
  • Little research is available on the impact of loans.  While debt aversion may be one important explanation for why loans do not appear to affect college access as much as grants, future research is needed to consider if it is possible to make loans more attractive and less risky without increasing costs as well as to determine  which loans and loan features are effective and which are not.
• Finally, while research in general has shown that student financial aid has an impact on student outcomes, far more information and research are needed on which programs work best and why. 

The student loan interest rate debate will come to a head early this summer as the 3.4 percent interest rate on Subsidized Stafford student loans nears its July 1 expiration. When that deadline hits, the rate will revert to 6.8 percent, the rate currently charged on Unsubsidized Stafford loans. Last week, we published a piece detailing the half-dozen reform proposals currently floating around Capitol Hill and produced some takeaways on each. But there are still other misconceptions to clear up.

One of the current interest rate plans, Senator Elizabeth Warren’s (D-MA) proposal to reset Subsidized Stafford interest rates for just one year at the Federal Reserve bank lending rate of 0.75 percent, is perhaps the most controversial. Federal Education Budget Project Director Jason Delisle last week published an op-ed on Yahoo! Finance detailing one of the underlying problems with the plan: that the government already loses money on Subsidized Stafford loans. Delisle wrote:

What about Senator Warren’s claim that the government makes money off loans to low-income students?… She points to figures that the non-partisan Congressional Budget Office says “do not provide a comprehensive measure of what federal credit programs actually cost the government and, by extension, taxpayers.” In fact, when the budget office “accounts more fully… for the cost of the risk the government takes on when issuing loans,” it reports that Subsidized Stafford loans – those made to low-income students – cost taxpayers $12 for every $100 lent out, or $3.5 billion per year. If the loans cost $3.5 billion a year when the government charges a 6.8 percent interest rate, cutting the rate to 0.75 percent would more than triple that cost.

Warren’s claim that the government is profiting on student loans – and therefore that it should drop the interest rate it charges on federal loans for low-income students dramatically – is a rhetorical one. Delisle spoke to Dylan Matthews of The Washington Post’s Wonkblog to clear up the issue. Matthews writes:

Just like any institution, the CBO determines the cost of loans by “discounting all of the expected future cash flows associated with the loan or loan guarantee—including the amounts disbursed, principal repaid, interest received, fees charged and net losses that accrue from defaults—to a present value at the date the loan is disbursed.” To do that, it needs to settle on a “discount rate,” which is usually the expected rate of return on the loan in question. Banks and other private institutions generally estimate that by finding loans with similar risks and maturities to the one being evaluated, and then using those similar loans’ rates of returns.

The CBO does not do that. It discounts all government loans using the returns on Treasuries of similar maturity. So a 30-year student loan would be compared to a 30-year Treasury bond. But Treasuries are the safest bonds in the world... To capture the true risk of these loans, you’d need to discount using the rate of return for another loan with similar risk. Comparing them to Treasuries make them seem safe no matter what the actual risk.

The claims that student loans turn a profit for the government are based on unrealistic, rigged budgeting mechanisms. And looking at a fair accounting method, the one recommended by the CBO, it’s pretty clear that Subsidized Stafford loans are actually costing the government (and taxpayers) $12 for every $100 lent.  This may seem a wonky, insider issue, but with Congress under rigid fiscal constraints right now and members arguing that the U.S. needs to reign in the deficit, costs matter.

For more on how the government is losing money on these loans, check out this background page from the Federal Education Budget Project. You can also see the Wonkblog article here, and Delisle’s op-ed about Senator Warren’s proposal here.