U.S. Department of Education

In today’s tough economy, many recent college graduates are looking for ways to shrink their federal student loan payments. Income-Based Repayment (IBR), which allows students to pay a monthly amount based on their earnings, not their federal student loan balances, provides significant relief. However, a new report, Safety Net or Windfall? Examining Changes to Income-Based Repayment for Federal Student Loans, from the Federal Education Budget Project (Ed Money Watch's parent initiative) shows that pending changes to IBR are far more generous than previously thought. Borrowers with high student loan balances and high incomes, not low-income borrowers, stand to benefit the most.

Congress created IBR in 2007 to make it easier for college graduates to make their student loan payments even in their first years out of school when they are earning lower incomes. If a student’s monthly payment under standard repayment exceeds 15 percent of his monthly discretionary income, he is eligible for the program. The borrower’s monthly payments increase as his salary increases until they reach a cap at the level he would have paid under standard repayment. After that borrower makes 25 years of payments in IBR, the Department of Education forgives any remaining loan balance.

But in 2010, at President Obama’s request, Congress made the program even more generous. The new IBR will base monthly payments on 10 percent of discretionary income, instead of 15, and loan forgiveness will be provided after only 20 years. That change was set to take effect in 2014 until the Department of Education, as part of the president’s “We Can’t Wait” initiative to circumvent legislative gridlock, sped up the availability of the new IBR by creating a version of it through regulations – “Pay As You Earn” (PAYE). PAYE will take effect by the end of the year.

But little is known about the real effects of this new IBR system. To fill in this knowledge gap, FEBP Director Jason Delisle and Program Associate Alex Holt designed and built a calculator that estimates the monthly payments a borrower will make under the original IBR, the pending version of IBR, and other repayment plans like standard 10-year and consolidation. It accounts for a borrower’s loan balance, interest rate, income, and family size over the entire repayment period. It also calculates the total payments over the life of the loan, and the amount of loan forgiveness he will receive.

The calculator revealed some surprising results. PAYE (the plan that is virtually identical to the 2014 10 percent, 20-year IBR) doesn’t necessarily target the greatest benefits to struggling borrowers. Because low-income borrowers have so little discretionary income above the poverty exemption applied annually, the new IBR only lowers their monthly payments by as little as $5 and at most $20 compared to the original IBR.

Instead, borrowers with high federal student loan balances at graduation – think law students or graduate students, since undergraduates face annual and aggregate limits on the amount they can borrow – reap the most benefit. When their incomes are low, they are able to pay manageable amounts. But as their incomes rise, their monthly payments are capped at the standard repayment amount, meaning they actually derive more benefit from IBR as they become wealthier. Plus, these borrowers often qualify for loan forgiveness after only 20 years; according to the calculator, borrowers above certain debt levels may not even pay down the interest they owe over 20 years, let alone the principal. This is a much greater benefit than is offered through the consolidation repayment plan, in which borrowers with debt totaling more than $40,000 repay their loans in full over 25 or even 30 years. And since IBR allows graduate school borrowers to take out such high loan balances with few concerns, schools have no reason to lower tuition – in fact, they have an enticement to raise it.

The report’s authors offer recommendations for changes to the PAYE/new IBR plans based on these findings. The IBR changes haven’t taken effect yet, which means there’s still time to restructure the program so it targets benefits to those who need them most. In an era of limited resources, we can’t afford to provide payouts to the rich while leaving struggling students languishing in debt.

To read the paper, click here. To try your hand at the IBR calculator, click here.

In his 2010 State of the Union address, President Obama urged Congress to change the federal student loan program’s existing Income-Based Repayment (IBR) plan, which caps borrowers’ payments at 15 percent of their incomes and forgives any remaining debt after 25 years of payments. He argued that high college tuition was an untenable burden for the middle class, and that by reducing payments to 10 percent of a borrower’s income and providing loan forgiveness after 20 years of payments, lawmakers could provide borrowers with relief.

As college costs have skyrocketed, one thing is clear: Parent PLUS loans have increasingly become a giant minus for many families. According to a recent article in The Chronicle of Higher Education, the government issued $10.6 billion of Parent PLUS loans to approximately one million families last year. That’s nearly double the amount of borrowers and an increase of $6.3 billion in inflation-adjusted dollars since 2000.

Parent PLUS Loans, which are taken out by parents on behalf of their children, act most like a private loan compared to other federal loan options. PLUS loans have a relatively high fixed interest rate of 7.9 percent. Additionally, parents do have to meet a minimal standard to qualify—they cannot have adverse reporting on their credit history and have to pass a “credit check.” But this credit check is different than the check that is normally done for a private loan. It is quick, simple and does not consider income or ability to repay the loan.

Unlike other federal student loans, PLUS loans have no cap—parents can borrow up to the full “Cost of Attendance” (COA) for the institution. These loans aren’t dischargeable in bankruptcy and don’t normally qualify for repayment options designed to help struggling borrowers, like Income-Based Repayment. As a result, families who find themselves in over their heads on PLUS debt can be forced to make difficult choices, like postponing retirement.

The data reported by the Chronicle are probably the bellwether of a developing PLUS loan crisis. The problem can’t be completely solved until college costs are reined in, which may never happen, especially if we keep handing out easy cash in the form of PLUS loans to institutions (chicken, meet egg!). But in the meantime federal policymakers should do at least two things to start containing what appears to be a burgeoning crisis:

Update: New America has released Safety Net or Windfall? Examining Changes to Income-Based Repayment for Federal Student Loans. The paper can be accessed here.

Next week, the New America Foundation will release a paper examining pending changes to the Income-Based Repayment (IBR) program for federal student loans. Today, we are releasing the calculator we used to develop our findings.

The pending changes to IBR are the result of an Obama administration proposal to change the federal student loan program’s existing Income-Based Repayment (IBR) plan—which caps borrowers’ payments at 15 percent of their incomes and forgives any remaining debt after 25 years of payments—by reducing payments to 10 percent of a borrower’s income and providing loan forgiveness after 20 years of payments. Congress enacted this proposal two months after the President proposed it in his 2010 State of the Union address, but limited it to students who take out their first loans on July 1, 2014 or later. Anxious to deliver those benefits sooner, the Obama administration announced last year that it would instead make the plan available as early as this year—to borrowers who took out their first student loans in 2008 or later and borrowed at least one loan in 2012 or later. The final regulations are still pending.

To date, policymakers and advocates have provided little information about the benefits that the impending changes to IBR will provide to borrowers with different income and debt profiles over their entire repayment terms. Instead, they illustrate what a borrower with a certain income and debt load would pay for one month under IBR. (The Obama-Biden 2012 campaign website’s “Student loan reform: The facts” is just one example of the short-term illustrations.) Unfortunately, that sort of snapshot view leaves a lot of important questions unanswered:

• How do the pending changes to IBR affect borrowers over time, as their incomes change?
• How much can a borrower earn and still receive loan forgiveness?
• How much will he have forgiven if his income follows a certain path over his career?
• How does the program compare to other repayment options offered on federal student loans, like consolidation, over the long term and in terms of monthly payments?
• Can a borrower end up paying more overall under IBR than other plans?
• Will the pending changes provide windfall benefits to higher-income borrowers?

We searched for answers to these questions, but thus far, no one seems to have asked them—even though the new IBR program will enroll its first beneficiaries by the end of this year. So we developed our own IBR calculator to examine how borrowers fare under the old (2009) IBR and the new (2012) IBR and other repayment options.

Our findings will be published in the forthcoming paper, Safety Net or Windfall?: Examining Changes to Income-Based Repayment for Federal Student Loans, next week. In the meantime, we are making available here for download the New America Foundation IBR calculator. We encourage readers to use it to see for themselves what the pending changes to IBR will mean for borrowers. (The calculator allows users to enter in a borrower’s initial loan balance and income over 25 years to display monthly and total payments as well as loan forgiveness under the old and new IBR.)

In the first presidential debate this week, both Governor Romney and President Obama gave education a bigger spotlight than anticipated. Both candidates approached education reform as a way to drive job creation and improve workforce training for American workers. Their comments, however, brought up a few lingering questions. (For more on the debate, check out this post from Maggie Severns at our sister blog, Early Ed Watch.)

Governor Romney’s Record: The Massachusetts Bubble

Governor Romney touted his record in Massachusetts, saying the state’s schools “are ranked number one in the nation.” It is true that Massachusetts schools ranked first during his tenure as governor – but with a few caveats.  Romney’s ranking of choice is based on National Assessment of Educational Progress (NAEP) fourth and eighth grade reading and math scale scores in each state in 2005. While NAEP is considered a reasonably rigorous test, it is important to note that it is administered through a system of statistical sampling. This means it doesn’t include all students, or even all schools, in a state. Further, the distinctions between states at the top are marginal, a difference of as little as one percentage point, calling into question the import of a “number one” ranking.

Regardless of the measure, though, Massachusetts ranked first in NAEP scores in at least reading as early as 2002, before Governor Romney took office. That year, Massachusetts fourth graders scored an average of 234 points on the NAEP reading exam, well above the national average of 217. In 2005, they scored 231 in reading compared to 217 across the country, and fourth graders scored 247 in the math exam compared to the national average of 237. And even as recently as 2011, Massachusetts again ranked first according to NAEP scores in all subjects. This suggests that Romney might have just been riding the wave of high achievement; it is unlikely that his policies specifically caused these patterns.

So Governor Romney is right that Massachusetts was ranked first in the country according to the NAEP scores during his tenure. But it is harder to make a claim that the ranking was a result of his policies, especially given that the state performed well before he even took office, and still ranked first in the nation afterwards.

President Obama’s Plans: But How Would We Pay for Them?

President Obama, for his part, also spoke at length about education, saying “I think we’ve got to invest in education and training. I think it’s important…that we take some of the money that we’re saving as we wind down two wars to rebuild America and that we reduce our deficit in a balanced way that allows us to make these critical investments.”

Among those investments, he plugged his administration’s Race to the Top program (three mentions of the competition from the president in 90 minutes!). Congress and the Administration established the Race to the Top with $4.35 billion in the 2009 America Recovery and Reinvestment Act and subsequent rounds of nearly $700 million and $550 million respectively in 2011 and 2012. The President also repeated a proposal from his Democratic National Convention speech in which he called for 100,000 new science, technology, engineering, and math (STEM) teachers. That goal—a $1 billion, one-year proposal the president included in his 2013 budget request, or 1.5 percent of the Department of Education’s annual appropriation. He also called for an additional 2 million community college slots (likely funded with federal money). But if the president is to make good on his deficit-restraining rhetoric on display during the first debate, he will have a tough time finding the money to make those investments. After all, you can’t raise taxes, spend that new revenue, and then reduce the deficit.

The candidates face two more presidential debates, and a vice-presidential debate will be held next week. But there’s not much time left in the campaign for the president or Governor Romney to fine-tune their positions. And come November 6, they may be facing an entirely new reality.

During last night’s Presidential Debate, both candidates linked education into their arguments as a major workforce development issue- rhetoric that is often used by education and labor advocates but less often by presidential candidates, who are more likely to focus on the economy and other top-tier voting priorities.

Romney swung towards the center on many issues last night, and education was chief among them. When it comes to education and student aid, Romney said, “I'm not planning on making changes there.” Once again, he praised Education Secretary Arne Duncan and Race to the Top, and often focused more on what he had in common with Obama’s education policies than where they differ. One big exception, however, came when he touted his “backpack” program, in which students can use Title I and IDEA funds to attend whichever public school they choose. Some have called this a voucher program, though Romney hasn’t used that terminology to describe it.

Obama went after Romney’s approach to balancing the budget, saying that Romney would make cuts that would “[gut] our investments in schools and education.” When Romney announced Paul Ryan as his running mate, the Ryan budget raised eyebrows among many with its drastic cuts in domestic discretionary spending, a pool that includes education. As I and my colleague Clare McCann have noted on Early Ed Watch before, Ryan’s budget could have a big impact on federal education spending—though it won’t necessarily “gut” every education program.

It goes without saying these days that there is a lot of angst around Common Core implementation among state officials, local administrators, educators, and policy insiders. Many worry about the kinds of questions that will be on the new assessments, the quality of instructional materials, curricula, and training for teachers, the lack of technical capacity to handle online testing, and the possibility that federal involvement in Common Core will erode state political support. These are all significant, valid concerns within the K-12 community.

But no matter how well these issues are addressed, Common Core implementation faces a final challenge: how does higher education respond? After all, if Common Core aims to reflect “the knowledge and skills that our young people need for success in college and careers,” then the real test is whether Common Core mastery is seen as legitimate and sufficient preparation within higher education.

Thanks to the Department of Education’s ESEA waivers, this test is already happening. As I’ve written previously, states had to demonstrate adoption of college- and career-ready standards to secure ESEA flexibility. States could meet the bar in two ways: through Common Core or through standards approved by the state’s postsecondary institutions, which certify that students meeting the standards will not need college remediation. Last week, Bellwether's Chad Aldeman examined two recent requests based on the latter option, Alaska and Puerto Rico. Both waivers come up short. Postsecondary institutions support the standards, but not where it counts: policy. Neither assures that students meeting the K-12 standards will enter directly into college-level courses.

But what will encourage states to change remediation policy? It’s clearly not a waiver requirement. In November, Minnesota submitted a nearly-identical letter from its postsecondary leaders to certify the state’s math standards. But the letter admitted Minnesota lacks “any empirical evidence that students who master those standards do not require remediation in higher education." Isn’t that the point? They may say that standards mastery will lead to college-level work, but Minnesota failed to take any real action to guarantee it. Still, the Department approved the waiver request... and will likely do the same with Alaska and Puerto Rico. 

College- and career-ready standards, Common Core or otherwise, are only meaningful if they’re accepted by higher education and legitimized through the admissions and remedial placement process. Unfortunately, postsecondary institutions remain on the periphery of Common Core implementation, even as states begin to link high school exit exams to college readiness standards. The ongoing development of college- and career-ready assessments has allowed institutions to delay making decisions about how they will treat the new standards. But justified delay can become indistinguishable from unjustified avoidance.

Fortunately, not all states are waiting. In 2009, Kentucky adopted statewide performance indicators for readiness that translate from K-12 to higher education and are used to make remedial placement decisions in all public colleges and universities. Placement exams are where college readiness meets reality. No matter the assessment used, these measures serve as significant barriers to entry in higher education – with students identified for remediation much less likely to complete their degree. Since Kentucky requires high school students to take the ACT, many indicators are based on those benchmarks now, but can be updated to include the Common Core assessments in time.

Instead of avoiding the issue and defining readiness on an institution-by-institution basis, more states should follow Kentucky’s lead and adopt uniform performance standards for K-12 and higher education. And the Department can help by raising the bar for states to demonstrate their standards are certified by postsecondary institutions in both ESEA waivers and its ESEA reauthorization Blueprint. Otherwise, the tremendous efforts to implement college- and career-ready standards by governors, chief state school officers, the assessment consortia, and educators, may be for naught. Without concrete state policies, higher education will continue to decide – as they always have – what college readiness really means. 

On Friday, the U.S. Department of Education released the first official three-year cohort default rates for postsecondary institutions. As has been widely reported, more than 200 schools had rates at or above 30 percent and now must develop default prevention plans for submission to the Department. Which sectors are feeling the default prevention plan heat? At Higher Ed Watch, we thought we’d take a closer look.

But first, here’s some background on the development of cohort default rates. For nearly 20 years, the Education Department has kept track of the cohort default rates of every college that participates in the federal student-aid programs. The rates measure the percentage of students who have defaulted on their federal loans within two years of leaving college. The Department has used this measurement to sanction schools where large numbers of former students consistently fail to repay their debt.

In 2008, during the reauthorization of the Higher Education Act, Congress included a provision in the law to transition from requiring Title IV institutions to measure and report two-year federal student loan cohort default rate to a three-year rate.  Lawmakers recognized that the two-year window was too short to capture the extent of the problems students were having with paying back their federal loans.

Will Romney and Obama discuss education during Wednesday's domestic policy debate?

On this week's podcast, Education Policy Program Director Kevin Carey and Education Week reporter Alyson Klein explain what they’ll be watching for during the debates and what questions they’d like to hear the candidates answer. Also on this podcast, Clare McCann, program associate for the Education Policy Program, breaks down the education issues driving the New Hampshire gubernatorial race. This is the first of three installments about key state and Congressional elections.

The American Recovery and Reinvestment Act of 2009 provided an unprecedented $100 billion in additional funding for education over fiscal years 2009, 2010, and 2011. It has been notoriously difficult to interpret how states used those funds, despite promises of “transparency” from the Obama Administration. Did the money go to support the states that needed the most help? According to a recent U.S. Department of Education report, no—on average states with high per pupil spending and high student achievement received the most.

The report examines distributions of ARRA funds per pupil at the state level, grouping them by various indicators of need such as student poverty, budget gaps, and percentages of students attending persistently low-achieving schools.  The authors find that 25 percent of states that had the highest per pupil spending received an average of $435 more per pupil than the 25 percent with the lowest spending. The trend is mostly explained by $4.4 billion in Race to the Top (RttT) grants which were awarded primarily to higher-spending states.

The 25 percent of states with the highest student poverty rates received the least ARRA funding per pupil, $1,358 compared to $1,372 on average. The states that received the most per pupil were actually the states with average poverty rates (between 12.9 and 20.4 percent). Those states received $1,419 per pupil on average. Similarly, states with the highest performing students (based on the percentage scoring proficient on National Assessment of Education Progress tests) also received more per pupil than states with lower-performing students. The high-performing states received $1,463 per pupil, while the low-performing states received $1,304.

However, the report’s findings suggest more ARRA funds found their way to states with big budget gaps. States with the largest budget shortfalls did receive more funding per pupil than those with smaller shortfalls – a surprising conclusion given that Congress did not target the funds to states with large funding gaps. The 25 percent of states with the highest funding gap received $1,431 per pupil, while those states with the smallest gaps received $1,288. Again, this difference is primarily attributable to Race to the Top funding – the states with the largest gaps received $109 per pupil in RttT, while the states with the smallest gaps received only $7 per pupil.

Overall, it is not be completely surprising that the ARRA funds did not target states with the highest need as measured by student achievement and spending. Much of the ARRA funds were distributed through existing federal funding formulas like Title I or Individuals with Disabilities Education Act, which take into account many other factors besides need like state size. The State Fiscal Stabilization Fund, the largest program in the ARRA, distributed funds according to population size. Instead, Race to the Top, a $4.4 billion competitive grant program, seems to drive most of the funding differences across states. This is likely because it was intended to benefit states that were willing to or already investing in their education systems and demonstrating positive results.

Still, interpret the Department’s conclusions with caution. In calculating per pupil expenditures, the authors had to exclude some ARRA funding that technically went to education programs. But more importantly, the figures include all State Fiscal Stabilization Funds allocated to each state, not only those spent on K-12 education. States were allowed to spend the funds on both K-12 and higher education, and on average 20 percent of the funds went to higher education. As a result, the numbers cited above and in the report actually overstate per pupil spending from ARRA, particularly in states that spent most of those funds on higher education, like Wyoming and Colorado.

In all, the report sheds some much-needed light on the distribution of ARRA funds to states (as well as school districts, though that is a whole other discussion). And it suggests that the various ARRA programs mostly did what they were intended to do – push out money to states as quickly as possible based on existing funding formulas and population. While the Department attempted to encourage states and districts to use these formula funds to support reform efforts, few did. Instead the overwhelming goal of keeping teachers in classrooms and students in seats dominated. Any hope of reform now rides completely on the backs of the competitive grant programs.