Financial Aid

In his State of the Union address, President Obama called on Congress to prevent federal student loan interest rates from doubling later this year. This is the culmination of decades of legislative changes to the federal student loan program. Few people are aware of the policies that led to the pending student loan interest rate increase and many question whether the 6.8 percent fixed interest rate charged on the most widely-available loans provides a real benefit to students.

The Federal Education Budget Project today released an issue brief regarding federal student loan interest rates. This issue brief details the history of interest rates on federal loans, including the decisions that led to today’s fixed rates and the pending rate increase. It also examines the popular argument that current rates are unfavorable for borrowers and disputes the claim that student loans earn revenue for the government. 

The timeline below shows the interest rates on federal student loans taken out in each year, as well as the Congressional action that led to these interest rates. Roll over the points in the graph for more information.

In the Budget Control Act of 2011 (aka the debt ceiling agreement) Congress provided the latest round of supplemental funding for the Pell Grant program. The law included $10 billion for fiscal year 2012 for the program and another $7 billion for fiscal year 2013. The law offset the cost of that one-time supplemental  funding by eliminating a type of federal student loan available to graduate and professional students — Subsidized Stafford loans.  These loans will no longer be issued to borrowers as of July 1, 2012. While this is old news to some, it’s come to our attention that Ed Money Watch posts and Federal Education Budget Project issue briefs do not fully explain an important nuance in what this policy change means for graduate students. Let’s set the record straight.

Since the early 1990s, federal student loans have been available to borrowers regardless of family income. This includes undergraduate, graduate, and professional students. In earlier years, only middle and lower income families qualified for federal student loans, and the federal government did not charge interest on these loans while borrowers were enrolled in school. When Congress opened up the loan program in the early 1990s to effectively all students regardless of income, lawmakers maintained the in-school interest-free benefit for lower to middle income borrowers but did not offer this benefit to higher income borrowers.  Interest on loans issued to higher income borrowers accrues (but does not compound) while the borrower is in school. The loans with the interest benefit are called Subsidized Stafford loans and those without are Unsubsidized Stafford loans.

When Congress eliminated Subsidized Stafford loans for graduate students last year, most reports of this policy change (including ours at Ed Money Watch) explained that graduate students will lose the “in-school” interest benefit on loans issued on July 1, 2012 and later. But borrowers of Subsidized Stafford loans received additional benefits beyond the in-school subsidy, and few reports have mentioned that these benefits have also been eliminated – borrowers qualified for an interest-free benefit during the six months after leaving school (the so-called grace period interest benefit) and under any deferment period, including the three-year deferment periods for unemployment or economic hardship.

What is more, Subsidized Stafford loans provide an important benefit under the Income Based Repayment plan that Unsubsidized Stafford loans do not.  A borrower with Subsidized Stafford loans who does not pay enough each month to cover the interest on his loans (“negative amortization”) has this unpaid interest forgiven. Subsidized Stafford loan borrowers are eligible for this benefit for up to three years of repayment.  The federal government does not forgive this unpaid interest for borrowers with Unsubsidized Stafford loans, meaning their loan balances can grow while using Income Based Repayment.  (It’s interesting that the Obama Administration has fought to make the Income Based Repayment plan more generous for borrowers but simultaneously supported eliminating the Subsidized Stafford loans for graduate students, which makes Income Based Repayment far less generous for these borrowers.)

In short, eliminating Subsidized Stafford loans for graduate students means more than the loss of the in-school interest-free benefit. It includes the loss of a whole host of interest-free benefits for graduate students that would have received subsidized loans. These benefits helped lower costs for borrowers not just while they were in school, but during periods when they needed to delay (deferment) or reduce (income based repayment) repaying their loans.  For some students, those out-of-school interest benefits may have been worth more than the in-school portion, and they should be included in any analysis of the effects the elimination of Subsidized Stafford loans will have on graduate students. Moreover, policymakers and education advocates should keep this more complete explanation of the interest benefit in mind as they debate any proposal to end the still-available benefit for undergraduate students.

Media reports indicate that the House and Senate have reached an agreement on fiscal year 2012 funding for the U.S. Department of Education as part of an omnibus spending bill that covers multiple federal agencies. Many education supporters have been waiting to see how Congress will fund the Pell Grant program for fiscal year 2012 (which will support grants in the 2012-13 academic year) given that the House and the Senate had previously proposed very different plans for the program. Although both chambers proposed maintaining the current maximum grant of $5,550, a House draft would have made nearly a dozen changes to eligibility rules that reduced the cost of the program, while the Senate proposed redirecting money spent on student loan subsidies to Pell Grants.

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Here’s some good news for Pell Grants. Budget analysts expect the program to run a small surplus in fiscal year 2012. It turns out that Congress overfunded the program ever so slightly over the past few years, and as lawmakers look to finalize fiscal year 2012 funding in the coming days, they are likely to overshoot just a bit on Pell Grant funding. This is particularly good news because for the past few years Congress has done just the opposite—lawmakers have knowingly underfunded the program, throwing fuel on the Pell Grant funding fire.

Because Pell Grants operate like an entitlement, but one for which Congress has to actually appropriate funding (real entitlements don’t need annual appropriations, they are automatically funded), Congress has to estimate how much the program will cost at least a year in advance. That estimate changes throughout the year as new data on student enrollment, income, etc. become available.

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The Senate’s plan for funding the fiscal year 2012 Pell Grant hit a snag last week – the Republican-controlled House Budget Committee blocked a provision in the Senate proposal that would use fiscal year 2013 funding to support the fiscal year 2012 grant. The House and Senate have each staked out a Pell Grant funding plan for the upcoming school year, but a final compromise bill is still weeks or even months away. Suffice it to say the two proposals are very different (see our earlier post here) so the recent budget ruling on the Senate bill will only complicate a final compromise bill.

The Senate bill (S. 1599), which has been approved by the appropriations committee, not the full Senate, would provide the $24.3 billion needed to maintain the $5,550 maximum grant in the 2012-13 school year. Except some in Congress claim the bill falls $896 million short of that target.

Specifically, the Senate’s proposed Labor-HHS-Education appropriations bill provides a regular appropriation of $23 billion for Pell Grants in 2012, plus a supplemental $1.3 billion. The supplemental funding is offset (i.e. paid for) by a provision in the bill that ends the interest-free benefit on Subsidized Stafford loans during an undergraduate borrower’s six-month grace period after leaving school.

This change, however, doesn’t fully offset the $1.3 billion in supplemental funding that the bill would provide in fiscal 2012. It only offsets $400 million, leaving $896 million not offset.

However, eliminating the interest rate benefit creates savings every year because it ends an ongoing policy, meaning that savings accrue in fiscal year 2012 and following years. The Senate bill uses those future year savings to allocate the Pell Grant program extra funding in fiscal year 2013. Then, the bill includes language allowing exactly $896 million of that extra fiscal year 2013 funding to support fiscal year 2012 Pell Grants.

While shifting the timing of these funds wouldn’t affect the operation of the Pell Grant program, members of the House Budget Committee successfully argued (successfully ruled might be more apt) it sets a precedent that funding provided for Pell Grants for a future year could be raided to pay for a current year – creating a massive funding cliff. Supporters of the Senate proposal, on the other hand, say the budget rules that apply to the Pell Grant program allow for the timing shift since the rules specifically reference “award year" and not “fiscal year.” (An award year overlaps two fiscal years.)

But those who have argued against the Senate’s provision make a good point. The debt ceiling law enacted earlier this year (the Budget Control Act) provided supplemental funding for Pell Grants in both fiscal years 2012 and 2013, giving the program an emergency lifeline for two years. Congress could use a provision like the one in the Senate’s proposed funding bill as a precedent to justify shifting the $7 billion the debt ceiling law provided for fiscal year 2013 into fiscal year 2012.

If the Senate proposal is ultimately enacted, students will not receive smaller Pell Grants than they otherwise would have without this new snag. But it does mean the Senate Labor-HHS-Education appropriations bill is over its spending limit and must be trimmed before becoming law. In other words, the bill has to spend $896 million less than it currently does. That isn’t a lot of money in the grand scheme of the Labor-HHS-Education appropriations bill.  Even so, “finding” $896 million at this stage in the appropriations process visibly pits one program (Pell Grants) against a lot of others.

That’s certainly a cause for concern among Pell Grant supporters, especially during these desperate budget times. And you know what they say about desperate times…

As we wrote earlier this week, the House Appropriations Committee’s Labor-HHS-Education Appropriations bill for fiscal year 2012 makes numerous changes to eligibility rules for the Pell Grant program. These changes lower the cost of the program by $3.6 billion in 2012, meaning Congress needs to the fund the program at only $20.7 billion to maintain the maximum grant of $5,550 for the 2012-2013 school year. That’s down $2.3 billion from 2011 levels. Naturally, some of the eligibility changes affect the cost of the program more than others. According to a preliminary Congressional Budget Office (CBO) estimate, however, the changes that lower the cost of the program the most are surprising.

Upon first reading the House Committee’s appropriations bill, the change that most struck us at Ed Money Watch is the elimination of Pell Grants for students attending school less than half-time. This change would prevent students going back to school at night to earn a degree over several years from receiving Pell Grants. But while this would have a significant effect on individual students, the cost reduction from this change are actually quite small – $109 million in 2012 and $555 million over five years. In other words, if Congress approved the less-than-half-time eligibility change, the annual appropriation needed to fund a maximum grant of $5,550 would be $109 million less than it would be without the change.

The proposed reduction in the maximum number of semesters a student can receive a Pell Grant – from 18 to 12 – results in relatively large cost reductions: $535 million in 2012 and $2.7 billion over five years.

But the change that would result in the greatest savings is the reduction in the amount of a student’s personal earnings that can be excluded from a Pell Grant award calculation. This change, which affects different types of students differently, would reduce the appropriation required to keep the maximum grant at its current level by $1.6 billion in 2012 and $9.1 billion over five years.

While there is currently little information available on how this change would affect Pell Grant recipients, it’s worth reviewing what role the income protection allowance plays in determining who gets a Pell Grant and how much aid a student could receive.

Pell Grant awards are based on a student’s Expected Family Contribution (EFC). The EFC is determined by subtracting a family’s expenses (including living expenses, retirement needs, and tax liability) from its total income and, in some cases, assets and then identifying a reasonable percentage of that remaining income to support postsecondary education costs. The EFC is calculated slightly differently for students depending on whether they are dependents, independents with dependents (such as children), or independents without dependents. Importantly, if a student is independent, then the calculation does not include any financial information from his or her parents.

Once a student’s EFC is calculated, a student’s Pell Grant award size is the lower of (1) the total maximum Pell Grant (currently $4,860) minus the student’s EFC, or (2) Cost of Attendance (COA) at the student’s institution of higher education minus that student’s EFC. Students that are attending school less than fully time receive an award that is ratably reduced. After a student’s basic award is calculated, a mandatory award of $690 is added to the total amount (resulting in a total maximum award of $5,550).

The change in the income protection allowance means that more of a student’s personal earnings would be included in their EFC calculation than are currently, resulting in a smaller Pell Grant award overall. And students who may have otherwise qualified for a small grant may get none.  But the change would be different for different students. For some students, the amount of personal income they can exclude from their EFC calculation would decrease by as little as $2,710. But for others, the exclusion would decrease by $7,000 or more.

For dependent students, the amount of personal earnings that would be excluded from the EFC calculation would decrease from $6,000 to $3,290. For independent students without dependents who are single or who are married to spouses who also receive Pell Grants, the amount would decrease from $9,330 to $6,620. For independent students without dependents who are married to spouses that are not receiving a Pell Grant, the personal income exclusion would drop over $4,000 from $14,960 to $10,620. The personal income exclusions for independent students with dependents, which changes depending on the total size of the student’s family, would decrease by significant amounts starting with $6,850 for a family of two. Click here to see a side by side comparison of these changes to the personal income protection exclusion with the current law.

In the end, each of the changes the House appropriations bill makes to Pell Grants will have varying effects on the discretionary cost of the program (we’ll leave a discussion of the effects on the mandatory/entitlement cost for another time). Some of the changes are relatively insignificant, saving less than $100 million in 2012, while others are huge, like the personal income exclusions described above. But each of these proposed changes will be important bargaining chips as the House and Senate negotiate a final fiscal year 2012 appropriations bill over the coming weeks and find a way to pay for the 2012-13 academic year’s Pell Grant.

The country is facing a serious debt crisis that threatens to undermine our economic recovery. No, not that one. American households are carrying around $11.4 trillion of debt.

Negotiations over raising the debt ceiling—and what legislative changes should be adopted to reduce the deficit—are now centered around competing proposals from House Speaker John Boehner and Senate Majority Leader Harry Reid. At this time, it seems likely that one of these proposals, or some mid-point, will be passed by Congress in the coming days.

As we wrote last week, any proposal that Congress ultimately adopts to reduce federal spending would include caps on annual appropriations for future years, and would be enforced by across-the-board spending cuts called “sequestration.” We also wrote that caps on so-called discretionary spending will squeeze education funding over the coming years as nearly all federal education programs are funded through the annual appropriations process.

Both the Reid and Boehner proposals would put such caps and enforcement rules in place for the next 10 years. Both proposals divide the caps between defense spending and non-defense spending, so that one pot of funding cannot be robbed to pay for the other.

Both proposals take nearly identical steps to shore up the Pell Grant program and mitigate the squeeze that appropriation caps will put on the program—but only for two years. Each proposal would end the “in-school interest subsidy” on subsidized Stafford loans for graduate and professional students and use the resulting 10-year savings to put more money into Pell Grants. The Boehner plan also produces additional savings by ending on-time repayment incentives for student loan borrowers beginning with loans issued after July 2012. This additional proposal would save $3.6 billion over ten years according to the Congressional Budget Office.

Both plans provide supplemental funding for Pell Grants in fiscal years 2012 and 2013, effectively reducing the funding needed through annual appropriations to maintain the program’s current maximum grant of $5,550 in 2012 and an even higher grant the next year. So, the maximum Pell Grant could be maintained with an appropriation of only $25 billion instead of $34 billion in the 2012 appropriation. The table below details Pell Grant funding under both proposals. Note the spike in the appropriation that is required in fiscal year 2014.

As Congress moves closer to finalizing a deficit reduction plan in the coming days, it looks like lawmakers have agreed to provide more supplemental funding for Pell Grants—but at the expense of eliminating interest rate subsidies on federal loans for graduate students. This move makes it much more likely that lawmakers will maintain the maximum grant of $5,550 next year and provide the inflation-indexed increase the following year as enacted under the Student Aid and Fiscal Responsibility Act of 2010. However, the move also continues two recent trends: ad-hoc, one-year emergency funding for Pell Grants, and a Pell Grant program that is fast consuming the entire budget of the U.S. Department of Education.

As the drama of ongoing negotiations between the president and Republican Congressional leaders to raise the debt ceiling and cut the deficit wears on, one arcane idea seems to come up over and over again: Revising the government’s measure of price inflation—the Consumer Price Index—to use a more sensitive and arguably more accurate formula, known as the chained Consumer Price Index. That change could reduce spending by $300 billion over ten years. (The New America Foundation’s Committee for a Responsible Federal Budget and the Moment of Truth Project have made the case for this change in a 2011 paper.) What exactly is this proposal, and would it affect any education programs?

The Consumer Price Index (CPI) influences a plethora of government benefits, as well as many provisions in the tax code. It is used to calculate Social Security benefits, veterans’ benefits, annual increases in tax brackets, the size of tax deductions, the phase-out levels for tax credits, and other aspects of fiscal and social policy. Two forms of the CPI are currently used for these purposes. Replacing those versions with the “chained CPI” (C-CPI) would more precisely evaluate how consumers spend money by using a more careful calculation of how consumers fill the “market basket of goods” used to calculate inflation. According to economists, this provides a more accurate measure of inflation, but also a lower one than the CPI. The upshot is that any federal spending that increases with inflation wouldn’t rise as fast under the C-CPI.

So what does this mean for education programs? If the federal government switched its inflation gauge to C-CPI it would reduce eligibility and the maximum award for the Pell grant program; and over time, fewer people would qualify for education tax benefits, and tax benefits would shrink for those who still qualify.

As a result, middle-class taxpayers and low-income students, in particular, could find it more difficult to put themselves or their children through college—but they probably won’t know it. That’s what makes a switch to the C-CPI a sort of stealth spending cut. Moreover, the reform’s effects, which would save a total of about $3 billion government-wide in 2012 if implemented now, will build slowly overtime, producing more dramatic effects over the long term as the savings amount to about $300 billion over a decade and as much as $63 billion in fiscal year 2021 alone.

The change would have a more pronounced effect on the Pell program than on education tax benefits. The Student Aid and Fiscal Responsibility Act of 2010 (SAFRA) reformed Pell funding calculations to raise the maximum award to $5,550 in fiscal year 2011, but also tied annual increases in the maximum award to the CPI beginning in 2014. If the maximum grant is indexed to the C-CPI instead of the regular CPI, it will increase at a slower rate. As a result, the lowest-income students will receive smaller federal financial aid packages than they otherwise would.

Given the premium the president placed on Pell grants and other affordability measures since taking office, reforming the Consumer Price Index would be a step backwards from his stated goals of making higher education affordable for the neediest students.

Estimates from the Congressional Budget Office indicate that the impact on education programs (namely, Pell grants) from using the C-CPI would total a loss of more than $4 billion in Pell grants between 2012 and 2021.

Education tax credits would also take a hit from the CPI reform. Many of the education-related credits are linked to the CPI in calculating the size of the credit a taxpayer is eligible to receive. Switching to the chained CPI would increase the size of the credit at a slower rate than taxpayers would see using the current CPI formulas. Other credits, like the Student Loan Interest Deduction, specify a phase-out level at which the credit is available only at a reduced rate. In these cases, the income level at which the phase-out begins is adjusted upward each year to match inflation, but under C-CPI those adjustments will likely be smaller every year. This means that students claiming the tax credit within the current phase-out level may be closed out of the credit entirely under the new formula.

A switch to the C-CPI would also revise eligibility criteria for the American Opportunity Tax Credit and the Lifetime Learning Tax Credit. The American Opportunity Tax Credit is currently available to those making $80,000 annually or less ($160,000 annually if filing jointly), and is phased out for those with income over $80,000. It is a modification of the Hope tax credit (which returns in 2013 after the American Opportunity Tax Credit expires), designed to expand the reach of the program to more taxpayers and to cover more expenses. The Lifetime Learning Tax Credit has a lower maximum income for eligibility; phase-out credits apply to taxpayers with annual incomes between $50,000 and $60,000 ($100,000 - $120,000 if filing jointly). The income thresholds used to determine eligibility for both credits are indexed to inflation, but would increase at a slower rate under the chained CPI than under the current CPI.

As the United States faces down an August 2 deadline to raise the debt ceiling and with lawmakers demanding policies to reduce the federal deficit, both sides will have to make bold and politically-contentious compromises. Implementation of the chained CPI may become a serious line on the agenda in the deficit and debt negotiations because of its potential for savings and its economic merits. Additionally, it may be more likely to gain political traction because its effects will not be immediately felt, providing political cover to legislators. Further down the road, though, the lowest-income students and middle-class families could shoulder much of the burden if federal education assistance is trimmed through use of the C-CPI. That makes it even more important for lawmakers to work to strengthen federal student aid programs and balance out the effects of a change to the government’s inflation gauge. U.S. rankings are slipping in global educational attainment and reducing affordability will likely only entrench that trend.

Over the past five years, policymakers across the country have turned their focus to the availability and use of education data. These data, whether they focus on funding, demographics, or outcomes, can be important and powerful tools in the policymaking process. Despite national calls for improved access to data (by policymakers, researchers and the public, alike), much of today’s education data are still buried deep inside state and federal agencies or available in inaccessible formats.

The Federal Education Budget Project (FEBP), an initiative of the New America Foundation and Ed Money Watch’s parent initiative, seeks to bring those data into the light. Today, FEBP released the latest version of its website, www.EdBudgetProject.org, which expands upon an already rich array of education data. Since its launch in 2008, FEBP has become the largest, most up-to-date source of information on both K-12 and higher education funding, demographics, and outcomes. See the video below for a brief introduction to the site.

The FEBP website now provides data on every institution of higher education in the country, including an easy-to-read account of federal financial aid trends, student demographics, and student and school outcomes at each institution. These data can be used to compare federal funding across institutions, assess the degree to which students at individual schools have access to various forms of financial aid, and evaluate student and school outcomes at different types of institutions.

The newly released data include:

• Allocations and disbursements of federal grants and loans such as Pell Grants, Stafford Loans, Grad PLUS Loans, Work-Study, and Perkins Loans;
• Average grant and loan awards and student participation rates in aid programs;
• Graduation rates, retention rates, student loan default rates, and student loan repayment rates; and
• Tuition and fees, including average net price after financial aid.

The new website also features a more user-friendly interface with improved graphics and maps. These changes make the site easier to use and are tailored to the needs of various types of users including policymakers, the media, and the public. The improvements include:

• A simplified interactive comparison function for both K-12 and higher education data;
• Faster and easier data downloads for analysts and researchers; and
• More visually pleasing maps of states, K-12 school districts, and institutions of higher.

The website also includes recently updated K-12 data for every state and school district in the country. These data come from multiple sources including the U.S. Department of Education, state departments of education, and the U.S. Census Bureau. They include:

• State and district Title I allocations under the recently finalized fiscal year 2011 appropriations;
• State IDEA, Impact Aid, School Nutrition, and Education Jobs Fund allocations; and
• State and school district per pupil expenditure and demographic data for 2009.

The new version of the FEBP website allows users to follow the flow of federal dollars to states, K-12 school districts, and institutions of higher education. It is a useful tool that combines data on funding, demographics and outcomes from multiple sources and makes them all available in one easy-to-use place. Additionally, the site provides background and analysis on major federal education programs, national rankings maps and analysis, and policy papers and issue briefs.

Check back with Ed Money Watch over the coming weeks as we dive into the new K-12 and higher education data as part of our “Examining the Data” series.