Ed Money Watch

A Blog from New America's Federal Education Budget Project

Will President's Proposal Fix TEACH Grants?

February 21, 2012

The federal government funds several programs that seek to improve the quality of teachers in low-income schools, focusing mostly on training, compensation, and evaluation. But few of these programs provide a benefit directly to teachers. The president’s budget request, released last week, would phase out and replace one such program, TEACH Grants, with a new one called Presidential Teaching Fellows. Under the proposal, the Department of Education would provide funds to states via a formula and states would then distribute the grants to students at eligible, high-quality teacher training programs. It would cost significantly more than the TEACH Grant program – mainly because the Administration expects it to be more successful (more on that below) – but it would give awards to only a third as many students.

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The Teacher Education Assistance for College and Higher Education (TEACH) Grant program, which was created by the College Cost Reduction and Access Act of 2007, provides up to $4,000 annually in grants for full- or part-time undergraduate students (capped at $16,000) or graduate students (capped at $8,000) who agree to teach high-need subjects like mathematics and science in high-need schools. Students must maintain a 3.25 GPA to remain eligible. TEACH Grant recipients who don’t complete the full service requirement – teaching for at least four years within eight years of graduating – have to pay back their grants as loans, including interest calculated from the time the award was issued.

But TEACH Grants have a mixed record of success, which explains the administration’s efforts to replace the program (the president also included the proposal in his fiscal year 2012 budget request). According to the Department of Education, as many as three-quarters of TEACH Grant recipients do not complete their required terms of service. This means they either do not complete four years in a high-need subject at a high-need school or do not go into teaching at all. So for the vast majority of recipients, the program simply functions as another student loan program and adds to student debt.

The new Presidential Teaching Fellowsprogram, says the Department of Education, would address a few of the root causes of the largely-unsuccessful TEACH Grants. While TEACH Grant recipients are eligible for awards in any year of their undergraduate educations, the Presidential Teaching Fellows program would be available only during their final year of an undergraduate or master’s teacher preparation program, when students are better able to commit to a specific teaching placement.

Additionally, the Presidential Teaching Fellows program reduces the service requirements for recipients to three years in a high-need subject and school within the first six years after graduation. Like TEACH Grants, the Presidential Teaching Fellows awards would still convert to a federal Unsubsidized Stafford loan should a recipient fail to complete his service requirement.

And whereas the maximum TEACH grant is $4,000 per year, the maximum annual Presidential Teaching Fellow award would be $10,000 under the president’s plan. Though the overall maximum benefit for students is lower under the president’s proposal ($10,000 for Fellows in their senior year versus $16,000 for undergraduate students receiving four years of TEACH grants), more money during that one year may provide a bigger incentive for students who need to finance their final year of their training program.

But perhaps the most powerful inspiration to replace the TEACH Grant program comes from the administration’s ongoing efforts to improve teacher and teacher-preparation programs. Under the Presidential Teaching Fellows Program, states are only eligible to participate in the program if they agree to measure the quality of teacher-preparation programs, shut down low-performing ones, and provide awards only to students at the state’s most effective teacher preparation programs. This would likely limit the number of students eligible for the program, but hopefully would also increase the number of recipients who become successful teachers.

But the Presidential Teaching Fellows program is unlikely to be an automatic slam-dunk in Congress. In an era of budget-cutting and fiscal constraints, the president has suggested replacing a program that cost $21 million in fiscal year 2012 with a new one that will cost $190 million (plus another $11 million for continued awards to 2012 TEACH recipients) in the next fiscal year. The five-year cost totals $563 million. While this new funding is meant to make a federal program work better, it’s still more spending.

The Presidential Teaching Fellows proposal would cost more than the TEACH Grant program it would replace because the Department of Education is assuming more students will complete their service requirements. That is, the administration expects that the program will be more successful in recruiting teachers to high-need schools, thereby increasing its costs. In many respects, the TEACH Grant program is really a student loan program that provides borrowers with upfront loan forgiveness that they forfeit if they do not complete the service requirement. If more students complete the service requirement, the government must provide more loan forgiveness, increasing costs.  It’s also important to note that funding for both programs is outside the annual appropriations process (i.e. mandatory or entitlement funding), so the indefinitely-funded program wouldn’t compete for annual funding like most education programs.

And there is no guarantee that more Presidential Teaching Fellows would complete their full term of service than TEACH Grant recipients currently do. A shorter required term of service (albeit with a smaller overall award amount) may not be enough to recruit top students or retain them in the field. Targeting and concentrating the assistance to a student’s final year of education may not prove more effective in rewarding more committed prospective teachers, either. And while the program would require states to evaluate their teacher training programs, there is no guarantee that those evaluations will be of high quality or will result in real improvements. There is a lot of room for the White House to make its case on these arguments, if Congress ever agrees to hear them.

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President's Budget Shows Student Loan Defaults Cost Taxpayers

  • By
  • Jason Delisle
February 16, 2012

Countless journalists, advocates, and lobbyists claim that the government profits when students default on their federal loans. But this week’s release of President Obama’s fiscal year 2013 budget brings further evidence that nothing could be further from the truth. The budget includes a new section that explains more fully the estimated recovery rates on defaulted federal student loans. The recovery rate refers to the percentage of defaulted loan volume the government expects to eventually collect.

This newly-released information also contradicts those who argue that the government doesn’t bear any default risk in making student loans. That’s exactly the argument that a number of readers have made criticizing a recent Federal Education Budget Project (Ed Money Watch’s parent initiative) issue brief that concludes that the current fixed 6.8 percent interest rate on federal student loans isn’t a money-maker for the government, due in part to the cost of loan defaults.

Take a look at the student loan section of the FY 2013 Department of Education Justifications of Appropriation Estimates to the Congress. On the last two pages of the student loan section of that document is a detailed explanation of what share of loans are expected to default and how much the government will ultimately be repaid.  A helpful table shows that the U.S. Department of Education expects 23 percent of Subsidized Stafford loan volume issued in fiscal year 2013 to go into default at some point.

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After the federal government pays collection agencies to recover the loan, the government is likely to recover about 96 percent of what the borrower owes. But those efforts could take decades, and time is money. Once the risk-free time value of money is factored in, the recovery rate drops to 82 percent. It’s even lower for Unsubsidized Stafford loans (78 percent) and PLUS loans (76 percent) which together will account for three-quarters of the loan volume issued in 2013.

In fact, these estimates are actually on the high side because the U.S. Department of Education calculates the time value of money at risk-free interest rates. A risk-adjusted rate would better reflect the fact that the estimated collections are not guaranteed to happen as projected (i.e. they are not risk-free). By that measure, recovery rates are likely to be even lower than those shown in the president’s budget.

A National Bureau of Economic Research study that uses risk-adjusted rates finds that recovery rates are only about 50 percent, which the study finds is in line with the experiences of private student loan providers. (Like federal student loans, private student loans are not dischargeable in bankruptcy, so they tend to have higher recovery rates than other types of consumer debt.)

All in all, the more complete recovery rate information on student loan defaults that debuted in the president’s budget should help set the record straight. Student loan defaults are costly for borrowers and taxpayers alike. And for those who still believe federal student loan interest rates are too high because the loans pose no default risk for taxpayers and that the federal government is the world’s best debt collector: In the words of the U.S. Department of Education, “some loans may have little or no recoveries while others may have substantial collections” [emphasis added].

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Summary and Analysis of President Obama's 2013 Education Budget Request

  • By
  • Jason Delisle
  • Jennifer Cohen
February 16, 2012
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President Barack Obama submitted his fourth budget request to Congress on February 13th, 2012. The detailed budget request includes proposed funding levels for federal programs and agencies in aggregate for the upcoming ten fiscal years, and specific fiscal year 2013 funding levels for individual programs subject to appropriations. Congress will use the president's budget request to inform its consideration of tax and spending legislation later this year, including the fiscal year 2013 appropriations bill that will set specific funding levels for federal education programs. Fiscal year 2013 begins October 1, 2012.

In August of 2011, Congress signed the Budget Control Act which set appropriations funding limits for 2013 at $1.047 trillion (excludes funding for overseas military operations, emergencies, and other adjustments). This is $4 billion above enacted 2012 appropriations. That law also established a congressional committee to draft legislation that would reduce the deficit over nine years. The committee failed to meet its goals last year, triggering a pending “sequester” (across-the-board spending cuts) of the yet-to-be enacted fiscal year 2013 appropriations. While the pending sequester is scheduled under current law, the president’s fiscal year 2013 budget request proposes that Congress pass legislation to turn it off, maintaining the appropriations funding limit of $1.047 trillion for fiscal year 2013.  

Despite the minimal increase in total appropriations funding allowed under the Budget Control Act (pre-sequestration), the administration has proposed an overall increase for education programs for fiscal year 2013. In fact, under the president's proposal, the U.S. Department of Education would receive the largest increase (in absolute terms) in discretionary funding from fiscal year 2012 levels compared to any other non-security domestic agency.

The administration has proposed a $69.8 billion budget for education programs subject to the annual appropriations process, up from $68.1 billion in 2012. The increase is due to moderate funding increases for several programs, including Race to the Top, Work-Study grants, and the Teacher Incentive Fund. Other key programs, such as Title I Part A grants to local educational agencies, Individuals with Disabilities Education Act Part B grants to states, and Pell Grants would be funded at 2012 levels. In addition, the president is requesting $62.9 billion in fiscal year 2012 for education stimulus spending under his American Jobs Act proposal outlined in 2011. This funding is proposed in addition to the enacted fiscal year 2012 appropriations totaling $68.1 billion for the Department of Education.

The Federal Education Budget Project this week released an issue brief that provides a summary and analysis of the president's fiscal year 2013 education budget request.

Click here to view the full report.

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Key Questions on the Obama Administration's 2013 Education Budget Request

  • By
  • Jason Delisle
  • Jennifer Cohen
February 14, 2012
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President Barack Obama submitted his third budget request to Congress on February 13th, 2012. The budget request includes proposed funding levels for all federal programs and agencies in aggregate for the upcoming 10 fiscal years, and specific fiscal year 2013 funding levels for programs subject to the annual appropriations process.

It is important to remember that the president's budget request is a policy and budget proposal, but not legislation or law. Actual fiscal year 2013 funding levels for nearly all federal education programs will be determined through the congressional appropriations process that Congress aims to complete by the start of the new fiscal year, which begins October 1st, 2012. Policy changes and funding levels that the president proposes for education programs not funded through appropriations process (i.e. mandatory programs) are also subject to congressional approval.

In an effort to heighten the quality of debate on federal education policy, the New America Foundation's Federal Education Budget Project has reviewed the president's proposals and generated a list of key questions policymakers, the media, stakeholder groups, and the public should ask about the proposals.

Click here to view the full PDF.

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Friday News Roundup: Week of February 6-10

  • By
  • Clare McCann
February 10, 2012

Pennsylvania Governor Tom Corbett’s budget plan would give more money to schools, but most would go to pensions

Michigan’s 3% proposed funding hike for public universities tied to performance

Florida House approves $69 billion state budget

Missouri Governor Jay Nixon adds $40 million to proposed higher education budget

Pennsylvania Governor Tom Corbett’s budget plan would give more money to schools, but most would go to pensions
Pennsylvania Governor Tom Corbett this week released his fiscal year 2013 budget proposal. The plan would include $10 billion for public schools, 3.4 percent more than K-12 education received in fiscal year 2012. Most of that new funding, though, will be directed to teacher pensions. Funding for school districts and special education programs – $5.4 billion and $1 billion, respectively – is virtually the same as in 2012, and the state pre-K program will lose about $5 million from 2012 levels. In fiscal year 2012, the legislature avoided significant cuts to the K-12 budget by reducing spending increases in other areas, including welfare; legislators said that would not be the case in this year’s budget. In addition to the effective cuts to school districts for public K-12 education, Governor Corbett proposed a 25 percent cut to state colleges and universities. More here…

Michigan’s 3% proposed funding hike for public universities tied to performance
In his fiscal year 2013 budget proposal, Michigan Governor Rick Snyder will include a provision to increase funding for state universities by 3 percent. However, the funds will be divided according to a formula that accounts for growth in college completion rates, number of students graduating in particular fields, number of students receiving Pell Grants, and the degree to which schools are able to avoid tuition hikes. In fiscal year 2012, Governor Snyder’s budget also offered incentives to restrain tuition increases, only cutting state aid by 15 percent for schools that held hold tuition increases to below 7.1 percent as opposed to 22 percent. Michigan’s state aid to public universities has fallen in recent years – per-undergraduate student state support has fallen from $6,869 in fiscal year 2001 to $4,577 in 2012 – but this year’s budget reverses that pattern due to the small increase in spending. More here…

Florida House approves $69 billion state budget
Florida lawmakers advanced the state’s fiscal year 2013 budget process this week with a House vote on a $69.2 billion budget. The bill included a $1 billion increase for public K-12 education – not quite covering last year’s $1.3 billion cut to public schools – paid for with cuts to low-income healthcare programs. It would also raise college tuition by 8 percent and cut the Bright Futures state scholarship program by 9.3 percent. The bill does not include any new taxes to provide additional revenue. The state senate has not yet voted on a budget plan, but one moving through the chamber now would freeze tuition at the state’s public universities and increase it by 3 percent at public colleges. More here…

Missouri Governor Jay Nixon adds $40 million to proposed higher education budget
Missouri Governor Jay Nixon’s 2013 budget proposal, released last month, originally included a 12.5 percent, or $106 million, cut to higher education. But controversy over the spending reduction from Republican lawmakers and university officials led him to release an amended version of the proposal this week that adds back $40 million for state colleges and universities. College and university officials had warned that the budget cuts may force them to raise tuition, furlough employees, and limit course offerings. The additional funding will come from a state lawsuit with mortgage banks. A settlement in that case is expected to yield $140 million for the state; of that, $100 million will be used to aid homeowners, and the remaining $40 million will be spent on higher education. More here…

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A Closer Look at the History, Subsidies, and Cost of Federal Student Loan Interest Rates

  • By
  • Jason Delisle
February 9, 2012

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.

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Uncertain Futures for President's STEM Proposals

  • By
  • Clare McCann
February 7, 2012

Science, technology, engineering, and math (STEM) have featured prominently in the Obama administration’s education policy priorities, most recently as the focus of the third round of Race to the Top funding. And it looks like it will play a big role moving forward: An announcement from President Obama at today’s White House Science Fair offers a peek into the administration’s fiscal year 2013 budget proposal, which will apparently include a spotlight on STEM learning. But the real story is buried behind the budget rhetoric – the president also proposes a new STEM focus to the existing Teacher Incentive Fund program, which will require no Congressional action.

The details on the budget request should not be ignored, of course. This year, says the White House, the president’s budget request will include a host of new and revitalized STEM programs. Among them is $80 million for a new competitive grant program to provide funding for STEM teacher preparation programs. The federal funds will be accompanied by private investments from a coalition of companies and organizations called 100Kin10; 14 members will collectively contribute $22 million to a fund dedicated to STEM teacher preparation and support, distributed by the group. These efforts are a follow-up to his 2011 State of the Union address, in which Obama issued a challenge to the education community to prepare 100,000 new STEM teachers.

The president will also propose a $100 million investment in the National Science Foundation to support new and existing programs to improve the quality of postsecondary STEM education. He will resubmit a request for funding for the First in the World program, now with a new STEM priority. The program would reward applicants with innovative ideas for improving college completion rates and lowering the costs of postsecondary education. And the president will recommend a joint Department of Education-National Science Foundation project to support K-16 education reforms through evidence-based approaches to mathematics learning. The project will be jointly funded, with $30 million contributed each from the Department and NSF.

But it is unlikely that Congress will even pass a budget for fiscal year 2013 before the fiscal year begins – many members will be busy running for reelection or consumed by the presidential election – so most of these proposals probably won’t see the light of day on the Hill.

Instead, the real story lies in the proposals that require no Congressional approval.

The Department of Education, promised the announcement, will continue to focus on STEM education in its next Race to the Top (RTT) competition. This refers to the nearly $550 million Congress appropriated for Race to the Top in its fiscal year 2012 budget. The competition, which is open to both states and school districts, is likely to take place later this year.

More significantly, however, the president announced that a portion of funding already appropriated for the Department of Education’s fiscal year 2012 Teacher Incentive Fund – $300 million – will be newly dedicated to improving “compensation, evaluation, and professional development systems for STEM educators.” These types of interventions have the potential to strengthen the STEM teacher force by attracting and retaining STEM professionals in teaching. And because the change will require no legislative changes, the Department can begin to implement it immediately, starting with the next round of TIF grants.

To improve general teacher quality, the president announced that the TEACH Grant program, funded with nearly $24 million in fiscal year 2012 to distribute grants to undergraduate students who plan to teach in schools that serve low-income students, will now target postsecondary students at top schools. The Department will also factor quality into its TEACH Grant distribution.

President Obama’s proposal represents a marked policy shift toward focusing on STEM, adding some weight to his rhetoric on improving STEM readiness. But most of the administration’s proposals are likely to be tossed aside if and when Congress starts its own 2013 appropriations process (as are most White House budget requests), particularly if Congress is weary of increased domestic spending. Given that reality, the president may have to rely on the Department of Education to head up this new STEM charge through programmatic changes to the Teacher Incentive Fund alone.

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Friday News Roundup: Week of January 30-February 3

  • By
  • Clare McCann
February 3, 2012

University of Missouri campuses seek tuition increases

Scene set for an Iowa school financing fight

Washington House GOP’s budget spends $580M more on education

Mississippi universities say financial aid running short

University of Missouri campuses seek tuition increases
A meeting of the University of Missouri Board of Curators held this week yielded difficult news. Facing a proposed 12.5 percent cut to state funding in the 2013 fiscal year, the campuses are proposing tuition hikes that will help make up the shortfall. The smallest increase requested is for three percent at the system’s Kansas City campus; the largest is 8.2 percent at the University of Missouri—St. Louis. The Kansas City Chancellor Leo Morton said that, rather than dramatically increase tuition, the school would try to recruit more students. Under Governor Jay Nixon’s proposed 2013 budget, the state university system will have lost about 25 percent of their state funding over the past three years. The Board did not vote on the proposed tuition hikes, but will meet again to reevaluate the hikes as the state legislature continues its budget process. More here…

Scene set for an Iowa school financing fight
This year, Iowa Governor Terry Branstad asked state lawmakers not to comply with a law requiring them to pass a state cap on public school spending within thirty days of his budget proposal to the legislature. The “allowable growth” limit, as it is known, is intended to provide school districts with a sense of state K-12 education funding for the following year so that they can plan district-wide finances. This year, Governor Branstad has proposed a package of likely high-cost education reforms, and asked lawmakers to focus on those reforms rather than set growth rates. He that the growth rates law should be repealed. At the same time, the Senate Education Committee approved a bill setting the allowable growth rate at 4 percent (one percent of growth costs the state approximately $31 million). The bill, however, must also be approved by the full Senate to take effect. More here…

Washington House GOP’s budget spends $580M more on education
A $13.7 billion budget produced by Washington state House Republicans this week included $580 million more for K-12 education than Governor Chris Gregoire’s budget proposal – at least, according to the lawmakers who introduced it. Democratic lawmakers in the state question that pronouncement, pointing out that Republican leaders didn’t specify whether the cost would be offset by cuts to social services, higher education, or other programs.  The bill runs counter to some of Governor Gregoire’s proposed cuts; it would maintain the 180-day school year, provide full funding at 2012 levels for tax-poor districts, and submit $340 million in state payments on schedule. The proposed budget is controversial, and the Democratic Chairwoman of the House Education Appropriations and Oversight Committee, Kathy Haigh, planned to kill the bill in committee. House Democrats and a bipartisan coalition in the Senate are currently preparing their own budget proposals, expected to be released later this month. More here…

Mississippi universities say financial aid running short
According to Mississippi Higher Education Commissioner Hank Bounds, state scholarship funds proposed by Governor Phil Bryant in his fiscal year 2013 budget are insufficient to cover the state’s financial aid needs. Affected students will include more than 20,000 recipients of the Mississippi Tuition Assistance Grant program. In fiscal year 2012, the state provided $31 million in student financial aid, including $26.9 million in state appropriations, which was supplemented by funds collected from student loan repayments. Governor Bryant’s proposed fiscal year 2013 budget would hold state appropriations steady at nearly $27 million. But according to the state College Board, between the ongoing needs of the program and increased state aid eligibility following changes to the federal Pell Grant program, the state’s financial aid fund will be short by almost 14 percent in fiscal year 2013. More here…

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A Closer Look at Small State Minimums in Federal Education Formulas

  • By
  • Jennifer Cohen
February 2, 2012

At Ed Money Watch we talk a lot about funding formulas for various federal grant programs. We’ve written about proposed changes to the ESEA Title II funding formula in the House Students Success Act, the need for improvements to the Title I formula, and even idiosyncrasies in the Individuals with Disabilities Education Act formula. Congress has designed each of these formulas to account for factors such as population size and poverty rates or numbers when distributing federal funds to states and school districts. But another factor – something known as “small state minimums” – always seems to run roughshod over the intended target populations.

Small state minimums are intended to ensure that small states receive a basic level of funding under each federal grant. Often, the formula sets the minimum at a certain percentage of the total appropriation that Congress provides that year – like the 0.5 percent minimum in the Title II formula. The idea behind small state minimums has merit: just because some students live in small states doesn’t mean they are less deserving of equitable shares of federal funding. But do small state minimums always work as lawmakers intended? Or do they overcompensate and provide small states with disproportionate amounts of funding per student?

To answer this question, we compiled data on total student enrollment and total state Title I, IDEA, and Improving Teacher Quality State Grant allocations in 2010. We then computed the allocation per pupil for each state and ranked them. This analysis suggests that existing federal funding formulas for those programs do disproportionately benefit small states, though some formulas do so more than others.

The ten smallest states in the nation are the District of Columbia, Wyoming, Vermont, North Dakota, South Dakota, Delaware, Alaska, Montana, Rhode Island, and Hawaii, in that order. Their total enrollments range from a little over 69,000 to just over 180,000 in 2010. As expected, many of these states receive more in federal funding on a per pupil basis than their larger peers.

This is most consistently the case with Title II Improving Teacher Quality State Grants where the first nine smallest states receive nine largest allocations per pupil, in exact order of enrollment. This is because the formula ensures each state 0.5 percent of the total allocation, or just over $14 million in 2010. If the formula did not include small state minimums, each of these states would have received closer to $3 or $4 million under the program.  In fact, each of the small states receive dramatically more than the average allocation per pupil of $60. The District of Columbia received $202 per pupil, almost four times the national average.

Small states also fare well under the Title I formula, which should theoretically be driven by student poverty. DC, Wyoming, Vermont, North Dakota, South Dakota, and Rhode Island all rank in the top 10 in terms of Title I allocation per pupil. Of these states, only DC has a particularly high particularly high census poverty rate at 30.8 percent. The rest all fall in the bottom half of states in terms of poverty rates. These states received over $348 per pupil in Title I, and as much as $686, compared to the national average of $294.

IDEA Part B allocations are least influenced by the small state minimum provisions, but some effect is not all-together absent either. Wyoming, Vermont, North Dakota, Alaska, and Rhode Island each rank in the top 10 in allocations per pupil. Rhode Island has the highest rate of students participating in special education at 18.1 percent, so the high allocation it receives may be justifiable. But the rest of the states don’t fall among the top ten states with special education participants, even though they receive nearly $300 per pupil or more in IDEA funds compared to the national average of $233. Interestingly, DC, which is a small state and has a high percentage of special education students (16.3 percent) ranks only 21st in terms of IDEA Part B allocation.   

Clearly, small state minimums have a significant influence over how federal education funds are allocated to each state to the point where these small states are disproportionately benefiting from federal funds. This is not to say that Congress should eliminate the minimums entirely. But this analysis suggests that Congress should consider the implications of the minimums and perhaps readjust the formulas produce a more equitable distribution of funds. Just as students in small states deserve their fair share, so do students in large states.

Click here to view these data for all 50 states and the District of Columbia.

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Cost Looms Large for Obama's Student Loan Interest Rate Cut

  • By
  • Jason Delisle
January 31, 2012

Note: This post was updated on 02/02/2012 with new cost estimate information.

Last week President Obama called on Congress in his State of the Union address “to stop the interest rates on student loans from doubling in July.” That line surely left a lot of people (Washington’s education policy circles not included) wondering what in the world the president was talking about. Is Congress really planning to double the interest rate on federal student loans this summer? The answer is yes, no, and maybe. In other words, it’s complicated. What’s more, a newly released estimate from the Congressional Budget Office shows that the cost of the president’s request will weigh heavily in any debate on the proposal.

Interest rates on Unsubsidized Stafford student loans, which are federal loans available to all students, issued for this academic year (2011-12) are fixed at 6.8 percent. The same rate has been charged on these loans issued since July of 2006. However, the interest rate is fixed at 3.4 percent for a subset of federal student loans – Subsidized Stafford loans for lower-income undergraduate students – issued this academic year. That rate is only temporarily available, and beginning in the 2012-13 academic year, the rate on that subset of loans will be the same as for Unsubsidized Stafford loans, 6.8 percent. So yes, rates are set to double for newly issued loans made to a subset of undergraduates after July 1, 2012.

The seeds for the coming rate change were planted way back in 2006. In their 2006 campaign platform, A New Direction for America, House Democrats promised to “slash interest rates on college loans in half to 3.4 percent for students and to 4.25 percent for parents.” By the end of 2007, they had (technically) made good on their promise. But just like those credit card offers that promise a low interest rate, the rate cut was enacted with important details listed only in the fine print.

Once lawmakers realized that their campaign promise would, according to the Congressional Budget Office, cost $133 billion over ten years (a substantial sum), they opted to scale it back dramatically. That’s where the fine print comes in.

To reduce the cost of the rate cut, Congress cut rates in half only for a subset of loans – Subsidized Stafford loans – which are available only to borrowers from families with middle and lower incomes. While graduate and undergraduate students were previously eligible for Subsidized Stafford loans, the law made only undergraduate students eligible for the rate cut. It left rates unchanged for the larger Unsubsidized Stafford loan program as well as for PLUS loans for parents and graduate students despite their inclusion in the campaign pledge. Even so, those caveats still didn’t get the cost of the proposal down to the size lawmakers wanted.

So to further reduce costs, Congress slowly phased in the interest rate cut over four years and then turned it off such that only loans issued for the 2011-12 school year would carry rates of 3.4 percent (half of 6.8 percent). Subsidized Stafford loans issued to undergraduate students after that year would again carry a fixed rate of 6.8 percent. In short, the 2007 law “cut interest rates in half” for loans issued only this academic year – and only for certain undergraduate students.

As President Obama demonstrated in his address last week, the rate cut issue will loom large this election year and Congress will be under a lot of pressure to stave off the rate hike. Of course, if lawmakers thought the 3.4 percent rate was too costly to make permanent back in 2007 at $3.0 billion a year, it won’t be any cheaper to do it this time around. In fact, it will be a lot more expensive. An early estimate from the Congressional Budget Office says extending the rate cut for one year will cost about $5.9 billion and $45 billion to extend it for ten years.

That’s why President Obama has requested only a one-year extension of the rate cut. Sadly, that’s exactly the type of shortsighted policymaking that got us here in the first place.

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