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Revisiting Ryan Versus Obama on Pell Grants

  • By
  • Jason Delisle
August 14, 2012

This post was updated August 18th to reflect possible higher costs for the Ryan Pell proposal

All eyes are back on the Pell Grant proposal in the Ryan budget (the House-passed fiscal year 2013 budget resolution) now that Rep. Paul Ryan (R-WI) will be Governor Mitt Romney’s running mate. It goes unmentioned, however, that when it comes to Pell Grant funding, both Ryan and Obama are making promises that they cannot possibly keep.

The plan Rep. Ryan included in his fiscal 2013 budget resolution would make a series of eligibility changes to the program, end the portion of the program’s budget funded as an entitlement, and cancel the next five years of inflationary increases to the maximum grant. (Click here to view a side-by-side comparison of Ryan's proposed changes.) The plan also assumes that Congress will support a maximum grant of $5,550 each year through the appropriation process.

Based on our estimates, that would require an annual appropriation of about $28 billion (maybe even $30 billion), taking the eligibility changes into account. While that is less than what the program currently costs in total, it is about $6 billion more (or possibly $8 billion more) than what Congress typically provides through the appropriations process. Assuming such a big increase in funding for the Pell Grant program seems like a tall order given that the Ryan plan also assumes reductions in total appropriations spending as compared to the current trajectory.

Now the Obama plan. The president proposes no eligibility changes to the program and would keep the entitlement funding portion intact, along with the inflationary increases in the maximum grant. To do so, the president would temporarily allocate additional funding to the program – but for only one year – by cutting funding to other programs (mainly student loans). In 2015 and each year thereafter, President Obama’s plan assumes Congress will support the program with an annual appropriation of $32 billion, or $10 billion more than what Congress typically provides.

That is essentially the same unrealistic proposal that the Ryan plan lays out – both plans hinge on Congress making annual appropriations for the program that are higher than they are today, year after year, meaning that some other program(s) must be cut by the same amount. What should Congress cut to pay for that kind of increase? Neither candidate has said.

Sure, the Obama plan spares students from eligibility changes and includes a small increase in the grant, and the Ryan budget does not. But President Obama’s promised Pell Grant benefits should hardly reassure students, families, and education advocates, given that his plan amounts to little more than a heroic assumption about future funding. Yet these groups seem all too eager to let the president get away with proposing a budgetary near-impossibility, while taking Rep. Paul Ryan to task for proposing effectively the same thing.   

If the president’s supporters think that they are acting in the best interest of soon-to-be Pell Grant recipients by trashing the Ryan budget and touting the Obama plan, they are deluding themselves. The Pell Grant program is headed for a fiscal cliff that lawmakers cannot avoid by assuming more money will materialize. It’s going to take real money, which means advocates and policymakers need to start making real tradeoffs. So far, neither Ryan nor Obama has made those tradeoffs, and Pell Grant supporters shouldn’t give only one of them a free pass.

Issues:

Was Milton Friedman a Higher-Ed Progressive?

  • By
  • Alex Holt
  • Jason Delisle
August 9, 2012

Conservatives have been gushing praise for Milton Friedman on what would have been his 100th birthday last week. For some liberals, though, Friedman is a more controversial figure, especially in education policy – he proposed what we now know as school vouchers. Yet liberals do thank Milton Friedman for one thing: he proposed the idea of an income-contingent student loan program.

Yes, in case you haven’t heard, many sources cite Milton Friedman as the father of income-contingent loans, including a 2010 Inside Higher Ed op-ed. Income-contingent loans vary by program, but all involve the stipulation that a borrower repay at a rate based on a share of his income, and the newest federal programs involve loan forgiveness after twenty years. For years advocates for income-contingent loans have gleefully stated that Friedman proposed such a structure – a 1988 New York Times article notes that Michael Dukakis’s proposed income-contingent loan program was based on one “first proposed by Milton Friedman, guru to a generation of conservative economists.”

But it turns out that Milton Friedman didn’t advocate for income-contingent loans, nor was it the basis of his idea. In fact, Friedman probably would not like the three income-contingent repayment plans now available in the federal student loan program, nor would he sanction some broader version of those plans which tend to please student advocates and progressive pundits.

No, Friedman’s actual proposal was something closer to an equity investment. Think stocks, not loans. Under his plan, the government would provide a student with financial assistance to pay for college, and in return, the student would agree to pay a percentage of his income back to the government each year upon finishing school regardless of the amount of money initially provided to him by the government. 

Splitting hairs? On the contrary, the difference is hugely important. Income-contingent loans are fundamentally a privatized-gains-socialized-losses model; an equity investment is a socialized-gains-socialized-losses model.

When the government issues a loan, there is a limit to how much a borrower must repay, no matter how much he earns – and therefore there is a limit to what the government can earn. Once the borrower repays what the government lent him plus interest, he is debt free, even if he enjoys big returns on his educational investment. Those are his to keep after paying his loans. It is privatized gain. But if those gains don’t materialize, he is unable to repay his loan and the loss is socialized.

Under an equity investment arrangement, losses are socialized just like they are under a loan program. But a student who realizes a big return on his education investment shares it with taxpayers by repaying more than he would if he repaid a loan with interest. It is a socialized gain.

American are  typically outraged when government programs privatize gains and socialize losses. Yet when it comes to student loans, they give it a pass. Worse yet, the inherent fairness of the equity investment approach to funding higher education  seems to rub them the wrong way.

Yale University tried something like an equity finance program in the 1970s and as students began repaying, many complained that some graduates paid a lot more than others. “The only significant way the program seems really to have gone awry is in misjudging the gratitude of those who would benefit from it,” wrote Timothy Noah in response to a Wall Street Journal piece about the program ending. “Twenty to 30 years on, the richer ones are bitching about how much they've had to pay. ‘[E]asily the worst financial decision I ever made,’ gripes David Bettis, a physician in Boise… An e-mail support group for self-made Yalie plutocrats who now regret opting into the repayment scheme was started by Juan Leon, ‘who now sells Gulfstream jets in Latin America.’"

Liberals and progressives found inspiration from Friedman’s idea and now champion income-contingent loans. So why do most stop short of endorsing his actual proposal? Do they think privatized gains and socialized losses are acceptable for student loans, but not other programs? Or do they believe that most people – no matter how progressive – are just like the Yale students who bristled when they were forced to share their gains with the people whose investment help make those gains possible?

Maybe. But it’s probably more than that. Friedman said it was due to “the novelty of the idea, the reluctance to think of investment in human beings as strictly comparable to investment in physical assets” that prevents us from implementing the equity investment structure.

Ironically, Republicans, Democrats, and all who support income-contingent loans speak of higher education as an investment in our nation’s future. But higher education will never truly be a public “investment” until we socialize the gains, and not just the losses. That’s how Friedman would have wanted it. 

Issues:

Friday News Roundup: Week of July 30-August 3

  • By
  • Clare McCann
August 3, 2012

Alabama education fund revenue on pace to meet expenses

Sending more money to classroom part of Ohio Governor John Kasich’s plan to revamp school funding

University of Hawaii Foundation raises $66.9 million during fiscal year for public university system

California reaches deep into special funds to pay for schools, prisons, social services

Alabama education fund revenue on pace to meet expenses
Alabama finance officials said this week that they expect the state’s Education Trust Fund will collect enough revenue to meet its fiscal year 2012 target and avoid across-the-board spending cuts next year. The Finance Department reported that the trust fund has already raised $4.51 billion in the first 10 months of the 2012 fiscal year ending on September 30, 2012. That’s a 5.9 percent increase over the same fiscal year 2011 period. However, a legislative maneuver passed earlier this year also transferred $40 million from the fiscal year 2012 fund for use in 2013, so the fund will have to grow by 6.3 percent over the entire fiscal year 2012 period from 2011 levels if it is to break even with the $40 million in extra fundraising. The fund primarily collects money from state income and sales taxes, and has fluctuated with the economic ups-and-downs of the recession. More here…

Ohio Governor John Kasich plans to send more money to classroom and part of funding revamp
Ohio Governor John Kasich’s administration is working to design a new school funding formula, to be released early next year with the governor’s fiscal years 2013-2014 biennial budget. Since 1997, when the Ohio Supreme Court found the state’s school finance system unconstitutional, three other rulings have reached the same conclusion because it relies too much on local property taxes, severely disadvantaging land-poor school districts. The plan will allegedly include decreases in funding for administration, but divert more money to classroom costs. That may entail pooling districts’ services across a region to save administrative costs. Several House Finance Committee members in the state legislature are also taking on the challenge of rewriting the formula, and have embarked on a statewide tour to hear public opinion. Democrats in the legislature, however, are concerned that the funding formula will cut total dollars spent on K-12 schools, rather than simply shifting them to instructional costs. More here…

University of Hawaii Foundation raises $66.9 million during fiscal year for public university system
The University of Hawaii Foundation, a nonprofit organization that is separate from the university itself, raised $66.9 million for the school in fiscal year 2012. The funds will go to supporting the school’s 10 campuses. A plurality of the funds, $19.3 million, came from individual donors who were not alumni. University alumni contributed $15.4 million, while corporations donated $13.1 million to the school system, and foundations funded $13.3 million. According to the foundation, the fundraising included nearly $17 million for student aid. Faculty support was the next biggest category at $11.6 million, and funds for facilities totaled $10.4 million. More here…

California reaches deep into special funds to pay for schools, prisons, social services
California’s budget includes 560 “special funds,” accounts designated for specific purposes that collect revenue from particular taxes or fees. Because of the recession, the state has increasingly borrowed from those funds to afford educational and social services and prison costs that would otherwise be paid for from the state’s general fund. California currently owes those special funds $4.3 billion, more than five times the amount owed in fiscal year 2008, although the special fund dollars – $1.1 billion in fiscal year 2013 – comprise only a small portion of the $91.3 billion 2013 state budget. Governor Jerry Brown has promised to repay the funds with interest, but has no way to do so unless voters pass his suggested tax hikes in the November elections. Still, even before the recession, the state had failed to repay $448 million in special fund loans from 2002 and 2003, and $1.3 billion of the outstanding loans are not tied to repayment by any particular date. More here…

Issues:

Education Tax Credits Set to Expire at Year’s End Await Congressional Action

  • By
  • Clare McCann
August 2, 2012
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Last week, The New York Times published an article on the Coverdell savings account, calling it controversial because earnings in these accounts are tax-free if used to send students to private or religious K-12 schools. The article also pointed out that the K-12 component of the tax credit expires at the end of this year, making the issue ripe for further debate. We think they may have missed the bigger picture. Some education-related tax benefits have expired already, more will expire soon, and some (maybe all of them) will ultimately be extended at the last minute. So Coverdell accounts are the tip of the iceberg.

The Coverdell account allows families to contribute up to $2,000 annually (in after-tax income) to an investment account (the earnings of which are tax-free, as are any withdrawals) for a child’s K-12 or higher education expenses. There are no data available on what proportion of taxpayers use Coverdell accounts to pay for K-12 costs versus higher education, but in total 644,000 taxpayers contributed $718 million to Coverdell accounts in 2009, the most recent year for which data are available. According to the White House Office of Management and Budget, the tax credit was expected to cost the federal government $80 million in forgone revenue in fiscal year 2013.

Still, the Coverdell tax credit in fiscal year 2012 cost less than one-half of one percent (0.35 percent, to be exact) of the costs of all federal tax benefits set to expire, either in full or in part, at the end of this year. For a table describing the changes scheduled to take effect at the end of the year, click here.

The most expensive (and most generous) tax benefit set to expire is the American Opportunity Tax Credit (AOTC). Originally passed as a part of President Obama’s stimulus package in 2009, the AOTC replaced the Hope tax credit for a few years and allowed more taxpayers (incomes up to $80,000, or $160,000 if filing jointly) to receive larger credits. It cost taxpayers $14.3 billion in fiscal year 2012, and is expected to cost another $13.7 billion next year. The credit then reverts to the Hope Tax Credit, which is expected to cost about $5.8 billion annually.  

Also set to expire this December are nearly a half-dozen other tax benefits. The exclusion from taxable income of employer-provided educational assistance will expire completely; that tax benefit cost $750 million in 2012. And several health care-related scholarships – the National Health Service Corps (250 of which were awarded between 2009 and 2011) and F. Edward Herbert Armed Services Health Professionals scholarships – that taxpayers have been able to exclude from their taxable income will no longer be tax-exempt. That provision is expected to cost nearly $3.3 billion in fiscal year 2013.

The parental personal exemption for students over the age of 18 – which allows parents to claim their children as dependents if they are students aged 19-23 – will automatically lower the amount of the exemptions that high-income taxpayers may claim. That would likely lower the cost of the program, though we don’t know by how much. In total, the benefit cost $3.1 billion in 2012. And the student loan interest rate deduction will revert to its previous levels of lower income-phase out levels and a 60-month interest payment limit. That program cost $850 million in 2012.

What that means is that of the $23.0 billion spent on those six tax benefits in 2012, the Coverdell credit – only a portion of which will expire anyway – comprised only $80 million. In spite of their large price tag, tax benefits are often lower-profile because they are not funded by the annual appropriations process that dominates Congressional debate for much of the year, and so they are able to fly below the radar.

This morning, the Senate Finance Committee gathered to mark up a bill that would extend a dozen individual tax benefits, almost all of which expired a year ago in December 2011. The bill would make the tax benefits available to taxpayers for the 2012 tax year. Two of those benefits, the $250 deduction for teachers’ classroom costs and an up-to-$4,000 deduction for tuition and fees payments, are education benefits. Collectively, they cost shy of $900 million in 2011 – still falling well short of the considerable $23.0 billion cost of the six expiring later this year.

The Senate bill to extend deductions that expired in 2011 through the end of the 2013 calendar year will likely not receive much more attention before the November elections. But before Americans file their taxes next year, Congress will be forced to decide – publicly – whether it plans to swallow the costs and extend the 2011- and 2012-expired credits, or whether it is prepared to cut those benefits in favor of fiscal restraint and other priorities.

Issues:

CBO Issues Fresh Evidence That Student Loan Defaults Cost Taxpayers

  • By
  • Jason Delisle
July 31, 2012

Ed Money Watch has run a number of posts over the past two years debunking the myth that the federal government profits when borrowers default on their student loans (see here and here). This well-worn myth holds that the penalties, fees, and interest the government charges defaulters, coupled with its extraordinary collection powers (tax refund offset, wage garnishment, etc.) means the government stands to collect more on a student loan when a borrower defaults than if he had paid it off in full and on time. This simply isn’t true – and new evidence that it is not was just released.

Back in February, the U.S. Department of Education buried a table in hundreds of pages of budget documents illustrating that after netting out what the government spends to collect on a defaulted student loan, and adjusting for the risk-free time-value off money, the government ultimately collects 80 cents on the dollar on a loan that defaults. Now comes more evidence from the Congressional Budget Office that defaults are costly for taxpayers.

In a recent paper, “Fair Value Estimates of the Cost of Federal Credit Programs in 2013,” the CBO published a spreadsheet detailing the component parts of its cost estimates for federal student loans issued for the upcoming school year. Among those pieces is the effect that defaults on newly-issued student loans have on the cost of the program.

If the myth of the profitable student loan default were true, the CBO spreadsheet would show that defaults reduce the estimated cost of newly-issued loans. But estimates show just the opposite: Losses from defaults are the costliest part of the federal student loan program.

07312012%20Fair%20Value%20Table%20Studen

The table above uses information from the CBO loan costs spreadsheet to show the total losses from defaults that the agency estimates the government will incur on loans issued during fiscal year 2013 (October 1, 2012 to September 30, 2013). The costs are “net of recoveries,” or the amount of a loan that the agency estimates the government will not be able to recover from borrowers who default, and they reflect a risk-adjusted time value of money. (In CBO’s words, it is “the subsidy component due to default losses [which] represents the present value of defaults net of recoveries.”)

The highlighted column in the table shows the cost of defaults. For Unsubsidized Stafford loans, the most widely-available federal student loan, defaults are expected to cost taxpayers $20.6 billion over the life of the loans. Subsidized Stafford loan defaults will cost $10.3 billion, and even PLUS loans made to graduate students (theoretically the lowest-risk borrowers) are expected to impose $3.8 billion in default losses on taxpayers. In total, using fair-value estimates, CBO expects that of the $112.7 billion in newly-issued student loans the government will make this coming year, just over $38.4 billion will be lost to defaults even after the government collects whatever it can on the defaulted loan. 

Be aware that the $38.4 billion is not the total cost of the loans – it is only the gross cost of defaults, net of collections. The last column in the table shows the total cost of the loan program, which combines losses from defaults with interest payments from all student loans. For all loans except Subsidized Stafford loans, the default losses are more than offset by the interest that borrowers will pay on their loans.

In short, the latest figures from the Congressional Budget Office show that student loan defaults are not a money-maker for the government. In fact, if no borrower ever defaulted or if the government successfully collected every unpaid dollar in a default immediately and at no cost, the federal student loan program’s costs would go down by $38.4 billion.

Issues:

Friday News Roundup: Week of July 23-27

  • By
  • Clare McCann
July 27, 2012

Missouri public school aid formula facing $700 million shortfall

Texas financial aid program to fall well short of need

Louisiana school officials face aid freeze challenges

Board vote means $300 million less for Texas schools

Missouri public school aid formula facing $700 million shortfall
Missouri public schools, assured that they will receive a set per-pupil amount each year from state and local funding, will instead collect about $250 million less than the full funding amount in the current 2013 fiscal year. By fiscal year 2014, the shortfall is expected to grow to about $700 million.  That’s because the state Department of Elementary and Secondary Education was supposed to increase the per-pupil funding target to $6,423 in 2013, but instead froze the target at $6,131 because of ongoing state economic concerns. The target is set to rise again next year to $6,716, but the Department has not yet decided whether it will freeze the target again. In fiscal year 2013, the Missouri legislature provided more than $3 billion for elementary and secondary public education. More here…

Texas financial aid program to fall well short of need
The Texas Higher Education Coordinating Board voted this week to request $580.8 million in fiscal years 2014 and 2015 for the state’s main financial aid program, Texas Grants, from the legislature. That’s a $21.2 million increase from the previous 2012-2013 biennial budget, paid for by transferring money from other grant or loan programs. Still, it won’t be enough to fully fund the program; full funding would total $1.4 billion. Lawmakers haven’t provided full funding for the program since 2004; although they have allocated more money every year since, the number of eligible students has risen more rapidly. As it is, about half of eligible freshmen will likely receive the grants. More here…

Louisiana school officials face aid freeze challenges
For the fourth consecutive year, state aid to Louisiana public schools will be frozen. The state funding that will remain stagnant is meant to support faculty salaries, costs of classroom resources like textbooks, and other issues. The only exception will be an increase in money due to higher enrollment, but although the total will increase, per-pupil enrollment will remain the same as in the previous three years. The fiscal year 2013 budget totals $3.4 billion and covers about 700,000 public school students. Three years of frozen budgets have forced layoffs, deferred salary increases, transfers from school districts’ rainy day funds, and cuts to transportation and other services. Earlier this year, voters approved a half-cent sales tax increase, dedicated in part to technology costs in schools and to cover the costs of state-required foreign language instruction in elementary schools, which will help to defray the effects of the stagnant spending. More here…

Board vote means $300 million less for Texas schools
Public schools in Texas were expected to see $5.4 billion in cuts to public education over fiscal years 2012 and 2013 until a legislator, Rep. Rob Orr (R-Burleson), proposed a constitutional amendment that would pour another $300 million into schools. The amendment passed both chambers of the legislature and as a referendum in last year’s elections. But now the School Land Board, the group authorized by the amendment to disburse the new money, has decided to save the funds rather than distribute the money to schools. That means legislators left a $300 million hole in last year’s two-year budget – expecting it to be filled with the newly-authorized funds – and schools are now stuck without the additional money in 2013. The money is only a small share of the $34 billion schools will receive for the 2012 and 2013 school years, but coupled with $2.3 billion in deferred payments to schools and a $3.9 billion Medicaid shortfall, could affect schools’ budgets. More here…

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Department of Education Tips Its Hat on Planned Sequesters, but Still Little Information Available

  • By
  • Clare McCann
July 25, 2012

Members of the Senate Appropriations Subcommittee on Labor, Health & Human Services (HHS), and Education huddled today with Secretary of Education Arne Duncan and several school officials for a hearing to examine how sequestration – the automatic, across-the-board budget cuts coming in January – might affect education programs. Virtually everyone agreed: The impact on schools would be severe. Still, education stakeholders have been asking how sequestration might affect schools, and until this past week they lacked good estimates of those effects.

First, a quick review: Last summer, Congress passed the Budget Control Act, which required lawmakers to form a congressional “supercommittee” and hammer out a deal to reduce the deficit by at least $1.2 trillion over 10 years. The committee failed, and Congress didn’t pass any other deficit reduction package by its deadline, so federal agencies will be required as of January 2, 2013 to cut funding they will be allocated in a forthcoming fiscal year 2013 appropriations bill (Congress hasn’t passed the bill yet) by a uniform percentage. The supercommittee failure also triggered lower limits on future appropriations bills for the next eight years.

Discretionary%20Spending%20Caps%20Seques

The automatic, across-the-board cuts are known as sequesters. Congress has previously used the device to enforce budget agreements, but in most cases, lawmakers have voted to “turn off” the sequesters before they take effect, rendering them moot. It’s still unclear whether Congress will pass a bill cancelling the cuts, or whether the president would sign such a law.

Perhaps most valuable for schools trying to plan ahead is the guidance that Deputy Secretary of Education Anthony Miller issued late last week to chief state school officers. That memo says that four programs – Title I grants, School Improvement Programs, special education Part B state grants, and Career, Technical, and Adult Education – that are funded though “advance appropriations” will actually be exempt until the 2013-14 school year. In other words, these programs have already been allocated a big chunk of fiscal  year 2013 funding ahead of time and that funding is now exempt from the sequester in January.

That means schools will be spared cuts to those programs – which comprise most of the largest funding blocks in the Department’s discretionary budget – until the 2013-14 school year. Other federal programs will feel the cuts as soon as January 2013. As Deputy Secretary Miller said, schools will not have to lay off teachers or postpone hiring for the upcoming school year – and lawmakers have some time to find another workaround to the pending cuts.

There is one exception to the delayed effects of sequestration for education programs.  The Impact Aid program, appropriated $1.2 billion in fiscal year 2012, is not funded with advance appropriations. It will therefore see the effects of sequestration as early as this fall. As one witness at today’s hearing pointed out, for some school districts Impact Aid makes up a huge portion of their budget. For those schools, funds will be affected for the 2012-13 school year, and the cuts would place a substantial hardship on those districts.

Stakeholders were also interested to hear Secretary Duncan give his best estimates of the Department’s plans for sequestration in today’s hearing. Pell Grants, he confirmed, would be exempt from sequestration. Other programs wouldn’t be so lucky. The Department will not have leeway to pick and choose which programs will be cut. The law is written such that virtually all Department programs will face across-the-board cuts. The Department’s current estimates, using a Congressional Budget Office estimate, is that the agency’s programs will be cut by 7.8 percent compared approximately to what they received in fiscal year 2012. That translates to $1.1 billion less for Title I grants, and $900 million less for special education state grants.

Chairman of the Subcommittee Tom Harkin released his own report ahead of the hearing. The report uses the same 7.8 percent estimated across-the-board cut to predict expected cuts to a variety of Department of Education programs, including $41.6 million from the school improvement grant (SIG) program, almost $90 million from the federal Impact Aid program, and $76.1 million from federal work-study grants for college and graduate students.

There are too many unknowns at this point to make accurate claims about the impact sequestration would have on school districts – for one, only the Senate Appropriations Committee and House Appropriations Labor-HHS-Education Subcommittee have passed fiscal year 2013 appropriations. So we don’t yet know from what level programs will be cut. And Congress may yet cancel the sequester in favor of a more generous budget for fiscal year 2013 (that could happen in the lame duck session Congress will hold between the elections and the 2013 presidential inauguration). But Secretary Duncan’s testimony and Deputy Secretary Miller’s issuance give the first inside look at the planning for sequesters happening inside the U.S. Department of Education.

Issues:

Friday News Roundup: Week of July 16-20

  • By
  • Clare McCann
July 20, 2012

Mississippi schools to seek $320 million more in 2014

New Jersey’s Rutgers University raises in-state tuition 2.5 percent despite protests

South Carolina Senate overrides veto of $10 million for teachers

Audit: Colorado tuition up, state stipend decreases

Mississippi schools to seek $320 million more in 2014
The Mississippi State Board of Education this week released its official request to legislators for the amount of funding public K-12 schools will require in the 2014 fiscal year. The formula, known as the Mississippi Adequate Education Program, requires the Board to request the full funding amount required under its calculations from lawmakers. However, legislators have often under-funded the formula. In the current 2013 fiscal year, for example, public schools received $2.04 billion, $251 million less than required by the formula. For next year, the Board has requested $2.34 billion – $321 million, or 16 percent, more than was provided this year. Legislators say it is too soon to say whether the state will be able to afford that. However, they are also likely to wait for the results of a commission appointed to review the funding formula and offer recommendations for improvement. More here…

New Jersey’s Rutgers University raises in-state tuition 2.5 percent despite protests
Rutgers University students went before the Rutgers Board of Governors and staged protests outside the board’s regular meeting this week to request a tuition freeze for the 2012-13 academic year, but without results. The board voted to raise tuition and fees for in-state students by 2.5 percent for the academic year beginning this fall. The tuition hike comes in spite of the fact that state funding for the school was held constant at 2012 levels this year; legislators cut funding for the school precipitously in recent years, and institutions are still struggling to make up the difference. The increase means New Jersey students will be charged $13,073 in tuition and fees this year, $318 more than last year. Room and board will also increase by 1.9 percent, up to an average of $10,970, or $206 more than last year. Graduate students and out-of-state undergraduate students also saw their costs rise – in-state graduate students will pay 2.5 percent more per credit hour, and out-of-state students will be charged a 4 percent increase, $910 more than last year. University officials said they plan to find $20 million to cut from the school’s budget over the next year to hold down costs. More here…

South Carolina Senate overrides veto of $10 million for teachers
The South Carolina Senate voted this week to restore $10 million in the state’s fiscal year 2013 budget that had been vetoed by Governor Nikki Haley. The funds will help compensate school districts for a state-required teacher salary bump this year. Without the state dollars, lawmakers said, districts would be required to raise property taxes to cover the mandatory two percent salary increases. Governor Haley stated that she vetoed the provision because it offered only one-time funding; the veto left intact $39 million for the salary increases that are paid for with recurring funds. The $10 million newly-restored dollars, meanwhile, came from an education innovation fund created in 1984 with a one-cent addition to the state sales tax, and would not necessarily be funded every year. More here…

Audit: Colorado tuition up, state stipend decreases
An audit of Colorado colleges released this week found that students are paying more in tuition since lawmakers began to decrease funding for a stipend program that provides money directly to students, rather than to institutions. The audit found that the recession slowed the implementation of the 2006 policy, called the College Opportunity Fund. Since the start of the recession, students’ stipends have dropped as the state struggled to keep up with its expenditures in the face of falling revenue. The per-credit hour stipend decreased from $80 in fiscal year 2006 to $62 in 2011; at the same time, institutions raised tuition in part to accommodate for lost state funding, up from $6,660 to $8,530 on average. Student enrollment also grew by about 24 percent, while state spending dropped from $272 million in 2006 to $269 million in 2011. Although the law requires the state department of higher education to request the full funding amount needed including inflation and enrollment increases, the department has not done so in recent years because of budgetary considerations. More here…

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Department of Ed Gets It Wrong on New Pay As You Earn Calculations

  • By
  • Alex Holt
  • Jason Delisle
July 19, 2012

On Tuesday, the U.S. Department of Education proposed regulations for its new Pay as You Earn (PAYE) student loan repayment plan. The Obama Administration announced the new repayment option for federal student loans last year and the newly-released rules detail how it will work and who is eligible. But a quick look at the document reveals a few problems in how the Department is explaining this new program.

First, some background. The new Pay As You Earn plan adds to the two existing repayment options (Income Contingent Repayment, or ICR, and Income Based Repayment, IBR) that allow borrowers to pay back student loans based on their income. Under the existing IBR plan, borrowers who qualify for partial financial hardship – defined as having a loan payment higher than 15 percent of the borrower’s adjusted gross income after subtracting 150 percent of the household poverty threshold – make payments equal to 15 percent of their income minus the  poverty threshold. The government forgives any remaining unpaid loan balance after 25 years.

Under a 2010 law, those numbers are set to change for new borrowers in 2014 and thereafter.  Specifically, the 15 percent rate is cut to 10 percent, and unpaid loan balances are forgiven after 20 years rather than 25. The Administration’s Pay As You Earn plan effectively makes borrowers who took out an initial loan in 2008 and a subsequent loan in 2011 or later eligible for this plan immediately. (Technically, the Administration is using its regulatory authority to tweak the Income Contingent Repayment (ICR) plan to create the Pay As You Earn Plan.)

In the rules released this week, the Department provided an example of how the PAYE plan, which they say is more generous than the existing income based repayment system, would benefit a hypothetical borrower, Jesse.  A table in the regulations illustrates Jesse’s life: he leaves school with $40,000 in federal loans, gets married, and has a child in his fifth year of work, with a second child born in his seventh year. The plan compares what Jesse would pay on his loans under the old IBR plan and the new PAYE plan. But this illustration is misleading on a number of counts.

Over the course of the 25-year illustration, the Department of Education never accounts for an inflationary increase in the poverty threshold that Jesse can claim when calculating his loan payment. This dramatically affects how much Jesse will pay every month because as the federal poverty threshold grows with inflation, Jesse can exclude more of his income each year in the IBR calculation.

 In fact, over the last twenty years, the individual poverty exemption has increased at an average rate of 2.5 percent annually. Over that same period of time, the annual exemption for each additional member of a household increased at a rate of 2.6 percent. That means that by the 25th year of Jesse’s payment under the existing IBR plan, the size of the federal poverty exemption would have nearly doubled from his first year.

The table below shows how much Jesse would really pay, using all the same calculations that the Department uses, but making annual inflationary adjustments to the poverty exemption.

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The table also illustrates something wholly absent from any of the Department of Education’s explanations of the benefits (and costs) of PAYE and IBR. Jesse is accruing interest on his loans faster than he is paying them off – meaning that his loan balance grows over time. In the end, he has a loan balance forgiven that is well over twice what he originally borrowed.

More importantly for Jesse, the inflation-adjusted poverty exemption means he will pay significantly less before he qualifies for loan forgiveness than the Department explains in its illustration. If Jesse made his loan payments under the existing IBR plan (linked to 15 percent of his income with 25-year loan forgiveness), he would pay a whopping $45,389 less than what the Department of Education shows. Under the proposed PAYE plan (tied to 10 percent of income with 20-year loan forgiveness) he would pay only $2,935 over the course of twenty years. That is $18,231 below the amount that the Department of Education shows in its illustration. Click here to compare our figures with those released by the Department.

Since the recently-released regulations are not yet final, we hope the Department will address both issues – the poverty exemption calculation and the swelling size of Jesse’s loan balance – in its subsequent release. The Obama Administration should be forthcoming about accrued interest and the actual amount of debt forgiven under IBR and PAYE, and its examples should reflect the inflationary increases in the poverty exemption that are required by law.

On a final note, the proposed regulations show the PAYE plan will cost taxpayers $2.1 billion over the next 10 years. That’s because the Department believes 1.67 million borrowers will be eligible for and choose the PAYE plan. Some 400,000 of them will get loan forgiveness worth an average of $41,000 on original loan balances of $39,500.

That is effectively a $41,000 grant. It is also four times more than what the average four-year Pell Grant recipient receives in grant aid. That is exactly the kind of number the Department of Education should be talking about. 

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Are No Child Left Behind Waivers Really Giving States Flexibility?

  • By
  • Clare McCann
July 17, 2012

As of July 6, the U.S. Department of Education has granted more than half of states waivers from the most punitive provisions of the No Child Left Behind (NCLB) Act.  The Obama Administration is issuing the waivers to address unworkable parts of the 2002 law as key deadlines near and a legislative solution is unlikely. States granted waivers will no longer be subject NCLB’s accountability rules and must instead meet their own benchmarks for student achievement. However, the Obama Administration is taking steps to preserve a key piece of NCLB that has made it harder for schools to hide their lowest performing students – the reporting requirements.

Under No Child Left Behind, states were required to report to the Department of Education’s internal EDFacts system a wide array of data, including student performance by subgroups (racial/ethnic minority students, economically disadvantaged students, English language learners, and students with disabilities), as well as the subgroups’ performances against each state’s annual measurable objectives (AMOs), or state-defined proficiency targets. The Department announced in late May that it plans to keep this system in place and create a duplicate system to capture each state’s self-proposed accountability benchmarks. That will be no small feat for the Department of Education.

A recent Education Week article stated that state and school districts officials who gathered in Washington, D.C. for the annual STATS DC conference on data collection were clearly surprised by that news. It means that instead of lessening the load of data reporting those state officials are required to compile each year, the (voluntary) waivers have doubled their work.

States that have received waivers will have to report state, district, and/or school data in 22 more categories – the flexibility version of existing categories. And although each state hammered out the specifics of its waiver in close consultation with the Department of Education, the EDFacts system lays out only eleven categories into which states are expected to squeeze their own particularly-defined subgroups. That may require some extra calculations on the part of state officials who will have to calculate and recalculate state figures so they match both the federal and state definitions of subgroups.

The Department also calls on states and schools to collect all of the new flexibility data for three years, although the waivers are only valid through the 2013-14 school year. That begs the question: Is the Department using the waivers, as it says it is, as a stopgap measure until Congress takes on the long-delayed ESEA reauthorization originally scheduled for 2007? Or does the three-year data requirement suggest it will extend the waivers down the line?

Still, maintaining the strong reporting requirements set forth in No Child Left Behind will help preserve one of the law’s biggest achievements. In maintaining the existing reporting categories and adding in the new waiver-based ones, the Administration is ensuring ten years’ worth of data on student performance retains its relevance and can be compared to future data. Although the Department required that states set clear subgroup definitions on their own to win a waiver, holding onto the current reporting format ensures one thing: No school will be able to conceal a subpopulation’s failures, simply to protect itself.

The Obama Administration billed the NCLB waivers as a way for states to escape some of the punitive and unworkable measures of NCLB. States are now likely to accuse the Administration of a bait-and-switch given the data collection rules. But in spite of the added work, the Department of Education’s data process is ensuring transparency and openness from the schools that fail to serve many of their students well.

The Federal Education Budget Project, Ed Money Watch’s parent initiative, houses many of the state- and school district-level data that states report to the Department of Education in its database. Click here to view the data.

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