Ed Money Watch

Sequestration is going to happen, at least according to prognostications in the news headlines. How should the education policy community make sense of this latest budget development? It is really hard to say, but here are a few key facts and dates to keep in mind. Follow them and you’ll know as much as can be known in this uncertain budgeting world.

Fiscal Year 2013 Funding, the “CR”: Congress provided federal education programs with fiscal year 2013 funding temporarily at the same level as the prior year on what is called a “continuing resolution,” or CR. The CR provides funding from October 1, 2012 (the start of fiscal year 2013) through March 27, 2013. After that date, under current law, there is absolutely no funding for education programs funded through the annual appropriations process – yet. (Most programs except student loans and part of the Pell Grant program fall under the appropriations process.) That means Congress and the president still need to finalize fiscal year 2013 funding for education programs, or extend the CR, for the remaining six months of the fiscal year, by March 27. But they cannot simply extend the CR. Read on.

Budget Control Act of 2011: Way back in the summer of 2011, Congress and the president enacted the Budget Control Act, which set up the Joint Select Committee on Deficit Reduction (aka the supercommittee). The supercommittee was supposed to draft legislation that would cut the budget deficit projected over the next nine years. Knowing that the committee would probably fail in that effort (it did), lawmakers wanted an insurance policy that some sort of deficit reduction would occur anyway, through automatic spending reductions.

That insurance policy is set to occur by two separate mechanisms. One is the much-talked-about sequester (more on that below). The other, lesser-known – but more important – mechanism is the spending caps imposed on annual appropriations funding (federal education programs are largely funded through the annual appropriations process) through fiscal year 2021. For the purposes of this explanation, the two mechanisms are different only in their timing.

The Sequester: The sequester is supposed to reduce spending already provided for fiscal year 2013. Originally the sequester was supposed to kick in on January 2, at which point it would reduce the appropriation for education programs that Congress provided for fiscal year 2013 on October 1, 2012, by 8.2 percent. But Congress and the president postponed that date until March 1, 2013 and reduced the amount of the cut proportionally to 5.1 percent. So Congress funded education programs for fiscal year 2013 under the continuing resolution at fiscal year 2012 levels, and the sequester cuts them to a level 5.1 percent below that on March 1. Simple. Under current law, we can accurately say that if education program X is funded at level Y for fiscal year 2013, then when the sequester hits on March 1, the funding level will be 5.2 percent below Y afterwards.

Education Funding is $0.0 Billion on March 27, Twenty-Seven Days Post Sequester: Using the formula outlined above, we could show you a long list of education programs, their current funding levels, and their post-sequestration levels come March 1, but that would be a waste of time. Funding for all the programs goes to zero on March 27 when fiscal year 2013 funding under the CR expires, until Congress and the president decide specific funding for each program for the remainder of the year.

To recap, the post-sequester level of funding for education programs is 5.1 percent below current funding provided on the CR from March 1 to March 27, and after that the funding level is zero until Congress passes an appropriations bill for the remaining six months of fiscal year 2013 (which, incidentally, is when the bulk of an annual education appropriation is actually spent). Yes, the sequester will cut education programs by 5.1 percent on March 1, but what matters is the funding level Congress and the president set for programs as of March 27.

Watch the Spending Caps: Want to know what funding level Congress and the president will enact for education programs in the second half of fiscal year 2013, after the sequester kicks in and after the fiscal year 2013 CR expires? So do we. Unfortunately, no one knows. We only have clues. First, when the CR expires nearly a month after sequestration is implemented, on March 27, Congress cannot under current law appropriate funding for domestic discretionary programs – including education – above post-sequestration levels. In other words, after the sequester, the appropriations pie is shrunk under that new cap to a level that resembles the year 2008.

But unlike the sequester, the cap doesn’t apply to individual programs; instead, it applies to all of the programs measured in aggregate. Therefore, when Congress and the president are forced to finalize fiscal year 2013 funding after March 27, the aggregate amount of funding cannot exceed the spending cap that matches the post-sequester funding level. Theoretically, in the final fiscal year 2013 funding bill, Congress could increase funding for any and all education programs, but other programs in other agencies would have to sustain a big cut to make everything fit within the cap. It’s a zero-sum game.

In other words, what we know is that Congress and the president have not finalized fiscal year 2013 education funding; that when they do, they’ll be working with an appropriations pie for all domestic discretionary programs that looks similar to 2008 levels of funding in aggregate; and that they could still opt not to cut funding for specific education programs, provided they work within the cap.

Spending Caps in Place Through 2021 and Enforced by More Sequesters: While there is a sequester pending for March 1, note that the spending caps discussed above – which apply for each successive fiscal year through 2021 – are enforced by more sequesters. For example, suppose on March 27, Congress and the president pass a fiscal year 2013 appropriations bill that exceeds the cap in aggregate by $10 billion. In that case, a new sequester would be triggered to reduce appropriations by $10 billion. The sequesters give the caps some real teeth.

Of course, if Congress and the president agree, they could always pass legislation to change the caps, waive the caps, turn off or postpone any, all or some of the sequesters, or some combination. Again, uncertainty abounds.

To wrap up, the pending March 1 sequester is not what education policy stakeholders should be watching. Instead, they should watch for how lawmakers finalize fiscal year 2013 appropriations by March 27, post-sequester. Will they waive the new, lower spending cap? Will they abide by the cap, but spare education programs budget cuts? For now, it’s just a waiting game.

Congress and the president need a more rational way to set interest rates on federal student loans. The 6.8 percent rate on the most widely-available type of loan was set in 2001 and based on what student advocates and lawmakers thought sounded good then. Years later, lawmakers lowered the rate to 3.4 percent, but only for some undergraduates, and only on a portion of their loans, and only for loans made during the 2011 school year. President Obama wanted that policy extended for just one year, and Congress obliged. Rather than extend that policy further, lawmakers should consider a comprehensive and permanent interest rate fix – one that applies to all new federal student loans.

An approach outlined in the New America Foundation paper released today, Rebalancing Resources and Incentives in Federal Student Aid, would peg fixed rates on all new federal student loans to the interest rate on 10-year U.S. Treasury notes in the year the loans are issued, plus 3.0 percentage points. That formula would set rates low enough to provide a below-market rate to students, but still offset some of the cost of the loan program. Loans issued this year would carry an interest rate of 4.9 percent (as of today), which would actually cut  borrowers’ loan payments further than an extension of the 3.4 percent rate (this is tricky, but the math is here). What’s more, the policy is budget-neutral over a 10-year window. 

One consequence of setting interest rates based on, well, interest rates, is that rates can go up. Student aid advocates and policymakers worry that this could make loans unaffordable for borrowers. They suggest capping the rate. Unfortunately, a cap would be extremely costly, not to mention arbitrary. A Congressional Budget Office estimate shows that a formula to set variable interest rates on federal student loans, capped at 6.8 percent, would cost $200 billion over the next 10 years. That is not a typo – $200 billion.

Those who argue for a cap may not realize that the federal student loan program already includes a built-in interest rate cap. It’s called Income-Based Repayment (IBR). This plan acts like an interest rate cap because borrowers don’t make payments based on the nominal interest rate on the loan or even on the loan balance. Monthly payments are based on income (10 percent of Adjusted Gross Income [AGI] minus a cost-of-living exemption), and the loan term is fixed at 10 or 20 years through loan forgiveness. To be sure, a higher interest rate could cause a borrower to pay longer, but the 10-year and 20-year loan forgiveness provisions reduce that risk substantially – the loan is forgiven before the higher interest rate matters.

To illustrate this effect, we ran a number of scenarios through the New America Foundation IBR calculator. Consider someone with $45,000 in debt from undergraduate and graduate studies who works in the government/non-profit sector and earns a starting salary of $38,000 (AGI of $34,200) with a four percent annual raise. At an interest rate of 4.9 percent, she pays a total of $22,281 on her loans over 10 years, and then the remaining balance is forgiven under Public Service Loan Forgiveness. At an interest rate of 12 percent she still pays $22,281 and the remaining balance is forgiven. Even if her interest rate were 0.0 percent, her total payments would still be $22,281.

What if the same person worked in the for-profit sector and therefore qualifies for loan forgiveness after 20 years of payments instead of 10? At an interest rate of 4.9 percent, her total payments over 20 years are $58,998 and she has some remaining debt forgiven. Increase her interest rate to 12 percent and her total payments are still $58,998. IBR has capped her payments – and the interest rate on her loan – because her income isn’t high enough for the interest rate to matter.

As another example, consider a borrower with undergraduate debt of $28,000 working in the for-profit sector with a starting income of $29,000 (AGI of $26,100) and an annual increase of three percent. She would pay $27,228 on her loans over 20 years at an interest rate of 2 percent, 5 percent, or 25 percent. Her monthly payments over that time would be no higher or lower under any of those interest rates.

Under IBR, only borrowers with higher incomes would be affected by higher interest rates. But the program still provides a cap even for these borrowers, albeit a higher cap. Moreover, monthly payments are still based on income – only the length of payment is affected by the interest rate. And high-income borrowers who work for the government or non-profit organizations fare even better because they qualify for 10-year loan forgiveness.

Imagine a borrower with $40,000 in debt and a starting salary of $50,000 (AGI $45,000) who receives an annual raise of four percent. If she works for a non-profit employer, the interest rate on her loan is irrelevant. She’ll pay $35,247 before her remaining debt is forgiven after 10 years of payments whether the interest rate is 2 percent, 6 percent or 12 percent. However, if she works for a for-profit employer, her higher income means she’ll pay for longer if the interest rate is higher. But if the rate is 8 percent or higher, she won’t pay all of the extra costs. Instead, she will have much of it forgiven once she reaches 20 years of payments.

All of these examples illustrate how IBR works like an interest rate cap for borrowers with lower incomes or those who work in government/non-profit jobs. Student aid advocates and policymakers must therefore ask why an arbitrary interest rate cap is an essential part of any interest rate formula for federal student loans. Is the goal to limit payments regardless of a borrower’s income and regardless of interest rates in the market? If so, in a high-interest rate economy, a cap will provide low interest rates to individuals earning high incomes. Probably not the best use of scarce financial aid dollars.

Readers can download the New America Foundation IBR calculator here and view the above examples by entering in debt level, interest rate and borrower income. Readers should also try their own examples. The New America Foundation also published a paper last year on the effects of recent changes to IBR.

Much like the rest of President Obama’s signature education programs from the first term, the policy around ESEA flexibility seems to be shifting. The focus is no longer on how to win a waiver, but rather, on how to implement and monitor the commitments states made. Most states have secured their waiver, with only a handful waiting for approval from the Department of Education. While I’d encourage states to continue to refine their waivers based on lessons learned during implementation, no one has forced states (besides Virginia) to change their plans mid-course. Further, the Department has already shifted their attention to initiatives in early education and higher education.

So where does that leave the NCLB waivers in the second term? As I’ve written before, the waivers are insanely complicated, making it difficult for the public and even policymakers to parse out what states should be doing. That’s why it’s notable that the Senate HELP Committee wants to hold hearings on the waivers as soon as February, with testimony from Education Secretary Arne Duncan and state chiefs overseeing the waivers in their states. The House Education and Workforce committee is also mulling their role in providing oversight.  These hearings would likely involve some of the most controversial issues around graduation rate accountability, super subgroups, and different goals for minority and disadvantaged students.

While the hearings will likely shed light on the best – and worst – attributes of ESEA flexibility, the real question is whether they will lead to any meaningful action. The 112th Congress was the least productive and most polarized in history, and the 113th is not off to an auspicious start, with a so-called triple cliff to resolve before April: sequester, debt ceiling, and the expiration of the last budget continuing resolution. Add to that an unprecedented ‘to-do’ list for education – ESEA, IDEA, HEA, Perkins, WIA, CCDBG, Head Start, and the Education Services Reform Act are all pending renewal – and you have an environment where Congress will likely gripe about the waivers, but fail to reach a consensus on what to do about them.

The Obama administration seems to be betting on it. Over the next three years, states will implement their waivers and work through the kinks. By the time Congress gets its act together, states will have gone so far down the road with their new accountability and teacher evaluation systems that legislators will be hemmed in to passing a reauthorization that mirrors the flexibility policy. Secretary Duncan relayed this game plan in a speech to state chiefs: implementing the waivers “will have a big impact on shaping any reauthorization bill that might emerge.”

Given this context, here is what I’ll be watching in the second term:

District Waivers

For months, there have been rumblings of the Department offering district-level waivers for school systems in states that did not apply or were not approved for the larger flexibility plan – namely, California and Texas. Unsurprisingly, governors and state chiefs are not fans of the idea, and it is unclear what relief exactly the Department could give to districts without undermining the authority and autonomy of state education agencies. That said, eight districts in the California Office to Reform Education, or CORE, signaled their intent to apply for a waiver last week, before the Department even formally offered flexibility to them. How will Secretary Duncan respond to this request? Will the California Governor Jerry Brown or the State Board support their efforts? The CORE districts are some of the largest in California and have adopted reforms – like teacher evaluations – that doomed the state waiver request. Will other districts follow their lead?

Waiver Amendments

The waivers require states to overhaul accountability systems, implement college- and career-ready standards and assessments, and craft teacher evaluation systems based in part on student achievement. While many of these reforms could improve the state of education in the long term, the benefits are contingent on effective implementation.

Monitoring states’ waiver plans presents a significant challenge moving forward. In some states, new school grades and teacher evaluations appear arbitrary or inconsistent with past guidelines. Will states be receptive and responsive to feedback from educators, legislators, and the public? Just as states negotiated with the Department to draft their initial proposals, they have the opportunity to amend their plans at any time – Florida, Oklahoma, and South Carolina have done so already. Further, the Department should not rely on states alone to self-monitor their progress. With more states operating under a waiver than the original NCLB law, does the Department have the capacity to successfully monitor states’ activities? And if states do not follow through with their promises, will they intervene?

Stay tuned to the Waiver Watch for continuing coverage of these issues, and more, as states implement their flexibility plans.

What can you do with $45 million and three years? Well, if you’re the Bill & Melinda Gates Foundation, you can confirm, empirically, what educators have always known implicitly: great teaching matters, it can be measured, and it improves student learning.[1]

That was one of the many findings released last week in the final report from the MET Project (Measures of Effective Teaching). MET has generated buzz in education and popular media alike, so I won’t provide a full synopsis here. For a basic summary, check out the Washington Post or Huffington Post rundown; for more thoughtful commentary, turn to posts from Chad Aldeman, Andy Smarick, Rick Hess, Marty West, and National Journal Experts Blog. Instead, I want to call attention to two big takeaways from the MET Project.

What teacher evaluations measure is just as important as how they measure it.

Much has been made of the finding that classroom observations are the worst predictor of student learning, compared to state test scores and student surveys. Some have questioned whether observations are worth the significant time and personnel costs involved to do them well. Tim Daly of TNTP even claimed that MET shows “the way that most teachers have been evaluated forever is completely unreliable.”

It’s easy to jump to that conclusion: MET used proven, high-quality observation tools, and observers were trained and certified on their knowledge of them. This isn’t the case with many of the classroom observations used across the country.  Still, observations are a critical component of teacher evaluations, particularly for those in the early grades and in untested subjects. And using observations typically receives greater support from educators compared to test scores. Finally, MET’s research found that although classroom observations didn’t improve the predictive power of the evaluation measure, they did improve its reliability – or stability – from year to year. 

Test scores also don’t have the same diagnostic power as classroom observations: as Amanda Ripley put it, “test scores can reveal when kids are not learning; they can’t reveal why.” Observations can provide teachers with valuable, timely, and clear feedback on their practice. Given their complexity and the timing of state testing, value-added measures are far less teacher-friendly – not to mention, limited in scope. Surely, great teaching involves much more than improving student scores on multiple-choice tests in two subjects.

To this end, it’s laudable that MET’s researchers also used higher-order tests (the SAT 9 Open-Ended Reading Assessment and the Balanced Assessment in Mathematics) to measure student learning. In some states, these assessments are more similar to the Common Core assessments they will offer in 2014-15. Presumably, states should want teacher evaluations that not only function well with today’s tests, but also those of the future.

Still, the tests MET used only consider English Language Arts and math skills. If the ultimate goal of evaluations is to measure whether teachers create learning environments where students achieve a broader set of outcomes (say, the knowledge, skills, and attributes it takes to be college- and career-ready), then there is still a long way to go in developing these systems. In 2014, many states will be simultaneously implementing new teacher evaluations and the Common Core assessments. But the best evaluation systems today do a far better job identifying teachers that improve student learning via state test scores than teachers that improve college and career readiness. MET’s findings suggest that states should carefully consider whether their evaluation systems are measuring the teacher attributes needed to meet the Common Core’s objectives.

How teacher evaluations are used is just as important as what they measure.

Part of the demand for research like the MET Project comes from the push to use teacher evaluation systems to make human resources decisions. Hiring, retention, placement, compensation, and tenure can all be affected. Some of the push can be attributed directly to the Obama administration: developing and using teacher evaluation systems like the ones in the MET study for HR decisions was a major component of both Race to the Top and the No Child Left Behind waivers.

But there is still uncertainty surrounding teacher evaluation systems; the MET Project doesn’t provide a definitive roadmap or specific policies for states and districts looking to measure effective teaching. Many of its findings are ambiguous (with the exception that value-added measures must account for students’ prior test scores). The MET report is inconclusive when it comes to:

• whether student demographics should be included as a control in value-added models;
• precisely how to weight each component within a composite effectiveness measure: value-added data, student-perception surveys, and classroom observations;[2]
• whether measures like the Content Knowledge for Teaching (CKT) tests or subject-based classroom observation tools could be useful additions to composite measures of teacher quality; and
• who should observe teachers, how long these observations should last, and how many observations should occur each year.[3]

The teacher quality measures MET suggests are “better on virtually every dimension than the measures in use now.” But does that mean similar teacher evaluation systems should be used as the deciding factor for whether a teacher is fired? Or promoted? Or receives a pay increase?

Thorny questions, indeed. Yes, the new measures of effective teaching are promising, compared to most old-school teacher evaluation systems where nearly every teacher rated ‘satisfactory.’ But given MET’s lingering questions and inevitable measurement error in these measures of effectiveness, wouldn’t it make more sense to continue developing and refining teacher evaluation systems without rushing to use them for high-stakes decisions? Especially since most schools lack the capacity and resources to implement evaluations of the rigor and quality that the MET study used? States and districts should consider using the results from teacher evaluations in a more diagnostic manner: why not make these measures of effective teaching the first step in the process of providing professional development, determining who receives pay increases or tenure, and making decisions about hiring or firing – rather than the final step?