College Affordability

In last night’s State of the Union, President Obama announced the release of the College Scorecard, a consumer information resource that helps students and families compare colleges and universities on important measures such as costs and graduation rates. “Colleges must do their part to keep costs down…” said President Obama, “Parents and students can use [the Scorecard] to compare schools based on simple criteria: Where you can get the most bang for your educational buck.” While better information is not the cure to solving all problems with student access and success in higher education, it can lead to more informed decision-making and, in turn, improved outcomes. But information only helps students and families if it gets into their hands and they know how to use it.

The College Scorecard is not a new initiative. In last year’s State of the Union, President Obama put higher education “on notice” saying that, “If you can’t stop tuition from going up, the funding you get from taxpayers will go down.” In the days that followed he announced a new higher education reform package that included two new consumer information tools: the Scorecard and the Financial Aid Shopping Sheet. After thousands of public comments on both, the finalized Shopping Sheet was released in July and now the new Scorecard is out today. I’ve already written extensively about the Shopping Sheet, but what will the new Scorecard mean for students and families?

As a rule, speechwriters put the most dramatic parts of a president’s agenda front and center in televised speeches, leaving the boring policy details to the supplemental notes. Last night, the Obama administration did the opposite: the higher education section of the State of the Union address was much the same as last year’s, focusing intensely on college affordability and putting institutions on notice that the gravy train of public support for rising prices would have to end. But the truly earth-shaking policy initiatives were left for the supplemental policy document  released directly after the speech, in which the Obama administration proposed the biggest change to federal higher education policy since at least the Higher Education Amendments of 1972.

Those laws created what would become the Pell Grant program for low-income students, which has grown to a $40 billion pillar of government support for higher learning. The Pell grant is a voucher system--any eligible student can use their grant to pay tuition at any accredited college of their choice.

The key words in that sentence are “accredited” and “college.” There are lots of ways to learn, but Pell grants can only be used to purchase learning from organizations that fit the model of colleges as we know them today. And who decides, legally, what a “college” is? Accreditors, a group of independent non-profit organizations run by...colleges as we know them today. By controlling access to Pell grants, student loans, and other forms of financial aid, existing colleges determine the price, structure, and character of higher learning. This regulatory monopoly has had severe and sadly predictable negative effects on price and innovation in higher learning. To compete on a level financial playing field, you have to teach, spend, and ultimately charge like established institutions.

The Obama administration wants to change all of that:

In 1969, tenure track faculty constituted 78 percent of the academic workforce. Today, less than 25 percent of the academy is on the tenure track (TT). This means that in about forty years, faculty labor has turned completely upside down. Non-tenure track (NTT), contract-contingent faculty—otherwise known by the anesthetized (often pejorative) term adjuncts—now account for the vast majority of faculty appointments in the United States. Further, a recent survey of provosts affirmed that we have every reason to believe this reliance on adjuncts will continue its upward trajectory. While a good deal is known about the growth in NTT labor, very few people seem to realize that the traditional conception of a tenure-track faculty does not, by and large, apply to the modern academy.

Here’s some background on the status of adjunct labor. The community college sector accounted for the lion’s share of NTT growth between 1969 and 1998. Adjunct appointments in two-year colleges grew by more than 800 percent over that span. In the years that followed, data show that although community colleges still accounted for the greatest growth in real numbers, the most dynamic rate of growth in adjunct labor occurred at public and private, nonprofit comprehensive universities (four-year schools providing education through the master’s level). In addition, NTT appointments account for disproportionately high numbers of women and faculty of color.

Yesterday at Higher Ed Watch, I argued that a federal solution is needed to ensure that colleges use their institutional aid resources to keep higher education affordable for low- and moderate-income students. But why should the federal government get involved?

The reason is simple: the government is already involved, way involved. It spends nearly $40 billion on the Pell Grant program each year to try to remove the financial barriers that prevent low-income students from enrolling in and completing college through the Pell Grant program. Yet colleges are increasingly undercutting the government’s mission by using their institutional aid dollars to try to attract the students they desire rather than to meet the financial need of the low income students they enroll. Worse yet, there is compelling evidence to suggest that schools are capturing a significant share of the Pell Grant funds they receive and using them for other purposes, such as providing non-need-based aid to recruit high achieving and wealthier students. This is one reason why even after historic increases in funding, the program’s impact is so limited: students and families are not receiving the full benefits as intended.

The enormous growth in non-need-based, or “merit” aid, at four-year colleges over the last two decades has come lately at the expense of the neediest students. Low-income students who attend these institutions often face high levels of “unmet need,” defined as the difference between the cost of attendance and the amount of financial aid they receive. Unmet need forces students to take on significant amounts of debt, including risky private student loans. Financially strapped students also frequently engage in activities that lessen their likelihood of completing their degrees, such as working full-time while attending college or dropping out until they can afford to return.

Do colleges still provide a gateway to opportunity for low-income and working class students? Or are they perpetuating inequality in this country by limiting opportunity to only those who are rich enough to be able to afford it?

That question, which came up during a podcast conversation between my colleague Kevin Carey and New York Times journalist and New America Foundation Schwartz fellow Jason DeParle [author of this riveting article on the subject] last week, is central to proposals we have offered that aim to ensure that colleges use their institutional aid resources to keep higher education affordable for low- and moderate-income students.

Unfortunately this is often not the case. Colleges are, in fact, increasingly raising the barriers to higher education for low income students by redirecting their institutional financial aid dollars to wealthier students.

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.

EXECUTIVE SUMMARY

The federal financial aid system is no longer up to today’s demands. Built in a different era, its haphazard evolution over the decades has made it inefficient, poorly targeted, and overly complicated. With the need for higher education never greater and college growing increasingly unaffordable, students deserve a streamlined aid system that is more understandable, effective, and fair.

[The New America Foundation’s Education Policy Program on Tuesday released a comprehensive package of policy proposals that would provide an overhaul of federal financial aid. The report, Rebalancing Resources and Incentives in Federal Student Aid, calls for specific changes to grants, loans, tax benefits, college outreach programs and federal regulations to provide more direct aid to the lowest-income students, while strengthening accountability for institutions of higher education to ensure that more students are able to earn affordable, high-quality credentials. Yesterday, we explained why student aid reform is needed. In today's post, we provide an overview of our proposals.]

In Rebalancing Resources and Incentives in Federal Student Aid, we offer more than 30 specific policy recommenda­tions that are designed to create a streamlined federal student aid system that is more understandable, effective, and fair. Taken together, the package of proposals in our report is budget neutral over the 10-year period from federal fiscal years 2013-2022.

Pell Grants

The Pell Grant program is the cornerstone of federal stu­dent aid. In 1972, when the program was created, a Pell Grant covered most if not all college costs for large num­bers of low-income students. But as college prices have soared over the years, the system has become less and less effective. Moreover, the program is now facing a major “funding cliff” in the 2014 fiscal year and each year there­after.

[The New America Foundation’s Education Policy Program today released a comprehensive package of policy proposals that would provide an overhaul of federal financial aid. The report, Rebalancing Resources and Incentives in Federal Student Aid, calls for specific changes to grants, loans, tax benefits, college outreach programs and federal regulations to provide more direct aid to the lowest-income students, while strengthening accountability for institutions of higher education to ensure that more students are able to earn affordable, high-quality credentials. In today's post, we make our case for why student aid reform is needed.]

When Rhode Island Senator Claiborne Pell helped create the college student aid program that would become his legacy, American higher education looked very different than it does today. In 1972, the typical college student paid the equivalent of $526 per year in tuition and fees, in today’s dollars, to attend a public university in-state. Private college tuition was often affordable, and undergraduate borrow­ing was all but unheard-of. There were no “for-profit” colleges as we know them now. The large majority of all public support for higher education came in the form of direct appropriations to colleges and universities from states.

The world has changed since then. Profound shifts in the structure of the global economy have put a premium on high-skill jobs that require advanced credentials while many well-paying blue-collar jobs have disappeared. Students have flooded onto college campuses, in America and, increasingly, around the world. At the same time, col­leges and universities began a decades-long campaign in the early 1980s of constant price increases that continues, unabated, today. This happened in part because states, eager to cut taxes and facing rising costs for health care and public safety, reduced the portion of their budgets dedicated to higher education. At the same time, colleges competing for students and prestige ramped up spending year after year.

Welcome to the first edition of the Syllabus, a weekly guide that provides insight into what’s happening in higher education.

Read:

The Next Affirmative Action, Kevin Carey
Washington Monthly

In the January/February issue, Carey, Director of the Education Policy Program here at New America, argues that minority students need a much broader reform agenda. Since most students don’t attend colleges with admissions rates below 50 percent, affirmative action only affects the small percentage of students who are qualified to attend elite schools. Instead, we need to re-balance public resources toward those less-selective institutions that enroll the lion’s share of minority students in higher education. Then we should hold them accountable for student outcomes like graduation rates. “Those who set the national education agenda need to look past the handful of universities that graduate the ruling class,” writes Carey, “And focus on improving the neglected institutions that educate the future minority school teachers, scientists, doctors, and engineers.”