Low-Income Students

New Paper Highlights Perverse Benefits of New Income-Based Repayment Formula

October 16, 2012

In today’s tough economy, many recent college graduates are looking for ways to shrink their federal student loan payments. Income-Based Repayment (IBR), which allows students to pay a monthly amount based on their earnings, not their federal student loan balances, provides significant relief. However, a new report, Safety Net or Windfall? Examining Changes to Income-Based Repayment for Federal Student Loans, from the Federal Education Budget Project (our sister blog Ed Money Watch's parent initiative) shows that pending changes to IBR are far more generous than previously thought. Borrowers with high student loan balances and high incomes, not low-income borrowers, stand to benefit the most.

Congress created IBR in 2007 to make it easier for college graduates to make their student loan payments even in their first years out of school when they are earning lower incomes. If a student’s monthly payment under standard repayment exceeds 15 percent of his monthly discretionary income, he is eligible for the program. The borrower’s monthly payments increase as his salary increases until they reach a cap at the level he would have paid under standard repayment. After that borrower makes 25 years of payments in IBR, the Department of Education forgives any remaining loan balance.

But in 2010, at President Obama’s request, Congress made the program even more generous. The new IBR will base monthly payments on 10 percent of discretionary income, instead of 15, and loan forgiveness will be provided after only 20 years. That change was set to take effect in 2014 until the Department of Education, as part of the president’s “We Can’t Wait” initiative to circumvent legislative gridlock, sped up the availability of the new IBR by creating a version of it through regulations – “Pay As You Earn” (PAYE). PAYE will take effect by the end of the year.

But little is known about the real effects of this new IBR system. To fill in this knowledge gap, FEBP Director Jason Delisle and Program Associate Alex Holt designed and built a calculator that estimates the monthly payments a borrower will make under the original IBR, the pending version of IBR, and other repayment plans like standard 10-year and consolidation. It accounts for a borrower’s loan balance, interest rate, income, and family size over the entire repayment period. It also calculates the total payments over the life of the loan, and the amount of loan forgiveness he will receive.

New Paper Highlights Perverse Benefits of New Income-Based Repayment Formula

October 15, 2012
Publication Image

In today’s tough economy, many recent college graduates are looking for ways to shrink their federal student loan payments. Income-Based Repayment (IBR), which allows students to pay a monthly amount based on their earnings, not their federal student loan balances, provides significant relief. However, a new report, Safety Net or Windfall? Examining Changes to Income-Based Repayment for Federal Student Loans, from the Federal Education Budget Project (Ed Money Watch's parent initiative) shows that pending changes to IBR are far more generous than previously thought. Borrowers with high student loan balances and high incomes, not low-income borrowers, stand to benefit the most.

Congress created IBR in 2007 to make it easier for college graduates to make their student loan payments even in their first years out of school when they are earning lower incomes. If a student’s monthly payment under standard repayment exceeds 15 percent of his monthly discretionary income, he is eligible for the program. The borrower’s monthly payments increase as his salary increases until they reach a cap at the level he would have paid under standard repayment. After that borrower makes 25 years of payments in IBR, the Department of Education forgives any remaining loan balance.

But in 2010, at President Obama’s request, Congress made the program even more generous. The new IBR will base monthly payments on 10 percent of discretionary income, instead of 15, and loan forgiveness will be provided after only 20 years. That change was set to take effect in 2014 until the Department of Education, as part of the president’s “We Can’t Wait” initiative to circumvent legislative gridlock, sped up the availability of the new IBR by creating a version of it through regulations – “Pay As You Earn” (PAYE). PAYE will take effect by the end of the year.

But little is known about the real effects of this new IBR system. To fill in this knowledge gap, FEBP Director Jason Delisle and Program Associate Alex Holt designed and built a calculator that estimates the monthly payments a borrower will make under the original IBR, the pending version of IBR, and other repayment plans like standard 10-year and consolidation. It accounts for a borrower’s loan balance, interest rate, income, and family size over the entire repayment period. It also calculates the total payments over the life of the loan, and the amount of loan forgiveness he will receive.

The calculator revealed some surprising results. PAYE (the plan that is virtually identical to the 2014 10 percent, 20-year IBR) doesn’t necessarily target the greatest benefits to struggling borrowers. Because low-income borrowers have so little discretionary income above the poverty exemption applied annually, the new IBR only lowers their monthly payments by as little as $5 and at most $20 compared to the original IBR.

Instead, borrowers with high federal student loan balances at graduation – think law students or graduate students, since undergraduates face annual and aggregate limits on the amount they can borrow – reap the most benefit. When their incomes are low, they are able to pay manageable amounts. But as their incomes rise, their monthly payments are capped at the standard repayment amount, meaning they actually derive more benefit from IBR as they become wealthier. Plus, these borrowers often qualify for loan forgiveness after only 20 years; according to the calculator, borrowers above certain debt levels may not even pay down the interest they owe over 20 years, let alone the principal. This is a much greater benefit than is offered through the consolidation repayment plan, in which borrowers with debt totaling more than $40,000 repay their loans in full over 25 or even 30 years. And since IBR allows graduate school borrowers to take out such high loan balances with few concerns, schools have no reason to lower tuition – in fact, they have an enticement to raise it.

The report’s authors offer recommendations for changes to the PAYE/new IBR plans based on these findings. The IBR changes haven’t taken effect yet, which means there’s still time to restructure the program so it targets benefits to those who need them most. In an era of limited resources, we can’t afford to provide payouts to the rich while leaving struggling students languishing in debt.

To read the paper, click here. To try your hand at the IBR calculator, click here.

Safety Net or Windfall?

  • By
  • Jason Delisle,
  • Alex Holt,
  • New America Foundation
October 16, 2012

In his 2010 State of the Union address, President Obama urged Congress to change the federal student loan program’s existing Income-Based Repayment (IBR) plan, which caps borrowers’ payments at 15 percent of their incomes and forgives any remaining debt after 25 years of payments. He argued that high college tuition was an untenable burden for the middle class, and that by reducing payments to 10 percent of a borrower’s income and providing loan forgiveness after 20 years of payments, lawmakers could provide borrowers with relief.

Survey Shows Few Illinois Pre-K Teachers Have Bilingual or ESL Credentials

October 5, 2012

As few as six percent of Illinois pre-K teachers have credentials that qualify them to teach English language learners, according to a new survey from the Latino Policy Forum. As Early Ed Watch has reported extensively, Illinois plans for all pre-K teachers who instruct groups of English language learners (ELLs) to have such credentials by 2014; these credentials are already required for K-12 teachers who instruct large numbers of ELL students.

The Latino Policy Forum surveyed 307 administrators representing 354 state-funded pre-K programs, which serve 64,482 children. The sample was not representative of all programs in Illinois: Respondents were disproportionately from Cook County, the area that includes Chicago and its suburbs and has a higher immigrant population than most other regions of Illinois.

Still, the results paint a useful portrait. While six percent of teacher respondents overall had bilingual/ESL credentials, programs in communities with a high concentration of Latino residents do have a slightly higher proportion of teachers with the credentials — nine percent.

Low-Need States Benefited the Most from ARRA Spending

September 27, 2012

The American Recovery and Reinvestment Act of 2009 provided an unprecedented $100 billion in additional funding for education over fiscal years 2009, 2010, and 2011. It has been notoriously difficult to interpret how states used those funds, despite promises of “transparency” from the Obama Administration. Did the money go to support the states that needed the most help? According to a recent U.S. Department of Education report, no—on average states with high per pupil spending and high student achievement received the most.

The report examines distributions of ARRA funds per pupil at the state level, grouping them by various indicators of need such as student poverty, budget gaps, and percentages of students attending persistently low-achieving schools.  The authors find that 25 percent of states that had the highest per pupil spending received an average of $435 more per pupil than the 25 percent with the lowest spending. The trend is mostly explained by $4.4 billion in Race to the Top (RttT) grants which were awarded primarily to higher-spending states.

The 25 percent of states with the highest student poverty rates received the least ARRA funding per pupil, $1,358 compared to $1,372 on average. The states that received the most per pupil were actually the states with average poverty rates (between 12.9 and 20.4 percent). Those states received $1,419 per pupil on average. Similarly, states with the highest performing students (based on the percentage scoring proficient on National Assessment of Education Progress tests) also received more per pupil than states with lower-performing students. The high-performing states received $1,463 per pupil, while the low-performing states received $1,304.

However, the report’s findings suggest more ARRA funds found their way to states with big budget gaps. States with the largest budget shortfalls did receive more funding per pupil than those with smaller shortfalls – a surprising conclusion given that Congress did not target the funds to states with large funding gaps. The 25 percent of states with the highest funding gap received $1,431 per pupil, while those states with the smallest gaps received $1,288. Again, this difference is primarily attributable to Race to the Top funding – the states with the largest gaps received $109 per pupil in RttT, while the states with the smallest gaps received only $7 per pupil.

Overall, it is not be completely surprising that the ARRA funds did not target states with the highest need as measured by student achievement and spending. Much of the ARRA funds were distributed through existing federal funding formulas like Title I or Individuals with Disabilities Education Act, which take into account many other factors besides need like state size. The State Fiscal Stabilization Fund, the largest program in the ARRA, distributed funds according to population size. Instead, Race to the Top, a $4.4 billion competitive grant program, seems to drive most of the funding differences across states. This is likely because it was intended to benefit states that were willing to or already investing in their education systems and demonstrating positive results.

Still, interpret the Department’s conclusions with caution. In calculating per pupil expenditures, the authors had to exclude some ARRA funding that technically went to education programs. But more importantly, the figures include all State Fiscal Stabilization Funds allocated to each state, not only those spent on K-12 education. States were allowed to spend the funds on both K-12 and higher education, and on average 20 percent of the funds went to higher education. As a result, the numbers cited above and in the report actually overstate per pupil spending from ARRA, particularly in states that spent most of those funds on higher education, like Wyoming and Colorado.

In all, the report sheds some much-needed light on the distribution of ARRA funds to states (as well as school districts, though that is a whole other discussion). And it suggests that the various ARRA programs mostly did what they were intended to do – push out money to states as quickly as possible based on existing funding formulas and population. While the Department attempted to encourage states and districts to use these formula funds to support reform efforts, few did. Instead the overwhelming goal of keeping teachers in classrooms and students in seats dominated. Any hope of reform now rides completely on the backs of the competitive grant programs.

Great News! Reports of College Completion Crisis Grossly Overstated

September 26, 2012
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Great news for those who have been worrying about the college completion crisis – we are focusing on the wrong measures of success. At least that's what Tracy Fitzsimmons, president of Shenandoah University and representative for the National Association of Independent Colleges and Universities, seems to think. If you listen to Fitzsimmons' testimony at last week’s House Education and Workforce Committee hearing on college data, you might be surprised to learn that students don’t drop out because they lack financial or academic support from their colleges or universities. They drop out because they have opportunities that are better than college. Opportunities like becoming members of Congress or joining the national touring company of Beauty and the Beast.

Why Third Grade Is So Important: The 'Matthew Effect'

  • By
  • Annie Murphy Paul,
  • New America Foundation
September 26, 2012 |

Take a guess: What is the single most important year of an individual’s academic career? The answer isn’t junior year of high school, or senior year of college. It’s third grade.

Sequestration Will Mean Significant Cuts for Needy School Districts

September 14, 2012

Last Friday, the Office of Management and Budget at the White House released a sequestration report, confirming the impact of the automatic, across-the-board funding cuts scheduled for January 2013. Sequestration resulted from the “supercommittee’s” failure to find $1.2 trillion in 10-year cuts to federal spending (or tax increases) last year. According to the report, the majority of Department of Education spending programs will face an 8.2 percent cut as a result of the sequester. Unless Congress and the President agree to turn off the sequester, school districts across the country will face some difficult budget decisions starting in January and continuing into the 2013-14 school year.

To get a better idea of what these cuts will mean for schools, Ed Money Watch used Census data on school districts’ total annual revenue and federal revenue for the 2009-10 school year to calculate the percent of each district’s revenue made up of federal funds, as well as how much each district stands to lose under a 8.2 percent cut. (We did a similar analysis recently looking at the impact of Congressman Ryan’ proposed 20 percent cut.)

It is important to note that not all cuts will happen at the same time. Specifically, cuts to Title I and Individuals with Disabilities Education Act spending will not take effect until next school year because the programs are mostly forward funded (due to something called “advance appropriations”). Other programs, such as Impact Aid, will face immediate cuts in January 2013. School nutrition programs, however, are exempt from the sequester. Unfortunately, the Census data do not disaggregate by funding source, so it is not possible to include this exemption in our calculations.  

Unsurprisingly, the districts that rely the most on federal funds for their annual revenue will take the greatest hit due to a 8.2 percent cut as a proportion of their total revenue. For example, Shannon County School District in South Dakota relied on the federal government for 67.9 percent of its annual revenue in 2010. If that funding were to be cut by 8.2 percent, Shannon County would lose $1.5 million, or 5.6 percent of its $18.1 million in annual revenue. Shannon County serves over 1,100 students, 98 percent of whom participate in Free and Reduced Price Lunch and 99 percent of whom identify as American Indian.  The district receives nearly $5 million in Title I funding for disadvantaged students and over $8 million in Impact Aid funding to replace revenue lost from the lack of property taxes derived from Bureau of Indian Affairs land.

Similar stories can be told for numerous districts with high proportions of low-income, American Indian, English Language Learner, or other high-needs students.

But even districts that do not rely on federal funding for large portions of their annual revenue stand to lose significant funding. Forty-eight districts stand to lose more than $10 million should the 8.2 percent cut become a reality. These large districts include New York City Public Schools, which would lose about $168 million, Los Angeles Unified School District, which would lose $111 million, and Chicago Public Schools, which would lose $100 million.

But it also includes many lesser-known districts like Gwinnett County School District outside of Atlanta, GA, which would lose over $16 million, or Cypress-Fairbanks School Districts outside of Houston, TX, which would lose over $10.5 million. Though these figures represent less than 2 percent of each of these district’s budgets, finding savings to accommodate these cuts will surely be a challenge.

The 8.2 percent cut from the sequester will also have a dramatic impact on districts that serve particularly fragile communities like students with the most challenging special education needs or districts that have recently experienced natural disasters. For example, the Los Angeles County Office of Education, which serves nearly 9,000 students with severe special needs, would lose nearly $37 million, 3.6 percent of its annual revenue. The Recovery School District in New Orleans would lose nearly $12 million, 4.0 percent of its revenue.

Sequestration is a blunt instrument that prevents Congress from targeting spending cuts to the programs that are best equipped to face such cuts. Limiting federal spending may be a worthy goal in this austere time, but the current method stands to hurt the school districts and students that need the extra funding support the most. This is not an argument for increasing federal spending, but rather an argument for ensuring that any decisions to cut such spending are done thoughtfully and with an eye towards equity.

To download these data for every school district in the country, click here. 

Romney Education Plan Would Face Significant Political Hurdles

September 14, 2012

Several months ago, the Romney campaign released a document titled “A Chance for Every Child” that outlined the candidate’s education platform. Buried in the document is a proposal to “voucherize” the two largest federal programs for K-12 education: Title I and Individuals with Disabilities Education Act (IDEA) state grants. The proposal would allow eligible students to take that funding with them to the public or private school or district of their choice. While such student-based funding is gaining popularity, can a student really just show up at a school with federal vouchers in hand and demand to be educated? No. It’s not that simple.

For one, federal funds do not come close to covering the cost of that child’s education. To solve that roadblock, Romney’s plan is predicated on another, related concept – open enrollment. Open enrollment ideally gives students an opportunity to seek out the highest-quality educational opportunities, a worthy goal especially when targeted at low-income and high need students. The platform states that under a Romney administration, the U.S. Department of Education would ensure that every state has an open enrollment system.

Though the Romney proposal is short on details, existing open enrollment states can give us some sense of how it could work. While most states have open enrollment laws, which allow students to apply to attend school in another district, many of them are voluntary, allowing districts to opt not to participate. Others are open only to students at certain schools or at certain income levels. Assumedly, Romney’s plan would require states and districts to adopt open enrollment for all students, requiring districts to accept transfers.*

Such programs typically work like this: If both the resident (the student’s home district) and non-resident (the district the student wants to transfer to) approve a student’s transfer application, the state transfers a payment from the resident district to the non-resident district (usually a portion of the annual per pupil funding). The resident district usually gets to keep some portion of the per pupil funding for “fixed costs.” It is important to note that the per pupil amount typically includes both state and local funds.

But federal funds, particularly Title I funds, can’t easily be made portable because of how they are distributed. Currently, states distribute Title I funds they receive from the federal government to districts based on four formulas that account for Census estimates of both the proportion and number of students living in poverty. However, districts distribute those Title I funds to schools based on enrollment in the free and reduced price lunch program. Theoretically, these funds can be tied to specific students based on their family income levels. But, districts can opt to use Title I dollars for students only in certain grade levels. And schools with poverty rates over a certain level are able to use their Title I funds for “whole school” use, rather than targeting that spending to specific eligible students.

That means most of the federal dollars do not follow specific students but instead are pooled in areas where district or school leaders think they will have the greatest impact. This existing system is often inequitable and leaves many students – particularly high schoolers – at a disadvantage. But it also allows district and school leaders more flexibility in how they use the funds.

Under Romney’s plan states will likely have to distribute Title I funds directly to students based on their enrollment in free and reduced price lunch or some other indicator of poverty (like Medicaid or Temporary Assistance for Needy Families). This will take the district and school out of the equation, eliminating a district’s ability to target the funds to certain grade levels or create “whole school” Title I programs. The dollars could then truly follow the student.

This would involve significant structural changes to Title I, including likely rehashing the current funding formulas and redefining how schools can use the funds to serve specific students. That will be a serious challenge – no one likes to lose funding and under Romney’s proposal it would be inevitable.

And any sort of voucherized Title I or IDEA system would necessitate mandatory open enrollment to cover the remaining cost of educating transfer students.  This would require significant legislative action at the state level and heavy bureaucratic lifts in federal, state, and local government.

Romney gets extra points for thinking out of the box with this education proposal. It speaks to every parent’s desire to have more control over his or her child’s education and would certainly cause a stir among the education bureaucracy. But at the same time, it undermines local control of schools, a concept many conservatives hold dear. Not only would states be required to implement open enrollment systems and transfer funds among districts, but districts and schools could no longer target their Title I funds to the schools or grades of their choosing.

If candidate Romney becomes President Romney, we predict a long and tough road ahead for his education proposals, likely with resistance from both sides of the aisle.   

*Such systems often allow districts to reject a transfer in cases of extreme financial hardship – where a resident district would lose too much funding or a non-resident district would be unable to support the additional cost of educating a transferring student.

Romney Education Plan Would Face Significant Political Hurdles

September 14, 2012

By Jennifer Cohen Kabaker

This post originally appeared on Ed Money Watch.

Several months ago, the Romney campaign released a document titled “A Chance for Every Child” that outlined the candidate’s education platform. Buried in the document is a proposal to “voucherize” the two largest federal programs for K-12 education: Title I and Individuals with Disabilities Education Act (IDEA) state grants. The proposal would allow eligible students to take that funding with them to the public or private school or district of their choice. While such student-based funding is gaining popularity, can a student really just show up at a school with federal vouchers in hand and demand to be educated? No. It’s not that simple.

For one, federal funds do not come close to covering the cost of that child’s education. To solve that roadblock, Romney’s plan is predicated on another, related concept – open enrollment. Open enrollment ideally gives students an opportunity to seek out the highest-quality educational opportunities, a worthy goal especially when targeted at low-income and high need students. The platform states that under a Romney administration, the U.S. Department of Education would ensure that every state has an open enrollment system.

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