Higher Education

The Center for American Progress yesterday issued a preview of its upcoming proposal, which argues that Congress should allow people to refinance their student loans. The authors point out that the interest rate on the most widely-available federal student loan is a fixed 6.8 percent, but interest rates on other types of debt, like home mortgages and U.S. Treasury securities, are lower. Thus, they argue, borrowers with federal student loans should be able to take advantage of the lower rates. This line of reasoning is alluring, but it belies some key facts about federal student loans and lending markets in general.

First, no one with a federal student loan is barred from seeking out better terms elsewhere and refinancing their debt. In fact, the loans work exactly like home mortgages when it comes to refinancing. Borrowers are free to shop around for the best terms that a lender is willing to offer and use the proceeds from a new loan with better terms to pay off the old loan. Moreover, federal student loans never charge a “prepayment penalty” under which the borrower would be assessed a fee for paying off the loan early in a refinancing, or for any other reason.

Some might claim it is irrelevant that student loans and home mortgages can be refinanced in exactly the same way. After all, lots of lenders compete to refinance home mortgages, driving down interest rates in the market, but no such market exists for student loans. The lack of such a market, however, demonstrates a key point: The terms on federal student loans are still better than what private lenders offer. CAP’s proposal even notes that rates on private loans are twice as high as those on federal student loans. In other words, when it comes to federal student loans, borrowers already have the best terms available in the private market, and then some. What CAP and others must mean when they call for lower rates on student loans is that borrowers don’t have the best terms that the federal government can offer.

But that is a tricky argument to make. How does one measure what the government’s best terms ought to be? What should policymakers use as benchmarks, given that the terms on student loans are already the best available anywhere?

Like many observers, the Center for American Progress points to the interest rates on the government’s debt. Those rates are low and student loan rates are higher, the authors argue; therefore, borrowers should be able to refinance. That is an appealingly simple argument, but a deeply flawed one. 

Yes, banks make money when they borrow at a low rate and lend at a higher rate, but there is another essential component to that equation. Finance 101 teaches that it is theoretically impossible for anyone to borrow at a low rate and lend at a higher one unless someone also kicks in extra money to take the first loss. That extra money, the equity, acts like a buffer between the people from whom the bank is borrowing and the people to whom it is lending – and it is why the bank can borrow at a lower rate than it charges to lend the money out in the first place.

Most people are familiar with the concept of equity that takes the first loss, but may not realize it. When a bank issues a home mortgage, it requires the buyer to make a 20 percent down payment, which is equity. If home prices fall, the first 20 percent decline will be borne by the homeowner, not the bank. Similarly, when a bank borrows from someone at a low rate and relends that money out at a higher rate, the person who lent to the banks wants a similar buffer between his money and the loan the bank is making. It increases the chances he will be paid back.   

Equity, however, is obviously not free. That is why banks, who can borrow from depositors at rates as low as the federal government (the deposits are guaranteed by the federal government, after all) do not offer  loans at terms that beat those on federal student loans – especially when taking the non-interest rate benefits on federal student loans into account, such as universal eligibility, no credit or income checks, no co-signer requirements, income-based repayment with loan forgiveness, 30-year repayment plans, three-year forbearance plans, and unlimited in-school deferments. Despite being able to borrow at low rates, a bank lending at those terms would send its equity investors fleeing. 

When the federal government makes student loans, it is the taxpayers who act as equity holders. They are on the hook for any loss, since U.S. Treasury bondholders will always be paid back (debt ceiling debate notwithstanding). Therefore, arguing that interest rates on federal student loans should bear more resemblance to the low rates on U.S. Treasury notes implies that the federal government (i.e., the taxpayer) has no equity at risk in the transaction, or that the taxpayer is a source of free equity for the federal government. Neither is true.

The government’s cost to borrow is therefore an incomplete benchmark for calculating what the “break-even” interest rate on a federal student loan would be and determining whether rates are set too high. In other words, what investors demand when they lend to the federal government for 10 years is not what they would charge to lend to a student for 10 years. Even the most inexperienced investor knows that lending to the government is less risky than lending to a student.

Proposals for a federal student loan refinancing program boil down to this. Even though the federal government makes student loans at below-market rates and terms that no lender can beat, with protections galore for struggling borrowers, it could always sweeten the deal just a little bit more. But why should it? What is the goal, other than to slowly transfer money to people who meet no other metric of need other than the number in front of the percent sign on their student loan statement? There are indeed borrowers struggling to repay their loans, but ensuring that those borrowers are aware of and can easily enroll in repayment benefits that already exists seems like a much more targeted and far less costly way to deliver assistance.

Editor’s Note: Rebecca Shafer is a program associate with New America’s Bernard Schwartz Fellows Program. Previously, she taught at a public charter school in Washington, D.C. and a public school in Maryland. 

For two years, I taught eighth grade at a high-needs middle school in Prince George’s County, Maryland, just a few miles from Washington, D.C. The student body was nearly 90% African American, and over half of students qualified for free and reduced price lunch. (That didn’t include the cafeteria food one principal often bought out-of-pocket for other hungry kids.) Math scores hovered around 33% proficiency, and reading around 65%. The statewide average is about 69% proficiency in math and 80% in reading.  Especially at the start of my teaching career, I struggled to motivate my classes in the face of classroom disruptions, lagging reading levels, and pressures on students with unstable home situations.

Unfortunately, these issues aren’t unique to Maryland. There is an active conversation about how to reduce the disparities in education quality between K-12 schools in high- and low- income neighborhoods. Programs like Teach For America, which placed me (and some 38,000 other young college graduates over the past twenty years) in low-performing schools, and Obama’s Race to the Top program, which provided funding to my school, aim to fix this problem. If change is going to come, we need to set high goals for students.

My mentors and supervisors at my teaching jobs urged me to link my students’ academic growth with success in life. I pushed the idea to my students that college would reward them for their hard work, bringing opportunities and, further down the line, potentially lucrative careers. However, as Jason DeParle, a Bernard L. Schwartz Fellow, articulates in a recent New York Times piece, the path both to and through college to economic stability is often fraught with challenges particularly for lower-income students. For example, we see a widening socioeconomic gap in college attendance levels, graduation rates, and student loan burdens.

Editor’s Note: This post is part two in a series of four exploring research on the relationship between assets and children’s educational outcomes. Read part one here. Senior Research Fellow Willie Elliott is an Assistant Professor at the University of Kansas and Director of the Assets and Education Initiative (AEDI) at the School of Social Welfare.

One of the critical unanswered questions in asset development research to date has been how much money students need in their education accounts in order to realize the desired effects—on academic preparation and achievement, on future orientation and college-bound identity, and, ultimately, on college enrollment and graduation.

The amount of savings makes a huge difference when it comes to considering public policies with the potential to scale up to meet the growing need. Do we need to invest enough to finance all or most of a student’s higher education in order to increase the likelihood of their college success? Is just opening an account enough, even if it never has deposits?

Editor’s Note: This post is part one in a series of four exploring research on the relationship between assets and children’s educational outcomes. Senior Research Fellow Willie Elliott is an Assistant Professor at the University of Kansas and Director of the Assets and Education Initiative (AEDI) at the School of Social Welfare.

Even casual observers are likely familiar with many of the challenges facing our higher education system:

• Education is the path to economic mobility, but rising college costs construct a high barrier.
• Families worry that high costs will make college attendance impossible, even while they sacrifice to save for higher education.
• Low expectations about college attainment may stunt students’ academic achievement, such that college is beyond reach even if they find a way to finance it.
• Once students manage to enroll in college, graduation rates are unacceptably low, reducing the likelihood that the U.S. will produce enough college graduates to meet future labor market demands.
• Even with high levels of effort and ability and a strong desire to attend college, many poor and minority children perceive college as out of reach. Seventy percent of low-income children in tenth grade plan to go to college, but only 54 percent actually enroll.

Angelica Gonzales marched through high school in Goth armor — black boots, chains and cargo pants — but undermined her pose of alienation with a place on the honor roll. She nicknamed herself after a metal band and vowed to become the first in her family to earn a college degree.

“I don’t want to work at Walmart” like her mother, she wrote to a school counselor.

Congress pulled the country back from the edge of the fiscal cliff late Tuesday night when the U.S. House of Representatives voted to pass an agreement urgently negotiated and passed by the Senate on New Year’s Day. The agreement, set to become law this week, addresses some, but not all, of the policies that make up the fiscal cliff. It deals mainly with expiring tax policies, but only postpones for a few weeks the automatic spending cuts set to take effect on January 2 and does not increase the limit on the national debt. The pending law – titled the American Taxpayer Relief Act of 2012 – extends or makes permanent a number of tax benefits for education.

Few observers outside of Washington understand the extent to which Congress and the president make education policy through the tax code. Exemptions, credits, and deductions now account for over $30 billion a year in “spending” (in the form of forgone revenue) for education, mostly for postsecondary education. But a good portion of that spending was set to expire or had already expired at the end of 2012. With the passage of the American Taxpayer Relief Act of 2012, those policies are here to stay for a few more years, or in some cases permanently. (The table below lists the expiring policies and the pending extension.)

The largest of these tax expenditures related to education, the American Opportunity Tax Credit, was set to expire at the end of 2012 and revert to the less-generous Hope Credit. Instead, it has been extended for five years, through 2017, at a $67.3 billion 10-year cost to taxpayers. Other tax expenditures, including Coverdell education savings account benefits, employer-provided educational assistance, and the student loan interest deduction, were permanently extended. Those three combined will cost more than $21 billion over 10 years.

Two other education tax expenditures – the classroom expenses deduction for K-12 teachers and the deduction for qualified tuition and related expenses for postsecondary students and their families – were extended through 2013 after both deductions lapsed at the end of 2011. The short renewal Congress afforded to them this week means lawmakers have set themselves up for another fight over the deductions at the end of the 2013 calendar year.

Moreover, the deal Congress produced failed to answer other questions. Sequestration, the across-the-board cuts to virtually all programs scheduled to occur on January 2, 2013, for example, remains unresolved. Instead of either implementing the cuts this month or cancelling the threat of sequestration, the cuts have been delayed until March 1, 2013. That’s just a few weeks before the short-term continuing resolution, under which the federal government is currently operating at fiscal year 2012 funding levels, expires.

And according to the Treasury Department, the U.S. hit the debt ceiling – its borrowing limit – on Monday. Treasury Secretary Tim Geithner said the Department would engage a set of “extraordinary measures” to buy time, giving lawmakers until late February to act.

All this means the fiscal cliff agreement is really just a short respite on the way to the next fiscal cliff, scheduled to hit again in just a few months. Admittedly, the next agreement may be slightly easier to reach, given that it will occur under a new Congress with more Democrats in both houses (though leadership will still be split, with a Democratic Senate and a Republican House), and the biggest tax issues are now settled. But the circumstances haven’t changed, at least on the spending side. School districts are still at risk of losing significant federal funding (estimated at 8.2 percent per federal program, across the board). And Congress faces yet another knock-down, drag-out fight over spending levels and deficit cutting.

N. Gregory Mankiw is one of the most well-known economists in American politics. A Harvard professor, he chaired George W. Bush’s Council of Economic Advisers from 2003 to 2005 and served as a senior adviser for Mitt Romney’s presidential campaign. Many observers saw him among the top contenders to replace Ben Bernanke as chair of the Federal Reserve in a Romney administration.

Indiana higher ed commission wants tuition increase held at inflation

Louisiana’s Jindal administration to announce $129 million in cuts; colleges and health care expected to take big hits

Alabama’s two-year college system seeks $478 million in state funds for next year

Missouri lawmakers consider higher ed funding formula

Indiana higher ed commission wants tuition increase held at inflation
The Indiana Commission for Higher Education this week recommended that the state’s seven public universities hold their increases in tuition and fee costs at or below the rate of inflation over the next two years. The minimal increases in tuition would be a shift for the state university system – one school, Purdue, increased its tuition for in-state students by 4.5 percent  in each of its two most recent two-year tuition hikes. The commission’s recommendation was made in the context of its request for a 7.5 percent, or $128 million, increase in state funding for colleges, financial aid, and capital spending in the forthcoming biennial budget, which will cover fiscal years 2014 and 2015. The commission members are requesting the increase because Indiana lawmakers have cut spending in recent years. A 7.5 percent increase would restore higher education spending to fiscal year 2010 levels. More here…

Louisiana’s Jindal administration to announce $129 million in cuts; colleges and health care expected to take big hits
Because of a budget shortfall that has arisen over the past six months of the current 2013 fiscal year, Louisiana Governor Bobby Jindal is preparing to announce and implement mid-year spending cuts. According to the Louisiana Revenue Estimating Conference, the shortfall totals $129.2 million this year. Governor Jindal has the authority to make mid-year cuts without lawmakers’ input, provided he does not cross a certain threshold amount, so state legislators will not be able to target the cuts to specific programs. The state’s colleges and health care programs are the largest programs not protected by law from spending reductions, making them the ripest areas for savings and, therefore, cuts. This is the fifth consecutive year in which Jindal has instituted mid-year budget cuts. More here…

Alabama’s two-year college system seeks $478 million in state funds for next year
This week, newly-appointed Chancellor of the two-year college system in Alabama Mark Heinrich requested a 29 percent funding increase from the state for fiscal year 2014, a total of $478.3 million. The request includes $410.7 million for operations, as well as additional funding for capital expenses and maintenance costs. The system has seen significant budget cuts in recent years, so the 29 percent funding bump would restore spending levels for the system to pre-2008 levels, according to the chancellor. A large portion of the budget request would go to a workforce program that provides financial incentives to employers who hire students while they are attending community college. More here…

Missouri lawmakers consider higher ed funding formula
A plan presented this week by staff to the Missouri Legislature’s Joint Committee on Education would reformulate higher education spending and allocate a segment of it according to colleges’ and universities’ performance. The proposal is designed to provide incentives for colleges to improve their performances, much as the state does for a portion of K-12 education funding, rather than base funding exclusively on past allocations and the total available dollars, which is how money is currently allocated to postsecondary institutions. Under the new proposal, the state would fund 35 percent of schools’ operating costs. Of the remaining amount, 90 percent would be allocated automatically, and 10 percent by performance goals. Performance metrics may include student retention, graduation rates, and job placement records. The committee has an official mandate to redesign the funding formula by the end of 2013, but the proposal unveiled this week is only one option under consideration. More here…

Note: This post has been updated. The original version mischaracterized figures on the cost of IBR from the Barclays report.

In October the New America Foundation released Safety Net or Windfall, which explains how Obama administration changes to the Income-Based Repayment plan for federal student loans set to take effect this month dramatically expand the benefits the program offers, particularly to graduate students. Now Barclays has issued a report that measures just how big those changes will be.

The report, Student Loans: An Educated Mess, argues that the government has underestimated the cost of its student loan programs by $300 billion over the next 10 years, and the recent changes to the Income-Based Repayment program account for around $235 billion of that sum. Barclays projects that over half of all borrowers going forward will be eligible for the new IBR program, based on statistics reported by the Kansas City Federal Reserve Bank. The Department of Education believes enrollment will be just six percent.

Why such a big difference? Remember, when Congress first created IBR in 2007, the program was meant to provide a safety net to struggling borrowers. It sets a borrower’s payments at 15 percent of his monthly discretionary income, and any debt remaining after 25 years of payments in IBR would be forgiven. A borrower repaying through this “old IBR” program for a long period of time can incur substantial interest costs and pay a lot more on his loans over time, and even make higher monthly payments later, than if he repays under a non-income-based plan. Given those facts, coupled with IBR’s unwieldy enrollment process and a lack of awareness about the program, few borrowers opted in. Consequently, the Department of Education and budget agencies assume uptake will be similarly low going forward.

But those estimates ignore some big changes taking place. The Department of Education is improving the enrollment process and working hard to advertise the program. And now that a borrower’s payments are set to 10 percent of discretionary income, and loans are forgiven after 20 years, IBR will become a very attractive repayment option that has few if any downside financial risks for borrowers. In fact, new IBR is a large-scale tuition assistance program masquerading as a safety net, especially for graduate students who can take out federal loans to finance the full cost of their educations without limit.

Barclays has added more evidence to support that view. It won’t be long before the Congressional Budget Office and the U.S. Department of Education revise their cost estimates for IBR sharply higher. That should prompt lawmakers to rein in the benefits IBR provides while preserving the program’s safety-net function (see this Ed Money Watch post for how to do that). They can redirect those funds to more pressing student aid needs, like shoring up the Pell Grant program.

The results from our sixth annual Academic BCS are in, and we have a Cinderella story that rivals any BCS bowl game. If Academic BCS had a title game, Northwestern University would match up against… Northern Illinois University. Talk about an upset.

The Bowl Championship Series games, which pit the top-ranked football schools against one another, are great to watch. But it’s worth taking a step back to examine the darker side of NCAA football: too many elite football schools are doing a dismal job of graduating their players. Most of these players won’t make it to the NFL, which means that while the school has profited from them, all they can walk away with is a college degree. The trouble is that the graduation rate for football players is often much lower than it is for the rest of the school.

To focus on the student side of collegiate sports, the Education Policy team at the New America Foundation developed the Academic Bowl Championship Series rankings for Higher Ed Watch. Here’s how our formula works:  We calculate the difference between the entire football team’s graduation rate versus that of the male students at the university; the graduation gap between black and white students on the team versus the same gap among the overall school’s male population; and the gap between the graduation rate of black football players versus the black males at the school.* We also factor in the NCAA’s Academic Progress Rate (APR).**

We only rank the top 25 BCS teams, thus the winners of our Academic BCS have displayed prominence both on and off the field. For a full explanation of the formula, click here. For the full breakdown of scoring for this year and past years, click here.