On his education bus tour, President Obama is urging, among other suggestions, a new rating system to ensure that more families are able to afford higher education. I think we can all (well, almost all of us) agree that the rising costs of a bachelor’s degree need to be constrained, and we must find ways that facilitate middle- and lower-income students entering and graduating from college. The value proposition matters, and “debt without diploma” is unacceptable.
What is vastly harder to agree upon is how to address the problem, rather than just wringing our hands over it -- which we have been doing for far too long.
Let’s start with the president’s idea of rating colleges based on graduation rates and prospective earnings, among other variables. To be sure, given the president’s reference to U.S. News rankings in his speech today at the University of Buffalo, one wonders whether “ratings” are similar to or different from rankings – apart from using different variables.
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On the surface, these two data points may seem easy to calculate. And advising families on how to compare and contrast college offers seems wise. But devising a quality rating system will require deep insight into how the world of higher education actually works – on the ground, in the trenches. As the president noted, Secretary Duncan needs to garner suggestions from a wide range of educational constituencies.
First, we know that more-elite institutions that serve Pell-eligible students have higher graduation rates than open-access institutions that enroll Pell eligible students. What accounts for this disparity is subject to debate, but arguably, part of the answer is that the richer institutions “cream skim” and only take the “best” among the low-income students.
For example, students who are selected to be Posse Scholars graduate from college (largely highly selective institutions) at a rate of 90 percent -- which is stunningly good. But, it is worth remembering that the 640 Posse Scholars enrolling each year are selected from approximately 15,000 applicants.
This means that elite institutions, absent some adjustment, would rank higher than non-elite institutions on graduation rates without any explanation as to why that is occurring. And the lower graduation rate of less-elite institutions may be at least partially explained by the lack of preparedness of their students. For some students and their colleges, a graduation rate of 40 percent is success, not failure.
Second, if we only calculate graduation rates of true first-year, full-time cohorts, we will be missing the mark in terms of who is actually enrolling in college today. Students with previous credits, transfer students, adults returning, part-time students and veterans would not be counted in the calculation, although at least some of these data points will be included as IPED’s data are improved over time.
Third, earnings are certainly occupation-based. Graduates who become teachers and nurses and police officers earn less than students who are employed by investment banks or hedge funds. Clearly, success in higher education cannot be measured based on earnings alone.
Yes, college graduates should not be underemployed or employed in fields that do not take advantage of their education. But how we calculate “sufficient” earnings is critically important, and more earnings are not necessarily better for the public good.
Finally, there is a built-in assumption that students and their parents will pay attention to and use the ratings effectively. Experience suggests otherwise. Despite transparency in the realm of consumer protection, consumers still make irrational and unwise choices, as behavioral economists have noted.
Indeed, as scholars point out, consumption decision-making is often based on non-economic determiners. And we already have early evidence that the current scorecard has not worked as expected – despite best efforts to share its availability. Moreover, the income-based repayment program – also publicized – has not had the expected uptake among students who could benefit from it, as the president himself noted. We need to make disclosure “smart.” We also need to focus on how to engage families in conversations about money. And educational institutions need to see that their obligations to advise students about loan repayment extends beyond graduation, particularly since initial payments often commence six months post-degree.
So if we proceed with graduation rates and earnings as indicators, we need to be cautious in terms of how we calculate both and be aware that even the best ratings may not help the very audiences we seek to persuade.
Indeed, possible key users of the ranking system are high school guidance counselors. But, as a recent report from the Public Agenda notes, this group of professionals is struggling to counsel students for college effectively. Thus, their caseload and training may make their uptake of any new ratings problematic, absent major changes in their education and training.
As an additive or alternative to the president’s suggestions, I think we would be wise to make change where the “default” position benefits students and their families. So, as one example, what about enacting legislation, through an amendment to the Bankruptcy Code, that enables students and parents to discharge burdensome private and public loans through bankruptcy?
A recent study by the Center for American Progress suggested the dischargeability of select public and private loans (with a robust definition of what constitutes nondischargeable qualified student loans.) The Consumer Financial Protection Bureau and the Department of Education issued a report in 2012 suggesting reconsideration of the nondischargeability of private student loans.
To anticipate the suggestion that easing bankruptcy’s discharge will create a moral hazard, my experience over 30 years of working with debtors and consumer finance suggests that this common concern is not supported by the evidence.
The availability of bankruptcy and the opportunity for dischargeability of specified debt has not led to a wave of abusive bankruptcy filings. As I always have said, most people do not wake up in the morning and say, “Yippee. I get to file bankruptcy today, having failed at America’s rags-to-riches dream.”
Surely the president has latched onto an issue that matters – a college education for the betterment of individuals and their families and society at large. This is because, at the end of the day, we need an educated citizenry to preserve our democracy. The real issue is how we make that accurate idea a reality. As with most difficult issues, the devil remains in the details.
Karen Gross is president of Southern Vermont College. She served as a senior policy adviser to the U.S. Department of Education during 2012 and is now a consultant to the department. The views presented here are her own and do not represent the position of the government, including the Department of Education.
Submitted by Paul Fain on August 22, 2013 - 3:00am
The White House is keeping a tight lid on what might emerge during President Obama's two-day bus tour to address college affordability. But on the eve of those appearances, which begin today, sources said the president might seek to link federal financial aid to student outcomes, such as debt levels. Observers said that major proposal, which obviously would be controversial to many in higher education, likely would be accompanied by Obama signaling support for competency-based education, particularly programs that are not based on the credit-hour standard. However, the proposal's language was still being hashed out yesterday, sources said.
The New York Times also reported that the president's plan would involve linking federal aid to various student outcomes, likely with rating systems that compare colleges to their peer institutions.
Other parts of the Obama tour in upstate New York may be less controversial. In Syracuse, he is expected to highlight the "Say Yes to Education" program, which provides scholarships to students in participating schools in New York State with to attend public and participating private colleges, while also providing extensive support and guidance on preparing for colleges, The Post-Standard reported.
A think tank report released Tuesday argues for making student loans -- but only some student loans -- dischargeable under federal bankruptcy laws. The report from the Center for American Progress joins other recent calls for more protection for distressed borrowers than they now have, but it recommends targeted rather than blanket bankruptcy protection for student loan borrowers, based not on their source (the federal government or private lenders) but on the repayment terms and the educational and repayment track record of the institutions whose students received them.
Under the plan, certain types of products could qualify as "qualified student loans," which would both need to meet set definitions of borrower-friendly terms (low interest rates, access to favorable repayment options) and be available only to students at institutions and academic or training programs that "by virtue of their graduate employment rates" or other outcome measures "give graduates a reasonable chance to repay." Qualified loans would not be dischargeable in bankruptcy, but all loans that did not meet that definition would be.
The group argues that moving to such a system would prod lenders to create loans that were better for borrowers, and discourage predatory practices because both lenders and, quite possibly, institutions could be on the hook if loans that didn't "qualify" were able to be discharged in bankruptcy.
"Including some student loans in bankruptcy reforms and expanding borrower protections through Qualified Student Loans will ultimately maintain bankruptcy as the narrow path of last resort it was designed to be, while giving those burdened by student debt a chance for a fresh start," says the center's report, which was written by Joe Valenti, director of the center's asset building program, and David Bergeron, a longtime Education Department official who is now its vice president for postsecondary education.
The proportions of American undergraduates who received federal financial aid (57 percent) or at least some form of financial aid (71 percent) in 2011-12 both rose considerably from 2007-8, when the proportions were 47 percent and 66 percent, respectively, a new federal report shows.
The National Postsecondary Student Aid Study, which the U.S. Education Department's National Center for Education Statistics releases every four years, provides a wealth of data about how students are financing their higher education, based on a survey of about 100,000 students.
Among other findings:
About 40 percent of students borrowed federal loan funds in 2011-12, up from 35 percent in 2007-8. The average amount they borrowed rose to about $6,400 from about $5,000.
The proportion of students on federal grants rose sharply, to 42 percent from 28 percent, due to a significant expansion (now partially undone) in funding and eligibility criteria for Pell Grants.
The proportion of students on state grants remained largely flat, at 15 percent, but the percentage of full-time dependent students on state grants dipped to 26 percent from 29 percent, as some states contracted their aid funds.
This week, the U.S. Department of Education announced changes to the PLUS loan underwriting standards that may help previously denied PLUS loan applicants obtain loans. This will be welcome news to previously approved loan applicants who found themselves unexpectedly denied last year.
But federal PLUS loans can be risky business for graduate students and parents of undergraduates who can use them to borrow up to the full cost of attendance at college. Much more can be done to protect consumers from getting too deeply into debt. The Department of Education recently added PLUS loan underwriting standards to its list of items to potentially consider during negotiated rule-making, the process where students, advocates and colleges work with the federal government to hash out new regulations.
The National Association of Student Financial Aid Administrators offers three recommendations to add vital consumer protections to Federal PLUS loans.
Separate Parent PLUS Loans from Graduate PLUS Loans. Currently, there is one PLUS Loan program available to both parents (Parent PLUS) and graduate/professional students (Grad PLUS). This is a relatively new development: the Grad PLUS program was simply added onto the existing Parent PLUS program in 2005 to help graduate students cover the increasing costs of their programs.
While the borrowing profiles of parents and graduate students differ greatly, the same credit standards are applied to both. Lumping these groups together makes little practical sense. Separating the Grad PLUS and Parent PLUS programs would allow for vital variations in credit standards, loan limits, and interest rates that should be tailored to these two different populations.
Increase Loan Underwriting Standards on Parent Loans for New Students. Appropriate underwriting not only protects the lender (in this case the taxpayer), but also borrowers, by preventing them from getting into unmanageable amounts of debt.
The underwriting criteria for PLUS loans are minimal, resulting in approvals for parents who may not actually be in the best financial position to borrow. In fact, each year colleges field thousands of pleas from parents who have been approved for PLUS loans but believe they should have been denied. These parents know they cannot afford the loan debt on their income or have little experience with any form of significant debt. Yet, in order for dependent undergraduate students to receive additional federal loans in their own name, parents must first apply for -- and be denied -- a PLUS loan.
The sole credit criterion for PLUS loans is that an applicant “not have an adverse credit history,” meaning they cannot be 90 or more days delinquent on any debt or have defaulted or received a bankruptcy discharge in the last five years. Put another way, having no credit is tantamount to having good credit for purposes of a PLUS loan and -- perhaps even more troubling -- approval from the government doesn’t require even a simple debt-to-income analysis.
Using the current definition of adverse credit makes sense for graduate students who haven’t had time to build a credit history. Ignoring debt-to-income ratios also makes sense for graduate students whose earnings will increase based on the very educations they’re financing.
But parental earnings don’t increase because of an educational investment in their children. And unlike graduate borrowers, parents lack access to loan forgiveness programs offered through public service or the government's Pay As You Earn plan. When determining credit worthiness, parent eligibility credit criteria should include some measure of likely ability to repay, such as a debt‐to‐income measure, FICO score, or another test of adequate resources. Allowing parents to assume unmanageable amounts of debt presents a fiscal and moral hazard to both the taxpayer and borrower.
It must be noted that any changes to restrict access to Parent PLUS loans should only impact new students, so as not to disrupt current enrollments. ED learned this the hard way after the agency unexpectedly, and with little fanfare, tweaked underwriting standards last year. The move resulted in harsh criticism from some students, institutions, and lawmakers. Rep. Marcia Fudge (D-Ohio), chair of the Congressional Black Caucus, claimed in an August 1 statement that the change disproportionately impacted students attending historically black institutions and demanded that ED “immediately suspend use of the new ‘adverse credit’ criteria as a determinant for Federal Parent PLUS Loan eligibility.”
In response, ED has begun reconsidering previously denied PLUS loan applicants. Lest anyone believe the lesson here is to never reconsider underwriting standards that ultimately protect parent borrowers, it should be pointed out that the furor would likely have been much less had this not disrupted currently enrolled students who are now depending on these funds to graduate.
More Transparency in Federal PLUS Borrowing. Good public policy must be built on good data, yet the availability of data on federal PLUS borrowing is abysmal. Basic information about PLUS loan approval or denial rates, default and delinquency rates, and repayment plan distributions are difficult if not impossible to obtain. While Congress and the Education Department have significantly increased disclosures requirements placed on colleges regarding graduate earnings, dropout rates, repayment rates, educational costs, and Stafford loan defaults, there is no comparable level of disclosure from the department on Federal Parent or Grad PLUS loan borrowing.
The feds certainly have this information, so why not share it?
Efforts to better target the PLUS programs to the groups they serve, bolster underwriting standards for parent borrowers, and increase transparency would significantly strengthen the programs and help ensure that these federal loan dollars are used to provide access to higher education without crushing current and future borrowers.
Justin Draeger is president of the National Association of Student Financial Aid Administrators.
President Obama is planning a New York State bus tour next week to Binghamton, Buffalo and Syracuse (plus a trip to northern Pennsylvania) to talk about college tuitions and costs, the Associated Press reported. The president has promised to offer ideas about how to make college more affordable.
Growing consumer reluctance to pay rising tuition rates are threatening to drive up private colleges' tuition discount rates, limit net tuition revenue, and lower matriculation rates and enrollments in ways that could hurt their financial ratings, Standard & Poor's said in a report issued Tuesday. The report, which like most of S&P's reports is available only to subscribers, says that the pressure on institutions will come particularly in the most competitive markets; data in the report find tuition discount rates rising fastest in the Northeast (from 31 to 34 percent since 2008), but net tuition levels and matriculation rates fell most sharply in the West.