A no-cost solution to the impasse on extending the 3.4 percent interest rate on some federal student loans is hiding in plain sight.
Lawmakers can cut interest rates and lower student debt burdens at no taxpayer cost starting with the upcoming school year by pegging interest rates to those on 10-year Treasury bonds, plus 3.0 percentage points. This policy is better for all students, even those who would qualify for the 3.4 percent interest rate. Yet, in a show of election-year theatrics, lawmakers are deadlocked over how to offset the $6 billion cost of extending the 3.4 percent rate -- raise taxes or repeal part of the 2010 health care law -- and aren’t looking for what helps students most.
Why is Congress debating interest rates on student loans in the first place?
Since 2006, the Department of Education has issued most federal student loans (Unsubsidized Stafford loans) with a fixed 6.8 percent interest rate. In recent years, however, Congress has allowed undergraduates with greater financial need to get lower rates on Subsidized Stafford loans. Funding has now dried up for those lower rates -- which hit 3.4 percent last school year -- so all newly issued loans starting this school year will carry the 6.8 percent rate. That is, unless Congress comes up with more funding. So it is now a “how do you pay for it?” debate that is going nowhere.
Congress and the president should just call a truce and agree instead to peg the rate on all newly-issued loans (for graduate and undergraduates) to 10-year Treasury bonds, plus 3.0 percentage points. The Congressional Budget Office says this plan (which was introduced as a Senate bill on Wednesday) reduces the cost of the loan program by $52 billion over 10 years because the agency estimates that rates on 10-year Treasury notes will eventually rise and newly issued loans will carry rates higher than 6.8 percent.
Students would be better off under this plan than what Congress is currently debating. That is true even though the formula doesn’t get the rate on Subsidized Stafford loans down to 3.4 percent (at today’s 10-year Treasury rate it would be 4.5 percent). While Congress and the president have been focused on the seemingly magical number of 3.4 percent for Subsidized Stafford loans, they’ve overlooked the fact that a smaller rate cut applied to both Subsidized and Unsubsidized Stafford loans adds up to a better deal for borrowers. Here’s why.
Undergraduate students (who are still dependents) can borrow up to $5,500 in Unsubsidized Stafford loans their first year in school, $6,500 in the second, and up to $7,500 each year thereafter. However, Subsidized Stafford loans, those that qualify for the 3.4 percent interest rate, max out $2,000 below those annual limits. So undergraduates who qualify for the lower rate, but borrow the maximum in total federal loans, actually have both types of loans.
Under the proposed extension of the 3.4 percent rate, one loan would charge 3.4 percent interest and the other 6.8 percent. Under the 10-year Treasury note proposal, rates on both loans would be the same, at 4.5 percent based on today’s rates.
While the weighted average interest rates a student will pay under either plan are very close, the 10-year Treasury plan is more favorable because Unsubsidized Stafford loans accrue interest annually while a borrower is in school. (No interest accrues on Subsidized Stafford loans during that time.) As a result, lowering that rate on both loan types to 4.5 percent, as the 10-year Treasury note plan would do, means borrowers would leave school with lower overall loan balances than they would under current law or the pending proposals to extend the 3.4 percent interest rate on some loans.
For example, a first year student’s loan balance upon graduating four years later would be $6,044 under the proposed extension of the 3.4 percent rate. But under the 10-year Treasury note plan, it would drop to $5,860 because the Unsubsidized Stafford portion of the loan balance accrues interest at the lower rate of 4.5 percent while the student is in school. Therefore, the student’s monthly payment would be $3 lower under the 10-year note plan than if he were to take out a Subsidized Stafford loan at 3.4 percent.
Graduate students and undergraduate borrowers who don’t qualify for any of the loans at 3.4 percent also would realize savings under the 10-year Treasury note plan because they would pay lower rates, too. Parent and Graduate PLUS loans rates would be lower as well.
So far Congress and student advocates haven’t warmed to this alternative, despite its clear benefits. Some would-be supporters are concerned that pegging fixed rates to the 10-year Treasury note would mean that rates on new loans could eventually be higher than 4.5 percent or even 6.8 percent. There is certainly a risk of that happening, but that’s the only way to reduce the cost of the loan program in the long run while lowering interest rates in the short run.
Besides, there is merit to pegging rates to a market index. Students will get lower rates when the economy is weak and will pay higher rates only if the economy improves. That’s a fair approach, for both taxpayers and students.
If only Congress would look past the politically charged 3.4 percent interest rate, they would see that a better plan for reducing student debt is right in front of them.
Jason Delisle is director of the Federal Education Budget Project at the New America Foundation.
College and university presidents are expected to announce at the White House today a new system to promote clarity of financial aid packages, The New York Times reported. Starting in the 2013-14 academic year, students will be provided with a "shopping sheet" with easily understandable aid packages, detailing costs after grants, and estimating monthly payments on any loans. Details will be released today.
Over the last four decades, federal and state policy makers have wrestled with how to design student aid programs to make them fair, efficient, and effective – and how to evaluate and improve those programs, once in place.
Early on it was discovered that competing interests could easily overtake and dominate the policy formulation process. Unsupported claims that programs were inefficient, poorly targeted, or unfairly favored one type of student or institution over another were not uncommon. Even proposals that appeared to alter the intent of the program, disenfranchise a whole class of students, or undermine a particular type of institution were offered with no accompanying data analysis. Often developed behind closed doors, such proposals gave little consideration to the impact of the proposed change on the enrollment, persistence, and completion behavior of affected students.
Over two decades ago, in an attempt to improve the policymaking process, a group of analysts in Washington put in place a nonpartisan, analytical framework to ensure that policymakers could understand the exact nature and likely impact of alternative proposals. The framework involved an agreement to use a standard computer model with known assumptions and populated with the best and most recent data. The model produced standard output when alternative program specifications were entered, such as changes in the maximum award, level of tuition sensitivity of the award, expected family contribution, and other program algorithms.
The output was a standard table that displayed the resulting changes in cells. A simplified version looked something like this:
Impact of Proposal on Students and Institutions
Type and Control of College
Data Arrayed in Each Cell
Number of Recipients
Level of Program Funds
Share of Program Funds
Average Award of Dependent and Independent Students
The rows of the table (displayed on the left) represented levels of family income; the columns denoted institutions of different type, control, and cost of attendance. For example, cell A included the lowest-income recipients attending 2-year public colleges, cell B included their middle-income peers who attended 4-year public colleges, and cell C included their high-income peers who attended 4-year private colleges.
The bottom row contained program funds received, by type and control of institution. For example, cell D showed total program funds going to all other postsecondary institutions, and cell E showed total program costs. The remaining cells showed other combinations.
Within each cell (displayed on the right), the computer output would array the following data: number of recipients; level of program funds; share of program funds; and average award for dependent and independent students. Once this table was produced for the current programs, proposed changes could be entered into the model to produce a new table, for purposes of comparison to the benchmark table -- the status quo.
Proposals that did not significantly change the existing distribution of program funds, by family income and type of institution, as measured by the shares in the cells, were deemed neutral. Proposals that redistributed program funds toward the northwest portion of the table, that is, toward cell A, were deemed relatively consistent with program intent by most observers; while those that moved funds generally to the southeast portion of the table, toward Cell C, not so much. Even the most challenged participants got the hang of the exercise quickly.
The benefits of obtaining unanimous agreement to use this framework in the policy formulation process were profound. For each alternative proposal, policymakers had at their disposal: any and all changes made to the underlying demographic assumptions of the model; the complete set of all proposed program changes; and the impact on students, institutions, and taxpayers of implementing the changes. One major benefit of using the framework was minimizing, if not wholly excluding, obviously self-serving proposals that ran counter to any reasonable interpretation of program intent. Occasionally, however, such a proposal would slip through, to the great amusement of n-1 participants. (Wow, you really hate community college students, don’t you?)
Use of the framework had another really important advantage. Advocacy (nothing wrong with that!) could be quickly distinguished from analysis. Advocates, analysts, and the all-too-familiar hybrids, who wear multiple hats, had the same information. There was an even playing field with everyone’s cards in full sight on the table. When used to identify and compare equal cost options that held total funding constant and redistributed different shares to participants, a sometimes unsettling zero-sum game unfolded in which losses had to finance gains.
Lively discussions ensued. Some had to be taken outside.
It is important to note that the framework did not provide estimates of the likely impact on student outcomes, that is, actual changes in enrollment and persistence behavior. At the time, there were no reliable data to build into the model that predicted student behavior – particularly any induced positive or negative enrollment effects of the proposal.
But this early effort to standardize at least the analytical portion of the policy process was a resounding success. Because, without these first-order estimates, winners and losers under proposed changes could not be identified, much less educated guesses made about how students might actually behave in response.
As another round of Higher Education Act reauthorization approaches, the higher education policy community, more than ever, needs to develop a similar analytical framework, underpinned by a more sophisticated computer model, driven by far richer data, containing more grant programs – federal, state, and institutional. Creating such a framework would not be all that difficult, the returns would again be enormous, and the data are available.
The table would display students, by family income and dependency, and all institutions, by type, control, and cost of attendance. Separate tables could be created at the program, institutional, state, and national level.
The effort should start with simple questions: What information should be displayed in the cells? Certainly it should include at least those in the simple table above. Should dependent and independent recipients be treated separately? Yes. Should merit-based grants be included? Probably. How about nontraditional students? Of course. You get the idea.
Given today’s budget battles, momentous zero-sum decisions that hold program funding constant will be made at the federal and state level – decisions that will dramatically affect the enrollment and persistence decisions of low- and middle-income students, and institutions as well. Without an agreed-upon framework with which to compare alternative proposals, at least as to who gains and who loses, policy discussions will proceed unproductively as if policymakers were starting from scratch, when, in fact, they are not. Without such a framework, discussions will fail to take properly into account the sobering reality that there are already programs in place that students, parents, and institutions count on, and that changes in existing programs will not only add to complexity and confusion but also have important tradeoffs and consequences.
Building the analytical framework should start now with the Pell Grant program. Given its central importance to millions of students and thousands of institutions, all legislative proposals to modify or alter the program should be specified and evaluated using an up-to-date version of a standard computer model that all stakeholders, including students, can use – a model that includes a common set of inputs and outputs. This is particularly important in the case of proposed changes that would condition the Pell award on the basis of data not currently collected and used in the calculation of award, expected family contribution, or student and institutional eligibility.
Examples include making the Pell award conditional on measures of merit or progress. In such cases, the source of the data must be specified, a new parameter created, and the impact of making the award conditional on that parameter estimated using the model. Winnings must be balanced with losses, and educated guesses must at least be considered about what will likely happen to students affected by the proposed change – particularly those who would lose much needed grant aid if the change were incorporated in the program.
Perhaps most important, proposals whose cost and distributional analyses appear acceptable should be subjected to rigorous case-controlled testing with additional funds – holding students harmless – before implementation. Congress, the Administration, and state legislatures will certainly need this information to make decisions because redistributing a fixed amount of scarce need-based grant aid to meet national and state access and completion goals, while minimizing unintended harm to students and institutions, will be challenging.
Without the light that good data and analysis can shed on the effort, policymakers will again be dancing in the dark.
Bill Goggin is executive director of the Advisory Committee on Student Financial Assistance, an independent committee created by Congress in the Education Amendments of 1986 to provide technical, nonpartisan advice on student aid policy.
Some at the University of California at Los Angeles are questioning why Justin Combs is receiving a full-ride athletic scholarship, The Los Angeles Times reported. The questions don't relate to his academic or athletic qualifications, but to his wealth. Combs is the son of Sean (Diddy) Combs, who has so much money that he gave his son a $360,000 Maybach for his 16th birthday. UCLA officials stress that funds for athletic scholarships are financed separately from the budget for need-based awards. Justin Combs used Twitter this week to defend the scholarship, writing: "Regardless what the circumstances are, I put that work in!!!!"
Prepaid debit cards can come with high fees, including a 50-cent "per swipe" fee for Higher One cards if they are used with a personal identification number (as a debit card) rather than a signature (as a credit card). The report calls on colleges to negotiate agreements with lower fees and to provide students with a range of options, including checks and bank deposits, for financial aid disbursements.
Neither a Republican nor a Democratic bill to keep the interest rate on federally subsidized student loans at 3.4 percent could muster the 60 votes needed to overcome a filibuster in the Senate on Thursday, meaning that rates are still scheduled to double on July 1. The Republican proposal would have paid for the $6 billion extension by eliminating a preventive care fund in the health-care overhaul; it failed, 34-62. The Democratic proposal would have changed a tax provision that allows some small business owners to avoid paying payroll taxes; it failed to advance on a 51-43 vote.
Metropolitan Community College in Nebraska failed to comply with numerous provisions of federal financial aid rules and should be forced to repay at least $233,000 to the government, the U.S. Education Department's inspector general said in an audit this month. Among other things, the agency said, the two-year college improperly disbursed federal aid to students who did not have high school diplomas or had not passed ability-to-benefit tests, to students who exceeded the maximum number of allowable credit hours of remedial coursework, and students who did not satisfy academic progress requirements. College officials disputed some of the inspector general's findings, which will go to Education Secretary Arne Duncan for potential action.
A recent report calling on states to target their financial aid to students with financial need but set expectations and support for college success has come under criticism from the Advisory Committee on Student Financial Assistance, a federal panel that advises Congress. In a statement, the federal panel says that the Brookings Institution report released this month (and described by its authors in an Inside Higher Edessay here) would, if followed, result in states developing many different approaches that link grants to differing measures of on-time enrollment, rejecting "the longstanding, widely-shared goal of an integrated and consistent federal-state partnership in need-based grant aid." The proposal would also reduce grant aid for the "students most at risk in institutions with the least resources to support those students." The authors of the Brookings report said they believed the advisory panel's members had misinterpreted their recommendations.
Illinois Governor Pat Quinn, a Democrat, has announced he will sign legislation headed to his desk that will eliminate legislative scholarships, GateHouse News Service reported. The scholarships -- in which legislators give away scholarships to public universities -- have long been controversial but have survived many previous attempts to kill them. "There is no place for a political scholarship program in Illinois,” the governor said in a statement. “As I have repeatedly advocated, scholarships -- paid for by Illinois taxpayers – should be awarded only to those with merit who are in true financial need. Abolishing this program is the right thing to do."