The annual amount families spent on college leveled off at about $21,000 after several years of decline, according to Sallie Mae survey, which finds families -- particularly high-income ones -- taking steps to limit their expenditures.
As total student debt passed $1 trillion last year, more than 35 percent of repaying borrowers under age 30 were at least 90 days late on their payments. The first three months of 2013 were the worst on record for student loan defaults. A college education still pays, but rising tuition, low graduation rates and burgeoning debt levels are pushing postsecondary credentials out of reach for too many students. Meanwhile, the government is expecting to earn a $34 billion dollar profit on federal loans next year.
Congress is about to make things worse. Last spring, students fought and won a battle to prevent interest rates on subsidized Stafford loans, loans with lower interest rates on which the government pays the interest while students are enrolled, from doubling. Yet Congress only fixed the problem for a year. If our leaders in Washington fail to act again, over 7 million students would see their interest rates jump from 3.4 percent to 6.8 percent on July 1. That adds $1,000 to repayment per year of school for someone who borrows the maximum amount each year – an extra $4,000 for a student who graduates in 4 years. Students are fed up with manufactured crises and Band-Aid policies. We need a comprehensive solution that permanently fixes how the federal government sets interest rates for student loans. But the current long-term proposals fall far short.
Proposals Fail to Solve the Problem
One leading reform idea, embraced by both Senate Republicans and President Obama, would replace the current system, fixed interest rates set by Congress, with rates that vary with market conditions but are fixed over the life of the loan – like a mortgage. Students would pay less when overall interest rates are low, and more when overall interest rates are high. The rate would change over time, with no need for Congress to get involved. Allowing for some flexibility would be fairer to borrowers and provide the kind of comprehensive long-term fix that students need. Overall interest rates are currently at historic lows: the federal government can borrow for less than 2 percent on a 10-year Treasury note, but federal loans to students are set at rates ranging from 3.4 percent all the way up to 7.9 percent.
With a market-based rate, though, comes the risk that interest rates will shoot upward. If Treasury rates were to rise to say, 10 percent -- which happened in the 1980s -- not only would this substantially increase costs for students, but it could deter students from going to college at all. A market-based rate with no cap is simply wrong for students.
Which is why the devil is in the details. Senate Republicans, who want to use student borrowers to pay off the deficit, start with a rate set at the 10-year Treasury bill plus 3 percent, a rate that will inevitably rise further with the market. They would also allow interest to grow while students are in school, fueling more student debt, and using the money to reduce the deficit. Previous rounds of deficit reduction followed by sequestration have already slashed the federal education budget. Students need reform that makes college more affordable, not less.
The president’s budget proposal is also disappointing. It changes rates to a market-based rate, but provides no cap on how those rates could go. This approach keeps rates low now but pays for it by letting rates rise later. It also subjects those rates to the whims of the market – who could have predicted today’s low rates?
A better approach would combine a market-based rate with a strong cap and have borrowers pay back loans based on their income. Under this model, interest rates would track market conditions when issued, but would be fixed over the life of the loan.
The fixed rates and a strong cap would balance flexibility with the need to provide certainty to students. Borrowers would know their expected monthly payment as soon as they took out their loans. A dramatic interest rate spike would never seriously threaten educational investment. Finally, the annual adjustment of a market-based fixed rate removes Congress from the rate setting process -- something everyone can appreciate.
A change to interest rates alone, though, will not curtail rising defaults in a tough economy. That is why we need broader reform to the student loan system. We need better counseling, better loan servicing, and importantly, a simple system that puts students into income-based repayment (IBR). By having students pay back their loans based on what they earn, we would ensure that students graduating in tough economic times would not pay more than they could afford. IBR does not replace an interest rate cap because it does not limit total debt owed or the time required to pay it back. Rather, it limits monthly payment amounts, an essential tool for stemming the default tide that ruins credit ratings and livelihoods.
Finally, we need comprehensive federal and state reforms that will truly address the underlying driver of student debt -- the rapidly rising cost of college.
Last year Congress worked together to avoid a self-inflicted crisis only to face another one 12 months later. We need to address rising college costs and increase school accountability, but we also face a looming deadline to take action on student loans and ensure an affordable, stable system for years to come. And if comprehensive student loan reform proves politically impossible, we must at least come to a short-term agreement that keeps rates low for students and leads us on the path toward that long-term solution.
As we approach the July 1 deadline, one thing is clear: students can’t afford for Congress to default on its responsibilities.
Aaron Smith is co-founder and executive director of Young Invincibles, a nonprofit, nonpartisan youth advocacy organization.
The Obama administration unveiled its new College Scorecard with much fanfare this month. Highlighted to college-bound students as a way to “get the most bang for your educational buck,” the Scorecard is intended to serve as a consumer guide for higher education. The first section of the Department of Education’s new College Scorecard features the average net price of attendance at the selected institution. To guide users, the scorecard categorizes these average net prices as low, medium or high.
There’s just one problem: no student is average.
Consider a low-income applicant to the University of Pennsylvania, a school with a high sticker price. At Penn, a full-price student pays $59,600 (including tuition, room & board, and other fees) and a low-income student with a full scholarship pays $0. The average net price across these two students is $29,800. (As it happens, Penn’s reported average net price is $20,592.) Just like high sticker prices, high average net price can mislead students from modest circumstances looking for affordable college options. Many colleges – particularly prestigious schools with high sticker prices – are committed to building socioeconomically diverse student bodies. At such schools, students’ individualized net prices can vary significantly depending on their financial circumstances.
Would-be college students can access this kind of information before they decide where to apply to school. The Higher Education Opportunity Act of 2008 (HEOA) required all postsecondary institutions receiving Title IV funding to post net price calculators (NPCs) on their websites by October 2011. Using NPCs, students can identify their likely cost of attending different institutions – a number that often varies widely between students based on their state of residence, academic performance, personal income, assets, the number of family members also attending college and a variety of other factors. An individual student's net price is often different from both the school’s full-fare “sticker price” and the average net price.
The administration seems to be focusing on the College Scorecard, so we hear little about the net price calculators these days. Like the College Scorecard, NPCs offer key financial information to students and families prior to application and matriculation. The College Board’s 2012 study revealed that more than half of college-bound seniors from lower-income and middle-income families still rule out colleges on the basis of sticker price, but with the advent of NPCs, students from all backgrounds can identify affordable college options before they decide where to apply.
This innovation has the potential to turn college advising on its head. Instead of discussing financial aid after students have received acceptance letters in senior spring, counselors can help students build application lists in junior spring that take financial aid into account. With the Scorecard’s average net prices, high schools students are left with yet another one-size-fits-all ranking of affordability; in short, it is not much better than the starting “sticker price.”
To demonstrate the relative importance of individualized net prices, let’s take a look at the projected cost of college for Cristina Moreno, the narrator of the 2004 film “Spanglish” and a first-generation low-income minority college-bound student. Here, we have compared Cristina’s individualized net prices with the average net prices for three schools: University of California at Berkeley, New York University and Hampshire College.
For low-income students like Cristina, the College Scorecard misses the mark – sometimes by a big margin. As with sticker prices, these average net prices can indicate to low-income students that they will find neither financial support nor a warm welcome at selective schools.
Ultimately, the White House College Scorecard serves two important purposes: it provides policymakers a high-level view of the affordability of a school, and it provides students a more user-friendly portal to access existing summary data. Though the average net price might be helpful to policymakers trying to manage the overall cost of education in America, students making the biggest investment of their lives need easy access to detailed, individualized information. The Center for American Progress – which issued criticism of the draft College Scorecard in 2012 – praised the new version for including a link to each school’s NPC. Even so, parents and students would need to visit each school’s individual NPC – adding time and repetition to an already complicated college search – and then decode the distinctive results pages generated by calculators built by the numerous vendors in the space.
Despite the advantages of using net price calculators to identify affordable schools, the CollegeBoard’s 2012 study revealed that only 35 percent of college-bound high school seniors used NPCs during their college search. Initial efforts to promote NPCs included a video contest and substantial press coverage, but many college access professionals and counselors still aren’t aware of the net price calculators, let alone the federal requirement.
Theoretically, links to all NPCs have been available since 2011 on the Department of Education's College Navigator, but the list posted there is far from accurate; in 2012, our team spent more than 500 hours identifying the correct links for all 7,000+ schools and campuses receiving Title IV funding. A quick check of the College Scorecard’s NPC links revealed the University of West Alabama’s NPC link actually directs users to its homepage, but at least the calculators garnered a spot in the new system.
Regrettably, in drafting the HEOA, Congress missed an opportunity to create a centralized system based on the individualized net price concept. HEOA did not compel schools to adopt a specific net price calculator, and the implementation of the NPC requirement has yielded more than a dozen different calculator types with hundreds of variations. To generate of individualized net price results across all schools in a College Scorecard type system, the federal government would need to compel the adoption of a universal net price calculator format and amend HEOA. Such a requirement would place an additional burden on college financial aid offices, but would certainly benefit students seeking a bigger bang for their buck during the college selection process.
At College Abacus, we are closing the gap between legislation – and its goals – and the actual needs of students, parents, and counselors around the United States. We are taking on the task of aggregating the net price calculators into a single, student-friendly tool. With the help of a grant provided by the Gates Foundation’s College Knowledge Challenge, we expect College Abacus to expand from its current group of 4,000+ schools to include all US colleges and universities by September 2013.
Given the 1 trillion dollar student loan crisis, students need help identifying colleges that they can afford. The College Scorecard may have stimulated conversation on this critical issue, but it is unlikely to serve our most vulnerable students in their pursuit of affordable higher education.
Abigail Seldin is the CEO and co-founder of College Abacus, and an ABD DPhil in anthropology at the University of Oxford.