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.
Only days away from the 2012 election, one thing is abundantly clear -- Americans are deeply worried about our system of higher education. In fact, almost 90 percent of Americans believe that higher education is in crisis. The success of this generation, and of the U.S. economy, depends on whether we can rise to meet our challenges in higher education over the next four years.
The higher ed crisis is a product of both longer-term disinvestment and a failure to structure our current programs around key goals like access, completion, and job placement. Between 2000 and 2010, state and local funding per student for higher education fell by 21 percent. This follows decades of declining investment and fuels massive tuition hikes, which have hit students hard.
Higher education policy wonks and economists generally agree that a degree is still worth it, but that choice is not always so clear to the individual student. In our surveys and conversations with students across the country, they voice concerns over rising costs, complicated financial aid systems, little guidance, and the uncertain job prospects after school. Despite the problems, about four in five young adults believe that getting an education is even more important to their success than it was to their parents'.
From a national perspective, our biggest lever to improve higher education and help students is federal financial aid. Reforming our financial aid system changes incentives for students, families and schools, and can, if done right, put us on a path to a more successful higher education system. If reform is done wrong -- without student input, for example -- it could hurt the very students we are trying to help. But we owe it to ourselves to try for real change. Higher education is too important to settle for the status quo.
Successfully reforming federal financial aid requires a student-centered approach to drive real impact and minimize adverse consequences. Having surveyed and talked to thousands of students from across the country, we have laid out four key principles that should guide reform efforts:
1. Financial aid must provide meaningful access to all students and families.
About 84 percent of young adults believe that making college more affordable should be a priority for Congress. Our government currently provides critical Pell grants to lower and middle-income students because they need it the most, but we know that college is not yet affordable for all Americans. We can do more. Reforms to grant and loan programs must ensure that higher education is accessible for all students, particularly low-income students and those from communities with historically low enrollment and completion rates. For example, we must fill the impending Pell Grant shortfall.
2. Promote a transparent system that allows students and their families to act as well-informed consumers.
Access to grant aid increases enrollment, yet too few individuals fully understand the aid available to them. Complicated applications, meager advice, low information and an opaque marketplace frequently prevent students from enrolling or finishing school. Those that do graduate too often make choices along the way that raise costs and student debt. Change can start by proving better consumer information for students and families. By making it easier for students and families to compare college prices and outcomes, we can drive competition to help bring down tuition in the long run. For example, we should streamline and simplify federal student loans so borrowers automatically default into income-based repayment.
3. Hold all stakeholders accountable for the goal of graduating students with jobs, not debt.
We know that our college graduation rates are far too low. Federal financial aid does help. In a recent study, about 4 in 5 Pell grant recipients said that their grants increased the likelihood of completing school. Aid should be even more targeted to help students complete, and all stakeholders benefiting from aid, including schools, must be accountable for that goal.
Accountability does not end, however, with graduation -- students must be connected to jobs and careers that provide an opportunity to succeed and, at the very least, to pay off student debt. This generation believes in the value of hard work, and we know it is ultimately our responsibility to work hard and succeed. However, stakeholders should be judged on whether they take every opportunity to connect hard-working students to jobs during school, and encourage graduation with a meaningful degree and manageable debt. For example, we should restructure federal work-study to better connect students to jobs, and we should reward colleges that have more low-income graduates successfully paying back the principal on their loans.
4. Make smart, innovative investments to prepare this generation for tomorrow’s economy.
The federal deficit and the Budget Control Act have increased pressure on Congress for across-the-board cuts, including further cuts to education. But we cannot simply cut our way to prosperity. When we asked young adults whether Congress should cut Pell Grants in order to address the deficit, three-quarters were opposed. Indeed, young people understand that investing in higher education is crucial for the economy: 88 percent of young people agree that increasing financial aid and making loans more affordable for post-secondary education and training helps make the economy stronger. Policymakers looking to address deficits in the name of our future should listen to the generation affected by those choices. With limited resources, policymakers must 1) invest adequate dollars in aid, and 2) efficiently distribute limited dollars. Importantly, student-oriented innovations in our federal aid system could help to increase the efficiency of those investments. For example, we should re-examine the ways in which our tax structure helps build campus gyms or attempts to incentivize college savings among families who save anyway, and spend that money instead on shoring up Pell Grants.
The political landscape in 2013 won’t be easy to navigate, regardless of what happens next week. As policymakers head back to Washington post-election and step into the next Congress, we will have to deal with a looming fiscal cliff and budget battle, expiring tax cuts, the approaching reauthorization of the Higher Education Act and No Child Left Behind. But the next year does offer a real opportunity for major reforms to our higher education status quo: it is clear that some level of change to the federal aid system is inevitable. And with the cost of college rising at scary rates, our graduation rates lagging, and student debt mounting, a comprehensive look at our federal aid system should be a top priority. Young Invincibles will be laying out a detailed policy proposal for comprehensive change to the federal financial aid system in November, only a couple weeks after the election, to help guide Congress and the president.
Change is both necessary and challenging. Students must lead the way to ensure that no one claims the mantle of “reform” or “finding efficiencies” but really means “cut.” Instead, with evidence-based, student-led, and student-centered reforms and investment, we can attain greater enrollment, higher graduation rates, better job placement, and a generation prepared for tomorrow’s economy. The time for financial aid reform is now.
Aaron Smith is co-founder and executive director of Young Invincibles.