Higher Education

We have written plenty here at Higher Ed Watch about federal student loan programs. But increasingly, students are borrowing from private lenders to fund their educations, often at less-favorable terms than those for which they might otherwise be eligible. A new piece of legislation introduced in the Senate, the Know Before You Owe Private Student Loan Act (S. 2280), would help students avoid unnecessary or costly private borrowing.

The bill, introduced by Senators Dick Durbin (D-IL) and Tom Harkin (D-IA) late last month, would place added responsibility on colleges and universities and private lenders to help students avoid unnecessary (and generally more expensive) private loans and instead take advantage of federal loans. Private student loans often have variable interest rates (in some cases capped at 18 percent), and lack benefits that come standard with federal loans like deferment, forbearance, and income-based repayment.

The current rules are meant to inform borrowers that they could be eligible for more federal loans and may not have to take out private loans. Congress and the U.S. Department of Education put the regulations in place in 2010. They require only that students or borrowers “self-certify” – sign a form that indicates the student’s expected cost of attendance.

The Senate bill aims to bolster that process. Under the proposed legislation, private lenders would be required to obtain confirmation of students’ enrollment statuses and their costs of attendance (minus Pell Grant awards, other federal grants and loans, and institutional aid) from the institutions of higher education before making loans to students. (Presumably this would introduce a check against students over-borrowing unnecessarily.)

Many student aid advocates and pundits have panned the House Budget Committee’s loosely outlined funding plan for Pell Grants. The plan was part of the fiscal year 2013 budget resolution (aka the “Ryan Budget”) that the House passed a few weeks back. Critics say it would make deep cuts to Pell Grants and kick a million students out of the aid program. Indeed, the House Republican proposal would make some changes to the program to permanently address a $7 billion funding cliff that the program will face in 2014. But where were these critics when President Obama outlined his Pell Grant funding proposal earlier this year?

The president’s proposal included only a one-year fix for the massive $7 billion Pell Grant funding cliff. After the one-year fix, the president’s budget simply assumes that an extra $7 billion will materialize in the annual appropriation for Pell Grants each year. But this extra funding must be offset by $7 billion in cuts to other programs funded with annual appropriations, which the president’s budget doesn’t specify.

Do student aid advocates really believe the president’s “let’s not make tough decisions now; we’ll find an extra $7 billion later” is the better proposal?

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As we wrote last week, congressional budget resolutions are always light on details. At best, lawmakers include vague descriptions of policies that Congress could enact to meet spending goals. That’s exactly what House Republicans did for Pell Grant reforms in the fiscal year 2013 budget resolution that passed the House of Representatives last week. The document offers only a few hints about how lawmakers might fund Pell Grants as the program nears a major funding cliff in fiscal year 2014.

Using those hints, we’ve done some detective work to put together what we think the House Republicans might be after with respect to Pell Grant funding levels. The results suggest that House Republicans do in fact have a long-term plan for Pell Grants that would stave off a big cut to the maximum grant and/or avoid radical eligibility changes come 2014 – but their plan includes a few key tradeoffs.

Click here to read the full post on Ed Money Watch...

As we wrote last week, congressional budget resolutions are always light on details. At best, lawmakers include vague descriptions of policies that Congress could enact to meet spending goals. That’s exactly what House Republicans did for Pell Grant reforms in the fiscal year 2013 budget resolution that passed the House of Representatives last week. The document offers only a few hints about how lawmakers might fund Pell Grants as the program nears a major funding cliff in fiscal year 2014.

Using those hints, we’ve done some detective work to put together what we think the House Republicans might be after with respect to Pell Grant funding levels. The results suggest that House Republicans do in fact have a long-term plan for Pell Grants that would stave off a big cut to the maximum grant and/or avoid radical eligibility changes come 2014 – but their plan includes a few key tradeoffs. 

The report accompanying the House-passed budget resolution says it will make Pell Grants sustainable, referring to the funding cliff Congress must address for the fiscal year 2014 appropriation and each year thereafter. The funding cliff is the $30.7 billion annual appropriation needed to maintain the maximum grant under current law. (Keep in mind that the upcoming fiscal year 2013 appropriation isn’t problematic due to a current surplus of $2.1 billion and funding provided through other sources like the Budget Control Act of 2011. More information on funding history and the cliff is here.) To address the upcoming funding cliff, House lawmakers propose several policy and eligibility changes.

As part of their sustainability plan, House Republicans would set the maximum grant at $5,550 indefinitely – the same level as in fiscal years 2010 through 2012. That is a major concession over past proposals. House Republicans last year vowed to return the program to its “pre-stimulus” levels (a maximum grant of $4,731 at a cost of $16.2 billion). Congress first set the $5,550 maximum grant level using funds from the 2009 America Recovery and Reinvestment Act. Republican lawmakers have now proposed to fix that “post-stimulus” grant level in perpetuity.

Under current law, the maximum grant is scheduled to rise with inflation for five years starting in fiscal year 2013. The change proposed by the House budget – forgoing the five years of inflationary increases – reduces the cost of the program by about $1.5 billion in 2014 and a bit more each year thereafter based on figures from the Congressional Budget Office’s March 2012 baseline. It’s important to understand that House lawmakers would end the portion of the grant funded as an entitlement (not the portion funded through the appropriations process) to achieve the cost savings.

The entitlement funding source provided $5.0 billion in 2012 when the maximum grant was $5,550. Therefore, we assume that even though the House proposal would end entitlement funding currently in law for Pell Grants, lawmakers would move $5.0 billion each year from that funding source to support the annual appropriation in future years. Therefore, the portion of the entitlement funding that is eliminated by capping the maximum grant is the only actual reduction in program costs ($1.5 billion in 2014) that stems from eliminating the entitlement funding.

Other savings stem from changes House lawmakers would make to eligibility rules for Pell Grants (see this side-by-side). These include eliminating Pell Grants for students attending school less than half time, reducing the individual income threshold that automatically qualifies a student for the maximum grant from $23,000 to $20,000, and limiting grant eligibility to students below an absolute income threshold, though the proposal doesn’t specify what that income level would be. The first two proposals result in minor savings according to previous Congressional Budget Office estimates.

The latter proposal, however, could be the source of major savings depending on where lawmakers set the income ceiling. Current rules don’t set an absolute income limit for Pell Grant recipients. Eligibility is instead determined by a formula that takes income and other factors into account. Data from the U.S. Department of Education show that more than $7 billion in Pell Grants went to families earning incomes of $30,000 and above. For our estimate, we assume the House budget envisions an income cap of $45,000, which we approximate would lower the cost of providing a maximum grant of $5,550 by about $2.5 billion per year.  

Finally, we assume that savings generated by the House resolution’s proposal to end the interest-free benefits on Subsidized Stafford loans for undergraduate students would be used to fund Pell Grants. Ending the interest benefit produces large savings according to a Congressional Budget Office estimate released in 2010. It would free up about $4.8 billion annually to be reallocated to Pell Grants indefinitely.

When you add up the reallocated funding and the cost reductions that stem from the proposed eligibility changes, the House proposal would require Congress to appropriate annually about $21 billion. (See table below.) That’s about $9 billion less than what would be needed under current law starting in 2014 and each year thereafter. Furthermore, a $21 billion annual appropriation is in line with what Congress has provided through the regular appropriations process in recent years, bolstering the House Republican’s claim that their plan makes the Pell Grant program “sustainable.”

Of course, it is possible that House Republicans would not reallocate savings achieved by the various proposals into Pell Grants. Still, House Republicans state in their budget resolution that they want to support a maximum Pell Grant of $5,550 indefinitely. That concrete proposal gives us a good sense of how much funding Congress will need to provide each year for the program (after the proposed eligibility changes are made). Our calculations suggest that to eliminate the 2014 funding cliff and support a maximum grant of $5,550, most of the savings associated with the proposed spending cuts would have to be reallocated to Pell Grants.

If our assumptions are right, we think the House Republicans have a feasible proposal that trades cuts to other aid programs, a freeze to the maximum Pell Grant, and a few eligibility changes to fund maximum Pell Grants at $5,550 for the long-term. Now the question is: Will House Republicans provide all the details behind their proposal?

These days, education stakeholders are constantly clamoring for data – data on student achievement, data on spending, data on teachers – you name it, they want it.

The Federal Education Budget Project (FEBP), Ed Money Watch’s parent initiative, houses a database on its website that provides much of these data for both K-12 and higher education. In addition to relying on state sources, FEBP relies heavily on the U.S. Department of Education for data, particularly for higher education data at the state and institutional level. The primary source for these data is the Integrated Postsecondary Education Data System (IPEDS), a publicly available, but somewhat confusing database on postsecondary achievement, costs, and demographics.

While IPEDS has provided institution-level data for years, they recently launched a State Data Center to provide aggregated data at the state level. And though that data center is publicly available, IPEDS has not yet figured out how, exactly, to make that dataset as useful as possible. Our recent experience with the State Data Center’s graduation rate data is a case in point.

When FEBP launched its higher education database in mid-2011, we gathered state-level data on a host of indicators from the IPEDS State Data Center. This included average tuition and fees, four-year and two-year graduation rates, and student demographics. At the time, data were only available from the 2007-08 school year. Everything seemed on the up-and-up.

Fast forward to a couple weeks ago when we discovered that the State Data Center had made data for the subsequent year (2008-09) available. We downloaded the new state-level data and merged it with the 2007-08 data.

While most of the data looked fine, we discovered that the 2009 data for four-year graduation rates were dramatically different than the 2008 data. In some cases, graduation rates in 2009 were half of what they were in 2008. Though graduation rates do fluctuate from year to year, this sort of variation seemed highly unlikely. Unfortunately, the 2008 data are no longer available on the IPEDS State Data Center, making it impossible for us to do a fresh comparison.

Suspicious of some kind of calculation error and curious about the lack of availability of the 2008 data, we called the IPEDS helpline. We were informed that IPEDS is still figuring out the capacity of the State Data Center and what role they want it to play in the greater database. As a result, the 2008 state-level data are no longer available for download and are not stored anywhere offline at IPEDS. Further, IPEDs could not tell us exactly how the graduation rate data were calculated for 2008 or 2009, so we don’t know what might have caused the discrepancies.

Given this, it was clear to us that we could not include the state graduation rate data in our database as they were collected from IPEDS. Instead, we used the IPEDS institution-level data system to calculate group averages for each state for both total graduation rate and four-year graduation rate for 2008 and 2009, an iterative and long process. Though these data are not automatically available from IPEDS, we can ensure that they were calculated in the same manner and are therefore comparable across years. These are the data now displayed for both 2008 and 2009 in the FEBP database.

The IPEDS State Data Center could be a powerful tool for stakeholders attempting to understand how higher education systems and outcomes vary across states. But as long as IPEDS treats the center as a second class project, it will not reach its full potential. Key to this process will be making multiple years of data available and ensuring that data for each year are calculated in the same manner. Hopefully IPEDS will have the motivation and capacity to head in this direction. If not, we will continue to be concerned about the reliability and comparability of the data available at the State Data Center.

Congressional budget resolutions are notoriously light on details. That is by design. Congress uses the budget resolution as a framework for overall funding and revenue guidelines for 10 years out. And Congress may or may not follow that framework as it writes actual spending and revenue bills later in the year. The budget committees need not specify any tax policies, program cuts, or the like in their resolutions; instead, they just set broad targets.

Of course, though, the budget committees do have to develop a sense of which types of policies they could enact to keep spending, revenue, debts, and deficits within the proposed guidelines. Those “assumptions” are about the only aspect of the resolution that could have meaning for education policy stakeholders.

Last week, the House Budget Committee approved a fiscal year 2013 budget resolution that was full of assumptions about education programs. And despite the flurry of media coverage last week, the committee waited until this week to make any of those assumptions public. Even so, the documents currently available only illuminate a few key assumptions and do not provide an estimate of how the proposals would reach the spending levels outlined in the new fiscal year 2013 budget resolution.

Click here to read the full article on Ed Money Watch...

Congressional budget resolutions are notoriously light on details. That is by design. Congress uses the budget resolution as a framework for overall funding and revenue guidelines for 10 years out. And Congress may or may not follow that framework as it writes actual spending and revenue bills later in the year. The budget committees need not specify any tax policies, program cuts, or the like in their resolutions; instead, they just set broad targets.

Of course the budget committees do have to develop a sense of which types of policies they could enact to keep spending, revenue, debts, and deficits within the proposed guidelines. Those “assumptions” are about the only aspect of the resolution that could have meaning for education policy stakeholders if Congress takes them up through the legislative process later in the year.

Last week, the House Budget Committee approved a fiscal year 2013 budget resolution that was full of assumptions about education programs. And despite the flurry of media coverage last week, the committee waited until this week to make any of those assumptions public. Even so, the documents currently available only illuminate a few key assumptions and do not provide an estimate of how the proposals would reach the spending levels outlined in the new fiscal year 2013 budget resolution.

In short, there’s not much to say yet, except to call attention to these few education policy proposals, the bulk of which focus on higher education spending. The policies appear in the report that accompanies the legislative language of the budget resolution.

Higher Education

• Implement a series of reforms to Pell Grants, including:
  • Limit the maximum Pell Grant award to $5,550 and fund it entirely through the appropriations process. This would end the entitlement portion of the program’s budget;
  • Set an unspecified income limit for eligibility;
  • Eliminate Pell eligibility for less-than-half-time students, as was proposed in the House draft fiscal year 2012 appropriations bill;
  • End the $5 per-grant fees paid to schools to cover administrative costs (a 2009 estimate from the Congressional Budget Office [CBO] found that this would save nearly $1.8 billion over ten years when instituted for Pell Grants and campus-based aid programs); and
  • Revert automatic zero expected family contribution and income protection allowance limits to pre-College Cost Reduction and Access Act of 2007 (CCRAA) level of $20,000. (The automatic zero level was already reduced from CCRAA levels – $32,000 as of 2011-12 award year – to $23,000 in the fiscal year 2012 appropriations process.)
     
• Eliminate Subsidized Stafford loans for undergraduate students, as laid out by the Fiscal Commission. Congress enacted the same change for graduate students in last year’s debt ceiling agreement. An estimate provided by the CBO in 2010 shows that the undergraduate loan proposal would reduce federal spending by over $40 billion over ten years.
   
• Encourage innovation in higher education by limiting federal regulations and supporting unconventional models of postsecondary education like online learning.  Provide students with additional data to allow them to make informed postsecondary education decisions.
   
• Eliminate 5 percent set-aside for administrative costs for campus-based student aid programs, including the Supplemental Educational Opportunity Grants, Federal Work-Study, and Federal Perkins Loan programs.
   
• Recalculate savings set aside in Student Aid and Fiscal Responsibility Act (SAFRA), passed in the healthcare reform bill, using fair-value accounting standards and cancel the expenditure of those funds according to one or more of several recommendations:
  • Cancel income-based repayment programs for student loans established by the 2007 CCRAA;
  • Repeal the College Access Challenge Grants, which included $750 million in mandatory spending under SAFRA to sunset in 2014; and/or
  • Move all payments for Direct Loan Program servicers to annual appropriations funding.

• Cap the annual allowable increase for tuition expenses under Post-9/11 GI Bill for veterans’ education benefits at 3 percent.

K-12 Program Consolidations

• Eliminate or scale back programs that are not proven to be effective in increasing student achievement.  Examine and reform 82 duplicative teacher quality improvement programs (outlined in a GAO report last year) to streamline federal efforts.

• Zero out the Safe and Drug-Free Schools program because it has been found ineffective.

There is one additional matter that will be of interest to education policy stakeholders. The House-proposed budget resolution includes “reconciliation instructions” for several committees, but not the Education and Workforce Committee. Reconciliation instructions require committees to draft legislation that reduces federal spending on entitlement programs, so that the bills then qualify for expedited consideration in the House and Senate – mainly meaning that they cannot be filibustered in the Senate. It is curious that the House Budget Committee opted not to provide reconciliation instructions for the Education and Workforce Committee given that the proposals listed above would certainly reduce spending on entitlement programs (including Pell Grants and student loans).

If you felt like you couldn’t find any information on the House proposed fiscal year 2013 budget resolution last week despite all the press coverage, it’s not because you didn’t know where to look.  The Committee barely released anything meaningful for education policy stakeholders last week. But with the release of a committee report yesterday, at least some of Chairman Paul Ryan’s (R-WI) “assumptions” are now available – and that’s about as much as will ever be made public for a budget resolution.

Last week the Republican majority on the House Budget Committee released a fiscal year 2013 budget resolution. For the second year in a row, the document includes a so-called “fair value” rule that applies to cost estimates for federal loan programs – including student loans. While the rule went largely unnoticed last year (except by us here at Ed Money Watch), this year it has attracted a bit more attention. And with any budget rule, added attention begets added confusion.

Many have mischaracterized fair-value accounting as a Republican gambit to reinstate some version of a guaranteed student loan program and replace the 100 percent direct lending model in place since 2010. If that is in fact the intent, Republican lawmakers are terribly confused, because reinstating the guaranteed loan program in place of direct lending would cost $102 billion over a ten-year budget window according to fair-value estimates.

Click here to read the full article on Ed Money Watch…

This week the Republican majority on the House Budget Committee released a fiscal year 2013 budget resolution. For the second year in a row, the document includes a so-called “fair value” rule that applies to cost estimates for federal loan programs—including student loans. While the rule went largely unnoticed last year (except by us here at Ed Money Watch), this year it has attracted a bit more attention. And with any budget rule, added attention begets added confusion.

Many have mischaracterized fair-value accounting as a Republican gambit to reinstate some version of a guaranteed student loan program and replace the 100 percent direct lending model in place since 2010. If that is in fact the intent, Republican lawmakers are terribly confused because reinstating the guaranteed loan program in place of direct lending would cost $102 billion over a ten-year budget window according to fair-value estimates.

The math on this is simple. A 2010 Congressional Budget Office (CBO) study compared the two loan programs under fair-value accounting and found that the typical direct loan costs the government about $12 for every $100 lent, but the same loan made through the guaranteed program (under the Federal Family Education Loan [FFEL] program that existed in 2010) costs $20 for every $100 lent. Multiply the higher cost for guaranteed loans by the $128 billion in loans that will be issued annually over the next 10 years and you get an added cost of $102 billion. That means if Congress adopted fair-value accounting and then proposed a bill to reinstate guaranteed student loans, they would need to find $102 billion in spending cuts or tax hikes to make the switch budget neutral.

Guaranteed lending costs more than direct lending even under fair-value accounting because guaranteed lending subsidized both borrowers and private lenders. Direct lending subsidizes just the borrower because the government does not need to guarantee interest payments to private lenders or pay a complicated array of fees to guarantee agencies.

Is the fair-value movement really just about better, more honest accounting then? Mostly, yes. But it would also remove the budgetary incentive that Congress has under the current rules to expand subsidized loan programs. Under current rules, loans appear profitable even when they provide valuable subsidies to borrowers (and lenders). As a result, when lawmakers expand loan programs, it looks like they have simultaneously reduced spending. Generally, fair-value accounting reveals that government loan programs impose a cost on taxpayers when they subsidize borrowers (and lenders).

The difference arises because official rules value government loans as if the estimated performance of the loan (repayment rate, defaults, recovery rates, delinquencies, deferments, etc.) is certain to occur as projected. In contrast, fair-value accounting uses the exact same estimates of loan performance as the current rules (repayment rate, defaults, recovery rates, delinquencies, deferments, etc.), but it assumes that the estimated performance is not certain and that taxpayers bear a cost for assuming the risk that the loans will cost more than expected. The CBO explains that this is “market risk,” which is the risk that defaults will be higher and more costly in times of economic stress and that the federal government bears it when making loans just as any private lender would.

The Obama Administration’s proposal to revamp and expand the Perkins Loan program is a good example of the policymaking and political implications of fair-value accounting. The president’s proposal would turn the existing Perkins Loan program into one that allows some students to take out additional Unsubsidized Stafford loans—the most widely available federal student loans. Current accounting rules show that the proposal would generate a profit for the government—more lending at profitable terms means more profits. Fair-value accounting, on the other hand, shows the proposal would increase federal spending—more lending at subsidized terms means additional spending.

The table below, based on a 2011 CBO estimate of the Perkins Loan proposal included in the president’s fiscal year 2012 budget, compares the costs of the proposal under current rules and fair-value accounting.

Private companies that used to be the primary lenders under the old guaranteed loan program (Sallie Mae, et al) do not favor fair-value accounting because it gives them a shot at returning to the days of politically negotiated subsidies and rent seeking under the old guaranteed loan program. They support it because it shows that if Congress expands the federal student loan program or creates an entirely new one—such as the president’s Perkins Loan proposal—it imposes a cost on taxpayers. That makes such proposals unlikely to pass given today’s record budget deficits. Private student loan companies have a better chance, then, of preserving the small slice of the student loan market they currently occupy.

Lastly, there is the matter of loan sales. For years, student loan companies lobbied Congress to sell off the direct loan portfolio. Even last year, investment banks were pitching a similar (albeit nonsensical) idea to Congress as a phony way to reduce government debt. Current accounting rules show that selling the loans, even at market prices, would present a cost to the government, making a loan sale proposal a nonstarter. Fair-value accounting, on the other hand, would theoretically show that a loan sale is budget neutral. That is, the loans are worth what someone is willing to pay for them so selling them leaves the government in the exact same financial position had it kept them.

It’s possible that student loan companies see a move to fair-value accounting as a way to convince lawmakers to sell the government’s direct student loan portfolio. But it’s hard to imagine something like this coming to fruition. Even so, many ill-informed members of Congress think that selling the direct loan portfolio somehow reduces the government’s costs. Again, such a transaction, at fair-value prices, offers no financial gain to taxpayers.

There is no doubt that fair-value accounting would make it harder for Congress to expand student loan programs, be they guaranteed or direct lending programs. And that may well be the primary motive of some who support the accounting rule, just as those who oppose fair-value accounting tend to do so only because it ends the “free lunch” of providing subsidies while earning apparent profits. But setting political motivations aside, fair-value accounting is the most comprehensive and meaningful way to measure what taxpayers are being asked to give up when the government uses their money to make student loans. Whatever policy outcome it favors shouldn’t be a factor in whether to adopt it.