Higher Education

Wednesday July 11^th, the Asset Building Program will be hosting an event focused on the special July/August issue of the Washington Monthly. "The Future of Success" takes a look at current economic conditions, how we got here, the impact of the recession on the wealth of American families, and how we might get out. The editors and writers of the Monthly have taken the asset building perspective to heart and decided that it is a critical tool for restoring the American Dream. The event will feature two panels, one comprised of contributors to the issue, the other of expert commentators on the issues at hand.

This post first appeared on HigherEdJobs as part of their iFocus feature.

By 2018, nearly two-thirds of American jobs will require a postsecondary credential.While our economic success as a nation depends on getting millions more people to and through college, college has never been so expensive. As prices go up and state support dwindles, students are forced to bear a larger share of college costs. Instead of shoring up the resources meant to help low-income students, the federal government is pouring more money into financial aid programs that disproportionately help middle- and upper-income students who would have gone to college anyway. 

The success of low- and moderate-income students often hinges on their ability to receive financial aid, especially grant aid like the Pell Grant. If we don't overhaul our federal financial aid programs to make them sustainable and better targeted toward low- and moderate-income students, we risk never being able to fulfill our nation's labor market needs. And when it comes to finding the resources needed to revamp the federal financial aid program, the lowest hanging fruit, ripe for the picking, are the higher education tax credits and deductions. 

The main problem with higher education tax benefits, like the American Opportunity Tax Credit (AOTC) and the Student Loan Interest Deduction, is that they are not effectively directed toward the students who most need them. According to a recent report by Education Sector, tax filers earning more than $75,000 were two-and-a-half times more likely to receive AOTC benefits than those earning less than $25,000. In addition, millions of tax filers lack the financial literacy required to figure out if they are eligible for one of the higher education tax credits and how to best maximize their benefit. 

In 2009 alone, the federal government spent $14.7 billion on these tax credits that overly benefit upper- and middle-income families. Since higher education is not only a private good, this is both a bad education and economic policy. Federal financial aid programs were developed in part to make a college degree attainable for lower- and moderate-income students since the return on investment to the nation is high. A college education leads to higher earnings resulting in more tax revenues. The magnitude of this effect is astonishing - a four-year-equivalent degree gives the government $471,000 more in income, payroll, property, and sales tax revenue. 

The government could roll back the thresholds of these tax benefits to ensure they are better targeted to low- and middle-income families, but that would do nothing to reduce the complexity that prevents millions of these families - usually the least savvy and most needy - from claiming them. Instead, the government needs to get rid of them - the American Opportunity, Lifetime Learning, and Hope tax credits, plus both the Tuition and Fees, and Student Loan Interest deductions. With the savings, we could better target students who need the most financial aid help by restructuring and rethinking federal aid programs. 

This will be an uphill battle since the tax credits poll well. But in an age of shrinking resources, increasing college costs, and an urgent need to get more students to and through college, we have to put aside popular but poorly-targeted policies in order to help those who wouldn't otherwise attend college, go and succeed.

Every university has its own graduation tradition. At the University of Wisconsin-Madison, graduates don their caps and gowns and trek up Bascom Hill to where a statue of Abraham Lincoln sits tall and proud.  They climb into Abe’s lap, and take in the view. With one arm slung around his neck, they tell Abe their hopes and aspirations and thank him. After all, had Lincoln not signed the Morrill Land Grant Act, their beloved UW would not have thrived. In fact, without the Morrill Act, many of our great state institutions wouldn’t exist at all.

Justin Morrill, a congressman from Vermont, introduced the land-grant bill in 1857 to give federal land to states to establish institutions of higher education. In return, these universities would provide instruction not just in classical studies, but also in vocational fields such as agriculture, mechanics, and military tactics. Seen as federal overreach into states’ rights, the act languished for years, until President Lincoln signed it into law during the Civil War. Lincoln knew that the strength of the nation depended upon an educated electorate, so it was in the public interest to provide educational opportunities not only to the elite, but also to the industrial class.

Today we celebrate the sesquicentennial of the Morrill Act. Over the past 150 years, America’s public research universities have become some of the best in the nation and world. Not only do they contribute greatly to our national prosperity, competitiveness, and security, they also provide wide access to those historically underrepresented in higher education. America’s public universities educate approximately 85 percent of the students who receive bachelor’s degrees at research universities, and 70 percent of graduate students. They account for more than 60 percent of the research and development in the nation.

But fissures have appeared in our public system at the very time a postsecondary credential has become more critical. For decades, states have been disinvesting in their public colleges and universities, meaning that public institutions have been forced to do more with less. And when they can’t maintain the status quo or do more with less, they shift the cost onto students. This past year alone tuition and fees increased 8.3 percent for in-state students at public four-year universities compared with 4.5 percent at private nonprofits.

Many elite public institutions, meanwhile, have seemingly forgotten that they are not only public in funding, but in mission. In the face of diminishing resources, flagships have become increasingly “privatized” in order to set tuition rates higher than their public counterparts. This allows them to remain “competitive” with private, heavily-resourced universities at the top of the US News & World Report rankings. But this competition spurs institutional actions that run counter to the mission of public universities to provide broad, affordable access to a diverse student body.

As we celebrate the anniversary of the Morrill Act, let’s take a moment to consider the direction of our state university system. It's imperative that we work together to ensure that the best years of public higher education are not behind us. There are no quick and simple solutions for the problems that plague higher education. States need to reinvest in higher education. Institutions should quit playing the costly rankings game. Stakeholders need to stop eyeing each other suspiciously and recognize that “innovation” and “shared governance” do not have to be contradictions.

Let’s hope that when we reach the bicentennial anniversary of the Morrill Act, our state universities have not become relics of the past, and that graduates at Wisconsin still make the trip up Bascom to thank Abe.

Happy Birthday, Morrill Act. May there be many more.

Congress and the president are about to get an earful from angry college students and parents. Lawmakers just cut the interest rate on the wrong type of federal student loans. At least, that’s one take on a new Congressional Budget Office (CBO) report.

The CBO announced yesterday that most federal student loans made this coming school year will charge interest rates high enough to earn the government a profit. The only exception: Subsidized Stafford loans for undergraduates. Those loans still provide enough benefits to borrowers to show a cost to the government – and that was before Congress and the president agreed to cut the interest rate on those loans to 3.4 percent for another year.

Yes, the federal student loan program has always appeared profitable, but those profits were the result of an accounting bias written into federal law. The profits were, in other words, fictitious. The CBO endorsed that view earlier this year, and says that the federal law that forces it to exclude costs for all of the risks inherent in government loan programs thereby understates costs. To compensate for that bias, the CBO prefers fair-value estimates, which include a cost for all risks. Until now, those estimates have shown that the federal student loan program charges interest rates low enough to impose costs on taxpayers. In 2010, the last time it calculated such figures, the agency showed that the average direct loan cost $12 for every $100 lent. In other words, the loans provided subsidies to borrowers.

According to CBO’s new estimate, that won’t be the case for the vast majority of federal student loans issued this coming school year. New fair-value estimates show that three types of federal student loans (Unsubsidized Stafford, Parent PLUS, and Grad PLUS) are expected to earn a profit for the government. Subsidized Stafford loans, however, would still provide a subsidy to borrowers (and impose a cost on taxpayers) due to their interest-free benefit and default rate in excess of 20 percent. That subsidy will be even larger than the CBO estimates show now that the 3.4 percent interest rate is extended.

While it should be uncommon for government loan programs to show profits using fair-value estimates, it’s not difficult to see why this year’s loans do. As many know, interest rates on all types of loans in the market have fallen to record lows. In mid-2011 and early 2012 long-term rates moved sharply lower, and the high-risk premiums lenders charged during the recession are mostly gone.  Yet Congress has kept the fixed interest rates on newly-issued student loans at the rates lawmakers chose back in 2001. So a Parent PLUS loan issued today still charges a fixed rate of 7.9 percent (with a 4.0 percent origination fee) and an Unsubsidized Stafford loan still charges 6.8 percent (with a 1.0 percent origination fee) even in today’s low rate environment. (Congress’s and the president’s decision to eliminate graduate students from the Subsidized Stafford loan program also contributes to the program’s swing to profitability this year).

The table below shows the profit that the government will make on each type of loan issued this coming school year. The figures reflect the profit (or loss in the case of Subsidized Stafford loans) earned over the entire repayment period of the loan.

We should also point out that the CBO has a few caveats to its new numbers, excerpted below:

In principle, programs with a large negative fair-value subsidy [profit for the government] should be rare, because a negative fair-value subsidy should represent a profitable opportunity for a private financial institution to provide credit on the same or better terms. However, a negative fair-value subsidy could arise, for instance, if there are barriers to entry—such as the need for private lenders to incur large fixed costs to enter a particular credit market—and if the profit opportunity is expected to be shortlived.

In other words, the government could earn a profit on loan programs and still provide the best deal around. Even so, the latest CBO numbers offer a compelling case for Congress to cut the interest rate on the three types of federal student loans expected to earn a profit – Unsubsidized Stafford, Parent PLUS, and Grad PLUS loans. Ironically, lawmakers are about to pass a bill that cuts the interest rate on none of those loans.

We at Ed Money Watch have proposed a simple and fair way to cut rates on all loans issued this coming year at no cost to taxpayers over the long term. If Congress sets a fixed interest rate on all newly-issued loans each year based on the interest rate on 10-year Treasury notes, plus 3.0 percentage points, rates would be set low enough to eliminate any profits for the government. And borrowers this coming school year would get loans at fixed rates of about 4.75 percent, based on Treasury rates last month. 

Senators Coburn (R-OK) and Burr (R-NC) offered this plan in the Senate. Their fellow lawmakers and the president took a pass. Think about that. As the president and student aid advocates celebrate the 3.4 percent interest rate extension for some students, the government is set to earn a few billion dollars in profits off all other students and parents.

According to R. Barbara Gitenstein, president of the College of New Jersey, the model financial aid award letter will not solve the college affordability problem. She’s right. It also won’t solve global warming or cure cancer since that’s not its intention either. The purpose of the model aid letter is not to rein in college costs, but to provide students with something they desperately need—clear, comparable information about their personal financial aid offers.

In an opinion piece published by both The Huffington Post and Inside Higher Ed, Gitenstein’s main argument for why a model aid letter isn’t necessary hinges on her belief that it is too similar to existing voluntary efforts:

I think we can all agree that colleges and universities should be open and honest with prospective students about the actual cost of attaining a degree, not just enrolling for a year. Providing information that allows for simple, accurate comparison of institutions is a worthwhile goal, but I believe that adding a few data points to [the Voluntary System of Accountability's (VSA) College Portrait] would be a better strategy than implementing the [model aid letter].

The VSA’s College Portrait, which was developed by a consortium of four-year, public universities, can be a helpful resource to students and families. However, as the name suggests, it is voluntary. This is a huge problem—of the more than 6,600 Title IV institutions in America, only 300 are represented in the VSA’s database. If everyone could “agree that colleges and universities should be open and honest with prospective students” regarding college costs, then the voluntary resource would include 100 percent—not five percent—of institutions. 

Many public universities are suffering these days, wracked by budget cuts and struggling to bring enough students through the door. The University of Virginia isn’t one of them. A $5 billion endowment makes it the wealthiest public university, per capita, in the United States. Over 28,000 students applied for admission last year, a record high. The stately campus, a classic of red brick and white colonnade, is a UNESCO World Heritage site. Thomas Jefferson’s founding spirit lives on.

The ouster of President Teresa Sullivan at the University of Virginia—and the ensuing turmoil in Charlottesville —is not an isolated scuffle. It is a sign of what can happen when education succumbs to today’s reboot culture.

Last week a subcommittee in the Senate passed an appropriations bill to fund nearly all federal education programs for fiscal year 2013, which starts October 1, 2012. That isn’t big news because the details of a final bill that would be viable in both the House and Senate are contingent on some major roadblocks: It’s an election year; the Labor, Health & Human Services, and Education Appropriations bill is the most contentious funding bill; automatic, across-the-board spending cuts loom in January; and so on. The bill is even less newsworthy because the Pell Grant program is temporarily on sound financial footing and no year-end funding crisis is in play as in past years. That’s why many might miss that the Senate bill solves next year’s Pell Grant funding crisis—well, just about.

To read the full post, visit Ed Money Watch.

Last week a subcommittee in the Senate passed an appropriations bill to fund nearly all federal education programs for fiscal year 2013, which starts October 1, 2012. That isn’t big news because the details of a final bill that would be viable in both the House and Senate are contingent on some major roadblocks: It’s an election year; the Labor, Health & Human Services, and Education Appropriations bill is the most contentious funding bill; automatic, across-the-board spending cuts loom in January; and so on. The bill is even less newsworthy because the Pell Grant program is temporarily on sound financial footing and no year-end funding crisis is in play as in past years. That’s why many might miss that the Senate bill solves next year’s Pell Grant funding crisis—well, just about.

First off, recall why this year is an easy one for Pell Grant funding and why fiscal year 2014 and each year thereafter are not.

For the past four years, Congress has provided both regular annual appropriation and temporary funding for Pell Grants. The temporary funding is available through fiscal year 2013, but not beyond. If Congress doesn’t renew that funding next year at $7.8 billion, lawmakers must cut the maximum grant size and/or tighten eligibility rules. Let’s call this $7.8 billion the funding cliff.

In other words, this year’s funding bill (fiscal year 2013) is the last one before the cliff, taking a lot of pressure off of lawmakers for this year. Moreover, past funding bills actually overfunded Pell Grants by a cumulative $2.1 billion, and that money is available for Congress to spend on the fiscal year 2013 funding bill. It’s as if Congress reached into its pocket and unexpectedly found a wad of cash worth $2.1 billion just for Pell Grants. That “found money” means Congress could provide $1.8 billion less in the fiscal year 2013 appropriations bill than they provided last year while still supporting a maximum grant of $5,645.

That’s where the Senate bill makes an unexpected move to address next year’s $7.8 billion funding cliff. The bill doesn’t provide less for the regular appropriations in 2013, even though it could without cutting grants. It provides the same amount as in 2012. That effectively allocates the $2.1 surplus to the fiscal year 2014 grant and reduces the funding cliff by $1.8 billion. (It’s less than $2.1 billion because the costs of the program are higher compared to the prior year.)

Next, the Senate bill wrings savings from the federal student loan programs—as the president recommended in his fiscal year 2013 budget request—by cutting off the in-school interest subsidy on Subsidized Stafford loans after a student is enrolled beyond 150 percent of the normal time to complete a program and by reducing fees the Department of Education pays to guaranty agencies to rehabilitate federal student loans. The bill also would continue to award Pell Grants to eligible students attending distance learning program, but exclude room and board costs in calculating the grant.

According to a Congressional Budget Office estimate, those changes would make $3.5 billion available for Pell Grants in fiscal year 2014, reducing the funding cliff by the same amount. Indeed, the Senate reallocates those funds into the fiscal year 2014 Pell Grant.

Based on our math, that means the Senate bill closes the fiscal year 2014 funding cliff for Pell Grants by $1.8 billion, plus $3.5 billion, or $5.4 billion in total. Put another way, only about $2.4 billion of the cliff would remain when Congress begins drafting the fiscal year 2014 appropriations bill this time next year. That number is small enough that Congress could feasibly increase the annual appropriation at that time to reach the necessary $25.3 billion.

Of course, that is still only a one year fix. The fiscal year 2015 the funding cliff is still there.

As was mentioned earlier, Congress has a long way to go in completing the fiscal year 2013 Labor, Health & Human Services, and Education Appropriations bill. Even so, the version of the bill that the Democratic majority on the Senate subcommittee passed last week shows how lawmakers can take a few steps that would have a minimal impact on students while also addressing the 2014 Pell Grant funding cliff.