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91探花Federal Student Loan Default Rates Remain Very Low Relative to National Rates

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On Monday, the U.S. Department of Education (ED) released its annual update on federal student loan cohort default rates (CDRs), which measure the frequency with which student borrowers at all levels (undergraduate, graduate, etc.) default on their federal loans. Although both national and 91探花CDRs rose, the UW鈥檚 rates remain well below those of the nation.

As ED is in its second year of switching to the 听more accurate three-year CDR measure, this year鈥檚 report includes both the FY 2011 two-year and the FY 2010 three-year CDRs. These rates represent the percentage of student borrowers who failed to make loan payments for 270 days within two or three years, respectively, of leaving school.

The Department provides breakdowns of its data by , and . Here are some key findings:

:

  • The national three-year CDR increased from 13.4 to 14.7 percent overall鈥攑ublic institutions increased from 11.0 to 13.0 percent, private nonprofits increased from 7.5 to 8.2 percent, but for-profits鈥� whopping 22.7 percent rate decreased slightly to 21.8 percent.
  • The UW鈥檚 three-year CDR increased slightly from 3.1 to 3.9 percent, but this is still nearly 11 percentage points below the national average.听

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  • The national two-year CDR increased from 9.1 to 10.0 percent overall鈥攑ublic institutions increased from 8.3 to 9.6 percent, for-profits increased from 12.9 to 13.6 percent, but private nonprofits held steady at 5.2 percent.
  • The UW鈥檚 two-year CDR increased from 2.1 to 3.2 percent, but this is still nearly 7 percentage points below the national average.听

While this is good news, many students still struggle to afford ever-increasing tuition fees and/or to repay their student loans. The 91探花reaches out to our former students at risk of default on their Stafford Loans and helps identify federal repayment options that could benefit them.听Former 91探花students who are in default or experiencing difficulties repaying their loans can contact the Office of Student Financial Aid for assistance (osfa@uw.edu, 206-543-6101). Students can also visit to explore their repayment options.

ED Begins Negotiating New Gainful Employment Rule

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On Monday, the U.S. Education Department (ED) began formal negotiations on the draft language of a . The rule, originally published in 2011, was designed to enforce a requirement of the Higher Education Act that states career education programs鈥攏on-degree programs at all colleges and most degree programs at for-profit colleges鈥攎ust 鈥減repare students for gainful employment鈥� in order to participate in federal student aid programs. The rule was meant to discourage these programs from misusing federal aid dollars and leaving students with debt burdens they are unable to repay. However, in 2012 a federal judge rejected major provisions of the rule, requiring that ED rethink its strategy.

Here鈥檚 a summary of the changes:

  • The proposed rule applies to programs with as few as 10 students, whereas the old rule counted only career-focused programs with 30 or more students. Because of this change, ED estimates that the new rule could cover 11,359 programs at for-profit and nonprofit colleges鈥攏early twice as many as the old rule covered鈥攁nd that 974 of those programs (9 percent) could fail to meet the proposed standards.
  • The draft regulation omits loan repayment as a criterion for federal student aid eligibility. The old rule severed federal aid to programs where too few students were repaying their loans or where graduates’ debt-to-earnings and debt-to-discretionary-income ratios were too high. The new rule removes the loan repayment standards, which the courts deemed “arbitrary and capricious,鈥� and relies only on the latter two measures.
  • Debt-to-earnings calculations would be based only on students who receive federal aid, rather than students who complete the program. The old calculations were based on all students who completed the program, whereas the proposed calculations are based on any students who receive federal student loans and Pell Grants, regardless of whether they complete the program. As the rule is designed to ensure that federal aid is used effectively, this seems a more appropriate approach.听
  • Schools would have fewer chances to improve their performance before losing federal aid eligibility. Under the previous rule, programs that failed the measures in 3 out of any 4 years would be ineligible for federal student aid. However, the new rule only lets programs fail in 2 out of any 3 years before they lose eligibility.

For details, see a prepared by the Education Department.听 Please continue to follow our blog as well as the for updates on this topic.

Oregon Passes Bill to Implement 鈥淧ay Forward, Pay Back鈥� Pilot Program

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(This piece was originally posted on 07/11/2013, however听it was lost听due to听technical issues and is therefore re-posted here.)

Last week, the Oregon legislature passed a bill that, if signed by the governor, will implement a pilot program to study the effects and feasibility of substituting upfront tuition payments with income-based, post-graduation payments. For 24 years after graduating, four-year college students would pay back 3 percent of their income and community college students would pay back 1.5 percent. Students who do not graduate would pay back a smaller percent determined by how long they were in school.

If, after several years of study, Oregon decides to adopt a plan (or some form of it), it would signify a major shift in the funding paradigm for public institutions.听But that鈥檚 a big IF. The plan has received considerable criticism due to a multitude of unanswered questions that could pose significant logistical barriers. For example:

  • How would institutions and/or the state pay for the plan鈥檚 implementation (i.e. the several years of foregone tuition revenue between when a student enters school and when they graduate and start earning pay)?
  • How would the state efficiently collect accurate income data on students who move out-of-state?
  • How would the state go about collecting and enforcing payments?
  • How would the plan account for and apply to part-time students, transfer students, mid-career students, and other non-traditional students?
  • How would the plan work with federal and state financial aid programs?听Would low-income students be accommodated so as to avoid creating barriers to entry?
  • How does one pilot a 24-year repayment program in just 2 or 3 years?

Even if Oregon鈥檚 higher education commission, which is tasked with implementing the pilot program, can find viable answers to those questions, the plan still has a number of possible (if not likely) negative consequences. For instance, the plan may:

  • Magnify the public鈥檚 view of higher education as a private good (only benefiting the individual) rather than a public good (benefits for many) which, in turn, could spur the continuing and problematic trend of replacing state dollars with tuition revenue;
  • Make institutions even more vulnerable to economic variations and recessions as their revenue would be tied to graduates鈥� earning and unemployment rates; and
  • Create social and economic imbalance between Oregon and other states since students who expect to earn less鈥攅.g. social science and humanities majors鈥攚ould be incentivized to go to Oregon, and students expecting to earn more鈥攅.g. engineering and medical students鈥攚ould likely go elsewhere.

Granted, the idea of basing college payments on graduates’ income is not a new one. Some federal student loans are eligible for income-based repayment and a program similar to Oregon鈥檚 already exists in Australia. However, Australia鈥檚 version is administered at the federal level, meaning many problems inherent in Oregon鈥檚 plan (tracking students who move around the country, imbalance between states, etc.) are avoided.

The Economic Opportunity Institute, a liberal think tank in Seattle, proposed a version of the plan for Washington in October 2012; but, unlike Oregon鈥檚 version, it has yet to go anywhere.听 We鈥檒l keep you posted.

States Shift Financial Aid Money toward Need-Based Aid and Grant Aid

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According to an released on Monday by the National Association of State Student Grant and Aid Programs (NASSGAP), the amount of state dollars going toward financial aid remained relatively stable between 2010-11 and 2011-12. In 2011-12, states awarded about $11.1 billion in state-based financial aid, a slight increase (0.7 percent) over the $11.0 billion awarded in 2010-11. That growth has not kept pace with rising enrollments or the overall increase in students鈥� financial need; however, it’s encouraging to see growth of any size given that听general state appropriations for higher education fell by 7 percent during that same time period.

The state-by-state data show that Washington, New Jersey, New York and California gave out the most need-based aid on a per-student basis. Oregon more than doubled the amount it spent on need-based grants, to nearly $44-million, and Washington increased its need-based grants by 26 percent. However, 23 states cut need-based aid from 2010 to 2011 and four states reported no need based aid听programs at all.

What’s most intriguing, in my opinion, is that even though states collectively put only slightly more money toward their financial aid programs, they shifted a larger portion of those aid dollars toward need-based aid and grant aid (see the tables below). This finding suggests that states are attempting to maintain access in the face of rising tuition rates and to reduce the amount of debt their students accumulate.

Of the $11.1 billion in total state-awarded student aid:

  • $9.4 billion (84%) was grant aid鈥攗p 1.7% from 2010-11; and
  • $1.7 billion (16%) was non-grant aid (loans, work-study, tuition waivers, etc.)鈥攄own 4.2% from the previous year.

Of the $9.4 billion in state-awarded grant aid:

  • $7.0 billion (74%) was need-based鈥攗p 6.3% from last year; and
  • $2.4 billion (26%) was non-need-based鈥攄own 9.4%.

Of the $10.1 billion in state-awarded undergraduate aid (both grants and non-grants):

  • $4.7 billion (47%) was exclusively need-based鈥攗p 6.0%;
  • $2.0 billion (20%) was awarded on a mix of need and merit criteria鈥攗p 1.6% and surpassing, for the first time ever, aid awarded solely on merit;
  • $1.9 billion (19%) was exclusively merit-based鈥攄own 1.3%; and
  • $1.4 billion (14%) was special purpose awards and uncategorized aid鈥� a 3.0% drop.

Change in Total State-Awarded Student Aid
Percent change from 2010-11 to 2011-12
Type of Student Aid Dollar amount Portion of total
Grant aid 1.7% 0.8%
Non-grant aid -4.2% -0.8%
Total aid 0.7%
Change in State-Awarded Grant Aid
Percent change from 2010-11 to 2011-12
Type of Grant Aid Dollar amount Portion of total
Need-based 6.3% 3.0%
Non-need-based -9.4% -3.0%
Total grant aid 1.7%
Change in State-Awarded Undergraduate Aid
Percent change from 2010-11 to 2011-12
Type of Undergrad Aid Dollar amount Portion of total
Exclusively need-based 6.0% 2.7%
Mixed need & merit-based 8.5% 1.6%
Exclusively merit-based -6.5% -1.3%
Uncategorized & other -17.4% -3.0%
Total undergraduate aid 0.0%

Federally Subsidized Student Loan Interest Rates Set to Double on July 1

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Thursday night, time ran out for Congress to reach a deal to keep federally subsidized student loan interest rates from doubling. The Senate adjourned for its Fourth of July recess without voting on a plan; thus, the interest rates on new federally subsidized loans will double to 6.8 percent on Monday July 1st (the same rate as unsubsidized federal student loans).

It is possible, however, that students won鈥檛 end up paying the increased rates.听 There has been a push from some legislators to enact a one-year fix that would temporarily adjust/lower the interest rates after the fact.听 As the lender of the student loans, it is within the federal government鈥檚 power to apply such a solution retroactively.

The increase was originally scheduled to occur a year ago.听 But, thanks to an election-year alliance of student advocates and the Obama administration, the rate increase was delayed by a year.

For more information, see the article and please stay tuned to the for updates.

Is All Merit Aid Meritorious?

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Although there are many types of financial aid, it is typically awarded on the basis of either need or merit.听Need-based aid is largely a result of a federal calculation and is somewhat predictable: 听to ensure access, students with more financial need receive more financial aid of various forms.听And, although there is no universal definition of the merit aid, it traditionally describes scholarship money used to attract top academic achievers. However, Kevin Carey, director of education policy at the New America Foundation, asserts in a for The Chronicle that a significant portion of merit aid is actually used to attract 鈥渁cademically marginal students with wealthy parents.鈥�

Carey cites evidence of this trend. A found that of the full-time students at four-year institutions who received “merit” aid in 2007-08, almost 20 percent had entered college with a combined SAT score of less than 700 and 45 percent had scored below 1000 (out of a possible 1600). The study also shows that although the percentage of private college students receiving need-based aid showed a slight decline from 1995 to 2007 (going from 43 to 42 percent), the proportion receiving 鈥渕erit鈥� aid nearly doubled during that time span (from 24 to 44 percent).听听 At public universities, the percentage of students getting need-based aid increased from 13 to 16 percent, but the growth in merit aid outpaced it, going from 8 to 18 percent.听 Thankfully, as discussed in a previous , a group of private-college presidents has been calling on its peers to limit the amount of financial aid awarded on criteria other than need.

The National Association of State Student Grant and Aid Programs鈥� (NASSGAP) and Brookings鈥� provide corroborating evidence that merit-aid is becoming more prevalent, while need-based aid is diminishing.听 However, neither discusses the academic strength of the students receiving merit aid.

So why is this happening? 听If a college offers good scholarships and financial aid packages to an affluent family, it may incentivize them to choose that school.听 Even though that family鈥檚 son or daughter may be a low academic achiever who has a decent chance of dropping out, it is still lucrative for the school to attract those students. 听, a higher ed consulting firm, revealed that one of its client colleges was able to generate over $10,000 more per low-achieving student than they could per top-achieving student.

Carey hopes that as taxpayers, the news media, and affiliates of universities become aware of this trend, their vigilance will keep institutions in check.

White Paper Focuses on Reforming Tax-based Aid

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Many of the white papers sponsored by the Bill & Melinda Gates Foundation’s Reimagining Aid Design and Delivery project have focused on modifications to the Pell program and/or student loans and repayment (including the two I summarized previously, found and ). However, the released on Wednesday by the Center on Postsecondary and Economic Success takes a different approach.听 It argues that by making tax-based student aid more beneficial to low and middle-income students, the federal government could save billions of dollars, direct those savings to the Pell program and improve the financial aid system as a whole.

Current tax-based financial aid provides high-income families with much larger tax deductions, since the value of the deductions is linked to a family鈥檚 marginal tax rate.听As notes, 鈥渁 $100 tax deduction, for example, is worth early $40 to a high-income household but only $10 to a lower-earning family.鈥澨� To remedy this issue and refocus the benefits of aid onto low-income families, the Center proposes increasing the refundable portion of the American Opportunity Tax Credit (AOTC).听The Center also recommends eliminating nonrefundable tax credits, such as the Lifetime Learning Credit (LLC), since they do not benefit households that pay no income tax (i.e. low-income families).

The table below shows the percent distribution of student aid by type and income category in 2013.听As you can see, Pell Grants (in blue) primarily benefit low-income families, whereas tax-based student aid (in purple) does the opposite.听 Another interesting table from the Tax Policy Center can be found .

The paper includes three alternative proposals for making tax-based aid more helpful to low-income students and simultaneously boosting college access and completion.听 It also discusses three options for improving performance measures used in student-aid policies.

TICAS Paper Proposes New Approach to Federal Financial Aid

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鈥溾�� is the Institute for College Access & Success鈥檚 (TICAS) white paper for the Reimagining Aid Design and Delivery project, sponsored by the Bill & Melinda Gates Foundation (see our 听for more information). Some of the report鈥檚 suggestions have been echoed in other white papers and publications, such as simplifying the federal financial aid application process, making the Pell program a mandatory federal budget item, and fostering more understandable and comparable reporting of college costs. The paper鈥檚 others recommendations include:

  • Holding colleges accountable not only to the percentage of student borrowers who default on loans (represented by the currently-used cohort default rates), but also to the percentage of students who take out loans in the first place. TICAS proposes denying federal aid to colleges that score below a certain threshold on a combined index of the two measures. The group also recommends increasing federal aid to colleges scoring above a certain threshold. The amount of additional aid would be determined by how much Pell funding their students receive.
  • Shoring up the Pell Grant. TICAS proposes doubling the maximum Pell grant award, to about $11,000 a year, and extending the eligibility timeframe from 6 years to 7.5.
  • Creating a single federal student loan with no fees and a fixed interest rate. The rate would be low while students are in school and would rise, by a fixed amount with a cap, when they leave.
  • Streamlining repayment plans, replacing multiple options for income-based plans with only one. Delinquent borrowers would automatically be placed in the income-based plan; but, a non-income-based option would be available to other borrowers. TICAS wants to leave borrowers听with a choice, but argues they need real counseling鈥攏ot just disclosure鈥攖o help them decide.
  • Eliminating higher education tax benefits and sending the savings to Pell Grants and monetary incentives for states and colleges. 听If tax benefits are preserved, the group recommends restructuring them into an upgraded American Opportunity Tax Credit aimed at helping low- and moderate-income students.

TICAS鈥� paper outlines a few ways the government could fund these proposals in addition to potentially eliminating higher ed tax benefits.听 As 听nicely summarized, those options include, 鈥渓imiting the benefit of itemized tax deductions, taxing private equity and hedge-fund income like other income, and removing or reforming tax-exempt bonds for private nonprofit colleges.鈥�

New America Paper Recommends Major Overhaul of Financial Aid System

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The Gates Foundation has joined the nation鈥檚 financial aid conversation and is attempting to rethink how policies and practices can not only help maintain access (in the face of flagging state support and rising tuition prices), but also help students succeed. In September of last year, the Gates Foundation launched its project, which provided 16 organizations with funding to develop and publish innovative financial aid strategies aimed at encouraging college completion. One of the 16 organizations, the New America Foundation, recently released its , which recommends bolstering Pell Grants, limiting student loan options, and removing higher ed tax benefits.

To improve 鈥渂oth the effectiveness and sustainability of Pell Grants,鈥� the New America Foundation recommends:

  • Making the Pell program a mandatory federal budget item;
  • Increasing the maximum grant faster than is currently scheduled while restoring summer grant support;
  • Limiting Pell eligibility to 125 percent of a program鈥檚 length;
  • Providing additional federal funding to public and private-nonprofit colleges that have a large proportion of low-income students and high graduation rates; and
  • Requiring four-year colleges that enroll a small percentage of low-income students and charge more than $10,000 per year (after financial aid) to match some of the Pell dollars they receive with need-based aid from institutional funds.

The plan, which is intended to be 鈥渂udget neutral,鈥� recommends that the Pell Grant changes be funded by:

  • Eliminating the American Opportunity and Lifetime Learning tuition tax credits, tax-advantaged savings plans for education, and the student loan interest deduction;
  • Ending the Supplemental Educational Opportunity Grant program; and
  • Encouraging borrowers to refinance old student loans into direct lending.

The authors also recommend consolidating federal student loan programs into a single, 鈥渆nhanced鈥� Stafford Loan sys颅tem as a means of simplifying the student loan system and reducing the potential for default. This would involve:

  • Automatically enrolling all federal student loan borrowers in income-based repayment plans;
  • Eliminating subsidized undergraduate loans;
  • Setting student loan interest rates via a fixed formula that adjusts to market conditions;
  • Ending the Grad PLUS and Parent PLUS loan programs;
  • Increasing borrowing limits slightly to $40,000 total for undergrads and $25,500 per year for grads; and
  • Limiting federal student loan eligibility to 150 percent of a program鈥檚 length.

Although some (if not many) of these ideas are politically unpopular, the authors argue that their recommendations must be implemented together in order to be effective. However, it seems more likely that Congress will cherry-pick specific suggestions to pursue or perhaps ignore the report鈥檚 policy proposals altogether. The Gates Foundation hopes their project will, at the very least, stimulate discussion about reforming financial aid.

Private-College Presidents Champion Need-Based Aid

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Two years ago at the annual Council of Independent Colleges, a group of private-college presidents advocated for limiting the amount of financial aid awarded on criteria other than need鈥攗sually referred to as “merit-based” financial aid. Although the presidents received an enthusiastic response from the Council, little action followed. However, last Saturday at this year鈥檚 Council meeting, the conversation was revisited and two encouraging developments suggest progress may be more conceivable this time.

First, the presidents unveiled a draft 鈥渟tatement of principle,鈥� which they hope will unite colleagues who believe that meeting financial need should be the highest priority of aid policies. Titled “High Tuition/High Discount Has No Future,” the statement articulates that the merit-aid/tuition discounting model is unsustainable and those signing their support acknowledge they鈥檝e contributed to the problem. The statement cites a that found “the increased use of merit aid is associated with a decrease in enrollment of low-income and minority students, particularly at more selective institutions.”

Second, David L. Warren, president of the National Association of Independent Colleges and Universities, revealed information from preliminary conversations with U.S. Justice Department officials regarding ways in which groups of presidents could discuss their tuition and/or financial aid policies without penalty and, hopefully, reach collective agreements to make college more affordable. This is significant as the Overlap Group, a set of elite universities that joined forces on admissions and financial-aid decisions for several years, faced antitrust charges by the federal government in 1991. The federal case effectively ended any meaningful collaboration on such topics, keeping schools in the dark about each other鈥檚 financial aid and admissions strategies.

“The fear, obviously, is that unilateral disarmament” in the merit-aid race won’t work, said one of the efforts鈥� leaders according to . Presidents worry that increasing need-based aid and decreasing merit aid, which is used to attract top students, will result in less robust enrollment and less prestige. But hopefully between the statement of principle, which could align presidents behind common goals, and discussions with the federal government, which could result in permissible collaboration, some progress will be made and the game of financial-aid chicken can end.