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Higher Education

Fact Checking the Student Loan Interest Rate Debate

May 31, 2013

The White House and House Republicans are arguing over two competing proposals to reform how the government sets interest rates on federal student loans. As we wrote two weeks ago, this is a good sign and a big improvement over the debate on the exact same issue from a year ago.

But if you are scratching your head trying to understand how the House plan and the president’s plan are different, it is because they are in fact very similar. Both tie rates to the market. The president’s plan only offers borrowers fixed rates, but the rate offered changes every year. The House plan requires different rates on the same loan while the borrower is in school, but then gives them the option to elect a fixed rate, which, like the president’s plan, is different depending on the year. Under the House plan, borrowers wouldn’t know unless they consolidate their loans exactly how much they owe.

Unfortunately, incomplete and inaccurate information about the pending proposals abounds. In this Ed Money Watch post, we publish an incomplete list of such information along with additional facts to bring more clarity to the debate.

Technology and the Next Generation University

  • By
  • Rachel Fishman,
  • New America Foundation
May 21, 2013

After besting the world in college attainment for much of the 20th century, the United States now ranks sixteenth in the share of adults ages 25 to 34 holding college degrees.1  In 2009, President Obama announced a goal to regain the world lead by increasing American degree attainment to 60 percent by 2020. This will require progress on several, seemingly incompatible priorities: increasing access to college, helping more students graduate, and improving the quality of the student learning experience, all in a context of scarce public resources.

Fact Checking the Student Loan Interest Rate Debate

May 30, 2013

This post was updated on May 31 and June 3 with additional entries.

The White House and House Republicans are arguing over two competing proposals to reform how the government sets interest rates on federal student loans. As we wrote two weeks ago, this is a good sign and a big improvement over the debate on the exact same issue from a year ago.

But if you are scratching your head trying to understand how the House plan and the president’s plan are different, it is because they are in fact very similar. Both tie rates to the market. The president’s plan only offers borrowers fixed rates, but the rate offered changes every year. The House plan requires different rates on the same loan while the borrower is in school, but then gives them the option to elect a fixed rate, which, like the president’s plan, is different depending on the year. Under the House plan, borrowers wouldn’t know unless they consolidate their loans exactly how much they owe.

Unfortunately, incomplete and inaccurate information about the pending proposals abounds. Below is an incomplete list of such information along with additional facts to bring more clarity to the debate.

The New York Times:

The [House-passed] legislation would cut the deficit by $3.7 billion over 10 years, a small but politically significant number, since White House officials say the deficit should not be reduced on the backs of indebted college graduates.

The New Republic:

Obama (whose own proposal is designed to be budget neutral; no additional spending on, or revenue from, student loans)...

Key Details Missing:

According to the Congressional Budget Office, the White House’s proposal would reduce the deficit over 10 years by more than the House proposal. The official figure is $6.7 billion. Why is that the case? The CBO estimates that the White House proposal would charge borrowers higher interest rates overall than the Republican bill passed in the House. If you add in the cost of the president’s proposal to expand a more generous income-based repayment plan to more borrowers, his combined proposal still reduces the deficit by $3.1 billion over 10 years, about the same as the House plan. To address The New Republic, the president's plan does include new "revenue" from student loans.

The New York Times should have called the White House on this hypocritical charge. The New Republic's account is wrong and one-sided.

The Institute for College Access and Success:

To make matters worse, [under the House-passed bill] the rate on every loan will change each year… This means the monthly payments required under most plans will change each year as well.

Key Details Missing:

Interest rates on the loans under the House plan do in fact change once a year after issuance, but borrowers my lock that rate in at any point after they have left school. Under the House plan, borrowers always have the option to choose a fixed rate (a free option) over a floating rate at any point during repayment. The interest rate and payments on the loans will not change if borrowers elect a fixed rate. While in school, the loans will carry interest rates that change once per year.

Under the president’s plan, borrowers would be issued fixed rate loans, but each loan would carry a different interest rate each year. (We proposed something similar). The difference in rates depends on the year the student borrows. This year it could be 5 percent, and next year the newly-issued loan could carry a rate of 7 percent, or even 4 percent, depending on where market rates go.

David Hawkings of CQ Roll Call:

But the GOP bill being passed today takes the [president’s interest rate] idea a significant step further — so much further, in fact, that the Obama administration has threatened a veto. While the House measure would link the rate to T-bills, as Obama proposed, it would set a much higher cap than the president on the maximum interest rate: 8.5 percent. [Emphasis added]

Key Details Missing:

David Hawkins for some reason believes the White House is opposed to the House plan because the interest rate cap in the House plan is too high, higher than what the White House would support. But the president’s proposal has no cap! None whatsoever.  The House proposal, at least in that regard, is more generous to students than the president’s plan. [We Tweeted at David to alert him to the error last week, but no correction has been run.]

USA Today:

The House Republicans' proposal would tie loan rates to the interest rate on a 10-year Treasury note, plus 2.5%, with a cap that would prevent the interest rate on Stafford loans from rising above 8.5%. Obama's proposal would have set the rate at slightly less than 1% above the Treasury note rate.

Key Details Missing:

The president’s proposal would in fact set the mark-up over 10-year Treasury notes at 0.93, 2.93, and 3.93 percent for Subsidized and Unsubsidized Stafford and Grad/Parent PLUS loans, respectively. Therefore, the 0.93 mark up is true only for Subsidized Stafford loans. On the more widely available Unsubsidized Stafford loans, the mark-up is actually higher under the president’s plan than under the House plan. The House proposes a higher mark-up Grad/Parent Plus loans than the president.

In short, the mark-ups are different for each loan type. That is an important detail that USA Today glosses over in a way that paints the president’s plan as more generous when the truth is more complicated than that.

Rep. George Miller in the Detroit Free Press:

Democrats compare the plan to predatory adjustable rate mortgage practices that helped fuel the housing collapse during the financial crisis. “We just saw that history in America. We saw what they did,” said Rep. George Miller, D-Calif., the senior Democrat on the Education and Workforce Committee.

Economists and academics have roundly dismissed the claim that variable rate mortgages had anything to do with the housing crisis. In the words of several Federal Reserve economists, “the data are not kind” to that narrative. They show that variable interest rate and fixed interest rate mortgages defaulted at the same rates, and that borrowers who had variable rate mortgages were paying the same interest rate when they defaulted as when they took out the loan.

Rep. Miller says, "we saw what [the variable rate mortgages] did," but what he says they did is entirely unsupported by actual data or research. The claim should be left out of both the housing crisis debate and the student loan debate.

The New Republic:

Keep in mind that the current [interest] rate has already produced record levels of delinquincy--[sic] the Department of Education announced last week that 11 percent of loans were 90 days or more past due.

Key Details Missing:

The New Republic has invented a novel explanation for student loan delinquency. No credible source or research has linked the current interest rate on federal student loans to the record levels of past-due loans. Readers will notice that The New Republic article includes 13 different links to substantiate its statements of fact -- but not on this one. And good luck finding one. Everyone accepts  large loan balances, the economy, or high unemployment as possible causes, but interest rates?

Mother Jones:

The GOP plan also includes no provision capping monthly payments according to income level, as Obama's does.

Key Details Missing:

All outstanding and newly issued federal student loans include a provision capping borrowers monthly payments according to income level. A more generous version of that benefit applies to all newly-issued loan under the president's proposal and the House proposal -- the two proposals share the exact same income-based repayment benefits for new loans. That is because those benefits are standard benefits already in law. The president would change the law to add the more generous version of the benefit in place for new loans to loans not affected by the interest rate changes, generally loans made prior to 2007, and the House would not, though the less-generous income-based repayment cap still applies to all loans. In other words, the GOP plan includes no provision capping monthly payments because one already exists in current law.

The Debate Continues On

In the coming weeks, the Senate is likely to consider its own proposals for setting interest rates on student loans. That will add more options into the mix, and more confusion. But here is a shortcut to understanding the different proposals: The president’s plan, the House-passed plan, and a leading bill sponsored by Senate Republicans really aren’t all that different from one another. Maybe that’s why there is so much confusion. The plans differ in only nuanced and technical ways, not in the broad ideological terms that might otherwise clearly set them apart.

Subsidized Stafford Loans Come at a Cost – Even at a Higher Interest Rate

May 21, 2013

The student loan interest rate debate will come to a head early this summer as the 3.4 percent interest rate on Subsidized Stafford student loans nears its July 1 expiration. When that deadline hits, the rate will revert to 6.8 percent, the rate currently charged on Unsubsidized Stafford loans. Last week, we published a piece detailing the half-dozen reform proposals currently floating around Capitol Hill and produced some takeaways on each. But there are still other misconceptions to clear up.

One of the current interest rate plans, Senator Elizabeth Warren’s (D-MA) proposal to reset Subsidized Stafford interest rates for just one year at the Federal Reserve bank lending rate of 0.75 percent, is perhaps the most controversial. Federal Education Budget Project Director Jason Delisle last week published an op-ed on Yahoo! Finance detailing one of the underlying problems with the plan: that the government already loses money on Subsidized Stafford loans. Delisle wrote:

What about Senator Warren’s claim that the government makes money off loans to low-income students?… She points to figures that the non-partisan Congressional Budget Office says “do not provide a comprehensive measure of what federal credit programs actually cost the government and, by extension, taxpayers.” In fact, when the budget office “accounts more fully… for the cost of the risk the government takes on when issuing loans,” it reports that Subsidized Stafford loans – those made to low-income students – cost taxpayers $12 for every $100 lent out, or $3.5 billion per year. If the loans cost $3.5 billion a year when the government charges a 6.8 percent interest rate, cutting the rate to 0.75 percent would more than triple that cost.

Warren’s claim that the government is profiting on student loans – and therefore that it should drop the interest rate it charges on federal loans for low-income students dramatically – is a rhetorical one. Delisle spoke to Dylan Matthews of The Washington Post’s Wonkblog to clear up the issue. Matthews writes:

Just like any institution, the CBO determines the cost of loans by “discounting all of the expected future cash flows associated with the loan or loan guarantee—including the amounts disbursed, principal repaid, interest received, fees charged and net losses that accrue from defaults—to a present value at the date the loan is disbursed.” To do that, it needs to settle on a “discount rate,” which is usually the expected rate of return on the loan in question. Banks and other private institutions generally estimate that by finding loans with similar risks and maturities to the one being evaluated, and then using those similar loans’ rates of returns.

The CBO does not do that. It discounts all government loans using the returns on Treasuries of similar maturity. So a 30-year student loan would be compared to a 30-year Treasury bond. But Treasuries are the safest bonds in the world... To capture the true risk of these loans, you’d need to discount using the rate of return for another loan with similar risk. Comparing them to Treasuries make them seem safe no matter what the actual risk.

The claims that student loans turn a profit for the government are based on unrealistic, rigged budgeting mechanisms. And looking at a fair accounting method, the one recommended by the CBO, it’s pretty clear that Subsidized Stafford loans are actually costing the government (and taxpayers) $12 for every $100 lent.  This may seem a wonky, insider issue, but with Congress under rigid fiscal constraints right now and members arguing that the U.S. needs to reign in the deficit, costs matter.

For more on how the government is losing money on these loans, check out this background page from the Federal Education Budget Project. You can also see the Wonkblog article here, and Delisle’s op-ed about Senator Warren’s proposal here.

Commentary on the Student Loan Interest Rate Debate

May 18, 2013

Be sure to check out this op-ed on Yahoo Finance regarding Senator Warren's proposal to cut interest rates on federal student loans.

This Ed Money Watch post has a rundown of all of the pending proposals, including the one sponsored by House Republicans that will be up for a vote next week.

A Divide In the Student Loan Interest Rate Debate

May 16, 2013

A clear divide has emerged in the debate over the interest rates on federal student loans. In one camp are House and Senate Republicans, along with President Obama; in the other are the congressional Democrats. But before explaining what makes those camps different, a quick refresher on the interest rate issue is in order.

Undergraduates are currently charged two different fixed interest rates: 3.4 percent on Subsidized Stafford loans and 6.8 percent on Unsubsidized Stafford loans. Loans issued on or after July 1, 2013, though, will carry the 6.8 percent rate. (That policy has its roots in a 2006 Democratic congressional campaign and you can read the history here.) The rates are different for graduate students and parents of undergraduates, and were never subject to the expiring policy. The two-rate policy on undergraduate loans was originally set to expire last year, but President Obama called for extending it for one year. Congress went along with that at a $6 billion cost.

Unfortunately, the interest rates on federal student loans are just numbers Congress made up (seriously). And in debating the expiring two-rate policy last year, lawmakers never tried to come up with a more rational approach. Instead, they just extended the made-up numbers. We criticized that approach and offered an alternative last year.

What a difference a year makes.

A real debate about student loan policy is now underway in Congress. House Republicans (Kline), Senate Republicans (Coburn), and President Obama have all put forth proposals to peg student loan interest rates to the rates on U.S. Treasury notes. While their proposals are all slightly different, these lawmakers have put forth proposal that would be permanent, fiscally sustainable, keep rates well below market rates for all borrowers, and ensure that those interest rates reflect economic conditions.

So here is where the divide in the debate emerges. Other lawmakers – House and Senate Democrats mainly – have proposed either gimmicky solutions, wildly expensive ideas, or a two-year extension of the made-up rates. A side-by-side table is available here

  • Rep. Courtney suggests a two-year extension of current policy.
  • Senator Warren would set the rate at 0.75 percent, but only for undergraduates and only for Subsidized Stafford loans, and only for one year. The cost would be close to $12 billion, by our estimates.  Senator Warren claims her proposal has something to do with an emergency lending program at the Federal Reserve, which is really just a rhetorical gimmick that has no practical effect.
  • Senator Reed introduced a bill that requires the Department of Education to set the rates at the “cost” of the program, and let borrowers with outstanding loans refinance to those rates. That would drop rates to about 2% by our estimates (official cost estimates understate the cost of the program, so the rates would be artificially low).  Even though the program would operate at “cost,” the reduced interest payments compared to current law would actually show up in the budget as increasing the deficit (i.e. as a cost) of about $175 billion over the next 10 years according to numbers released by the Congressional Budget Office yesterday. That is before factoring in the refinancing component, which could easily top $50 billion in costs.

We’ve received a lot of inquiries about the merits of all of these proposals. Obviously, the shortcomings of the congressional Democrats’ proposals need no further explanation. The president’s and the House and Senate Republicans’ proposals, on the other hand, are all a huge improvement over current policy – and a huge improvement over what lawmakers were discussing last year. None would be a step backwards.

That said, the House proposal gives borrowers the most options and protections – floating interest rates with the option to take a fixed rate and an interest rate cap – but those options and protections mean the proposal has a lot of moving pieces that will require a lot of explaining. It will also confuse borrowers, some of whom will inevitably make a bad choice on when to lock in their interest rate. The president’s proposal needlessly charges undergraduates two different interest rates just to score political points. The Senate Republican bill, on the other hand, has no complicated options and no moving pieces, or gimmicks to score political points.

Those should be guiding principles as Congress and the president work to finalize a bill by July 1.

New interest rate table2.png

The Higher Ed Arms Race: How the High-Tuition High-Aid Model Shuts Out Low-Income Students

May 9, 2013
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Yesterday, the New America Foundation's Education Policy Program released "Undermining Pell: How Colleges Compete for Wealthy Students and Leave the Low-Income Behind." Author Stephen Burd reveals a full-fledged "financial aid arms-race" between private colleges and universities, and a burgeoning one among publics as well. Schools adopt a "high-tuition, high-aid” model that allows them to attract wealthy and high-achieving students to boost their rankings with significant amounts of merit aid – money that could have instead been directed to need-based aid for low-income students. That means that the neediest students are left with an impossibly high tuition bill.

Burd uses data, many of which are available through our Federal Education Budget Project database, on Pell Grant enrollment and net price for the lowest-income students at thousands of individual colleges. The analysis shows that hundreds of public and private non-profit colleges expect the neediest students to pay an annual amount that is equal to or even more than their families' entire yearly earnings. As a result, these students are left with little choice but to take on heavy debt loads or to behave in ways that are demonstrated to reduce the likelihood of earning their degrees, such as working full-time while enrolled or dropping out until they can afford to return. Only a few dozen exclusive colleges meet the full financial need of the lowest-income students they enroll. Nearly two-thirds of the private institutions analyzed charge students from the lowest-income families, those making $30,000 or less annually, a net price of over $15,000 a year.

Many private colleges have small endowments, making it extremely difficult for them to provide adequate support to those students with the greatest need. According to the report, the poorest schools are often the ones that enroll the largest share of federal Pell Grant recipients, but they charge these students high net prices because of their own limited resources. At the same time, many of these institutions provide deep tuition discounts to wealthier students to attract those high-achieving students to the school.

This is not just a question of institutional wealth, though. Some of the country's most prosperous private colleges are, in fact, the stingiest with need-based aid. These institutions tend to use their institutional financial aid as a competitive tool to reel in the top – and the most affluent – students to help them climb the U.S. News & World Report rankings and maximize their revenue.

Workbook- pellprivates_test.jpg

We created an interactive graphic that groups institutions into four categories based on whether they charge low-income students a high or low tuition and whether they enroll a high or low percentage of Pell recipients. We also used data from the Department of Education, FEBP, and The Chronicle of Higher Education to determine the number of endowment dollars available per student.

We can see from this graphic, for instance, that Washington & Lee University enrolls a very low proportion of Pell students (eight percent) and charges the lowest-income students over $14,000 a year in tuition after Pell Grants and financial aid. That’s an average tuition bill of over half of a family’s total income. What's worse is that Washington & Lee has a relatively large endowment of around $450,000 per student. 

While the problem is not as extreme among public universities, it is rapidly getting worse. As more states cut funding for their higher education systems, public colleges are increasingly adopting the enrollment management tactics of their private college counterparts - to the detriment of low-income and working-class students alike.

In many states, public institutions are following the same high-tuition, high-aid model – and in some cases, including in Pennsylvania and South Carolina, the neediest students are facing net prices more than double what they are charged in low-tuition states such as North Carolina. At Penn State University, for example, in-state students attending the university's flagship campus in University Park pay about $16,000 in tuition and fees annually, which is double the average tuition charged at all national public four-year colleges and universities examined in his paper. Despite the fact that Penn State spends nearly $14 million a year on institutional aid, its lowest-income in-state students pay an average net price of nearly $17,000, the fifth-highest of any public institution this report examines. In other words, Penn State's neediest students do not appear to be getting any discount relative to other students at all. At the same time, about 6 percent of the school's first-time freshmen received an average of $3,800 in so-called "merit aid" in 2010-11.

Schools like Penn State seem to be using their pricing autonomy to gain an advantage as they fiercely compete for the students they most desire: the "best and brightest" students - and the wealthiest. These actions fly in the face of national goals to increase access to higher education and help more students earn high-quality degrees.

Over the past several decades, a powerful enrollment management industry has emerged to show colleges how they can use their institutional aid strategically in the pursuit of high-achieving and affluent students. And worse yet, there is compelling evidence to suggest that many schools are engaged in an elaborate shell game: using Pell Grants, the primary source of federal aid for low-income students, to supplant institutional aid they would have provided to financially needy students otherwise, and then shifting these funds to help recruit wealthier students. This is one reason that, even after historic increases in Pell Grant funding, the college-going gap between low-income students and their wealthier counterparts remains as wide as ever.

Department of Education Light on Details for Sequestration of TEACH Grants

May 6, 2013

Last week, the New America Foundation’s Education Policy Program published an issue brief on the recently completed (and two months late) fiscal year 2013 budget, with an early analysis of how the 2014 budget process is likely to affect education programs. One careful reader noticed that the explanation about sequestration failed to mention two lesser-known education programs: the TEACH Grants and Iraq-Afghanistan Service Grant programs.

The former provides tuition aid to prospective teachers, but it converts to a loan if the student fails to complete four years of teaching to high-needs students after graduation. The latter provides tuition aid to the children of military parents who died during military service after September 11. Both programs are affected by across-the-board spending cuts implemented last year.

Although sequestration was meant to apply uniformly to most education programs, slicing evenly program by program, there were some exceptions. Pell Grants, as we’ve reported, were exempt, and student loans were subject only to a fee increase to reduce costs. And it appears that cuts will be larger for TEACH Grant and the Iraq-Afghanistan Service Grant than for other programs.

How much larger will the cuts be?

Recall that in accordance with the Budget Control Act of 2011, the failure of an appointed “supercommittee” to find $1.5 trillion in deficit reduction over 10 years triggered the execution of across-the-board spending cuts in mid-fiscal year 2013. The final size of the cuts was 5.0 percent cut for education programs funded through appropriations, and 5.1 percent for those funded on the so-called mandatory side of the budget. (Both TEACH Grants and Iraq-Afghanistan Service Grants are considered mandatory funding.)

For the Iraq-Afghanistan Service Grant program, though, the reduction will be 10.0 percent. For the TEACH Grant, it will be 7.1 percent. Therefore, the maximum Iraq-Afghanistan Service Grant will drop from $5,645 (the program is meant to match the size of the maximum Pell Grant) to $5,081 next year. The maximum annual TEACH Grant drops from $4,000 to $3,716. Those reductions affect the first disbursement that occurs after March 1, 2013, which in most cases means the 2013-14 school year, and the reductions are effectively permanent, so they’ll remain at that lower level thereafter.

Why did sequestration impose larger reduction for these programs than for others? And why 10.0 percent for one and 7.1 percent for the other? The reasons remain unclear, and the U.S. Department of Education has not offered much explanation. Some media reports have suggested that the White House is working to limit the impact of sequestration by moving money around and restoring some funding under its budget authority – but thus far, there’s no word from the White House that such flexibility options were the case for these Department of Education programs. We’ll keep an eye out for a good explanation over the coming weeks and months.

And the confusion isn’t limited to these programs. The president’s fiscal year 2014 budget request, which usually includes spending levels for the prior two years, didn’t even incorporate final, post-sequester fiscal year 2013 spending into its budget tables, for the Department of Education or other agencies. So one thing is clear: The government still isn’t able to provide much evidence around sequestration’s implementation. In spite of anecdotal stories about children losing access to Head Start and special education and Title I services being cut across the country, there’s not yet a comprehensive understanding of how sequestration is affecting education programs.

For more on last year’s budget, check out our issue brief, Federal Education Budget Update: Fiscal Year 2013 Recap and Fiscal Year 2014 Early Analysis.

Education Watch Podcast: Driving Innovation in Higher Education

May 1, 2013
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New America higher education experts Amy Laitinen and Rachel Fishman discuss policy reforms that could alter the higher education system for the better. Laitinen explains how to move past the credit hour and measure learning, not just seat time, and Fishman explores how public universities are collaborating on that and other issues to develop online courses. Fuzz Hogan hosts.

Listen in to learn more.
This is the latest installment of Education Watch podcast, a bi-weekly dose of analysis and commentary on the latest news in the world of public education in the United States. More podcasts are available in New America's podcast archive.

Simpson-Bowles: Reform Student Loans, Fund Pell Grants

April 23, 2013

Alan Simpson and Erskine Bowles, of the famed Simpson-Bowles commission (officially the National Commission on Fiscal Responsibility and Reform) that the Obama administration tapped to generate ideas to reduce federal budget deficits, are out with a new wide-ranging proposal. Titled A Bipartisan Path Forward to Securing America’s Future, the report was published by the Moment of Truth Project, which is itself affiliated with the Committee for a Responsible Federal Budget, an organization previously housed at New America.

The report includes higher education reforms that they say will create $35 billion in savings through 2023. These reforms mirror some of the ideas outlined earlier this year in the Education Policy Program’s report, Rebalancing Resources and Incentives in Federal Student Aid. Unlike the latest Moment of Truth Project report, though, the New America Foundation report argues that the savings these proposals generate should be reinvested fully in more effective and higher-quality postsecondary education aid. (The Path Forward proposal reinvests most, but not all of the savings into higher education aid.)

One way that Path Forward finds big savings is through eliminating the in-school interest rate subsidy, which defers accrued interest on the borrowers loans until after graduation. This is basically identical to New America’s proposal to eliminate Subsidized Stafford loans.

According to the Moment of Truth Project report, the subsidy is poorly targeted and that money can be better spent by funding the Pell Grant program. The authors argue that income-based repayment is a far better benefit to struggling borrowers, something we made the case for in Rebalancing Resources and Incentives. The deficit reduction report writes:

Another $15 to $20 billion could be generated through a number of more targeted changes such as adopting the President's proposal to reform Perkins loans, lowering Guaranty Agency Compensation Rehabilitation loans, repealing Grad PLUS loans, equalizing loans for dependent and independent students, creating a two-tiered income-based repayment system, and reducing or discontinuing funding for underperforming for-profit schools.

The authors go on to note that such reforms would fix the Pell Grant funding cliff, something we also accomplished in the Education Policy Program report. The authors further note that "by providing mandatory funding to cover much of the projected shortfall in the Pell Grant program, this option would limit the pressure on the Appropriations Committee" to make deep cuts in discretionary programs or to decrease the benefits Pell provides. In 2014, Congress was pleasantly surprised by a Congressional Budget Office estimate that showed a surplus had accumulated in the program over the past several years, permitting lawmakers to flat-fund the program at 2013 pre-sequester levels. Still, costs of the Pell program are expected to increase rapidly over the next several years, demanding a long-term solution.

The report also endorses a proposal first offered by the Education Policy Program’s Jason Delisle. Recently highlighted both in President Obama's fiscal year 2014 budget proposal and in a bill proposed by Republican Senators Coburn, Burr, and Alexander, the plan would interest rates on federal student loans to the rate of 10-year Treasury notes, plus a mark-up. As the commission notes, this addresses the interest rate problem more gradually than a bump from 3.4 percent to 6.8 percent – and it would permanently resolve the annual debate over setting the rates by creating a long-term policy subject to the market, not lawmakers’ whims and political interests.

In the Education Policy Program paper Rebalancing Resources and Incentives in Federal Student Aid, we recommend nearly all of these fixes as part of a larger reform to make federal student aid more equitable and rational. And we did this in a budget-neutral way – that is, we used savings found in some programs to increase funding for other programs, or to create completely new ones. While the new Simpson-Bowles report would use some of the savings to fund the looming Pell Grant program shortfall, the authors would also redirect a portion of the savings to deficit reduction.

Our proposal included a broad array of reform proposals, covering loans, grants, tax expenditures, transparency, and other federal aid issues, and it is meant to be seen as an entire package, not a menu of options, because each component of aid affects the others. We stand by that belief, but we are pleased to see other groups arrive at the same conclusions that we did in reforming the federal student aid system: Policymakers can better spend the significant resources they have already committed to federal student aid programs to benefit students, taxpayers, and other education stakeholders.

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