Looking for our new site?

Higher Education

How Income-Based Repayment Can Cap, Reduce, or Eliminate Interest Rates on Student Loans

April 18, 2013

The president’s fiscal year 2014 budget request includes a proposal for setting interest rates on newly issued federal student loans. The fact that the president excluded a cap in his proposal (as did the New America Foundation) has rankled student aid advocates. We’ve argued that the new income-based repayment (IBR) program that became available last year for students who began borrowing after October 1, 2007 ensures that a borrower’s monthly loan payments are capped – which therefore makes it a more generous benefit than an interest rate cap.

Read the rest of this post on Ed Money Watch.


It’s Official! US Department of Education Approves First College to Ditch the Credit Hour

April 18, 2013
Publication Image

For more than 100 years, the time-based credit hour has been the currency of higher education. Originally created to calculate eligibility for Andrew Carnegie’s free faculty pension system, the credit hour evolved to become much more. Entire systems have been built around and upon the time-based credit hour, including the economic lifeblood of many colleges and universities—federal financial aid. But today, the U.S. Department of Education approved Southern New Hampshire University’s (SNHU) College for America (CfA) to be the first program in the country to receive federal financial aid based on “direct assessment” of student learning, rather than the credit hour. This move from the federal government could signal a new era for higher education—one in which we value and pay for learning rather than time.

Southern New Hampshire University, a small, private liberal arts institution, is familiar with pushing the boundaries of what is possible. Over a decade ago, it added a three-year competency-based bachelor’s degree to its regular course offerings. Rather than squeeze four years of “time” into three years through summer and weekend classes, the faculty identified the core competencies students should have upon graduation and then wove those competencies into every course and assignment. By looking at the program holistically, rather than just as a combination of courses, the school was able to eliminate redundancies in the curriculum and focus on what students were expected to learn and do.

Higher Education Lobby Changes Tune on Income-Based Repayment

April 17, 2013

In a hearing before the U.S. House Committee on Education and the Workforce this week, Terry Hartle of the American Council on Education (the higher education lobby) hinted that his association has had a major change of heart on income-based repayment for federal student loans. Or so it seems. 

At issue was a proposal by Rep. Tom Petri (R-WI) that would move the entire loan program to an income-based repayment system administered through employer payroll withholding. Borrowers would make payments at 15 percent of their discretionary income and there would be no loan forgiveness. Instead, total accrued interest would be capped at 50 percent of what a student borrows. Those terms are far less generous than the plan the Obama administration proposed in 2010 and enacted late last year, called Pay As You Earn or Income-Based Repayment. Under that plan, borrowers pay 10 percent of their incomes, 33 percent less per month than the Petri plan, and have their debt forgiven after 10 or 20 years.

Mr. Hartle told the Committee that the Petri proposal “could become an incentive to over-borrowing,” an outcome that he said, “no one wants.” If the Petri proposal more or less rolls back the Obama administration’s Pay As You Earn and Income-Based Repayment plans and replaces them with something that requires borrowers to pay more and for longer, one wonders what the American Council on Education’s position is on the Obama administration plan, which is in current law and available to nearly all new borrowers going forward.

Does Mr. Hartle believe the plan available now for recent borrowers encourages over-borrowing too? If so, that would be a new position for the American Council on Education.

When the president laid out the details of his Pay As You Earn plan in 2010, the American Council on Education rushed to send the White House a letter (available here). The Council’s letter expresses no concern about incentives for over-borrowing, despite the fact that the president’s program is far more likely to encourage over-borrowing (as outlined in this New America Foundation paper) than the Petri proposal because its terms are so much more generous for borrowers, mainly graduate students. The letter is a straight-up endorsement of the president’s proposal to “expand” benefits under Income-Based Repayment.

What explains the inconsistency in ACE’s “strong support” for the Obama administration’s plan and its cautionary warnings about over-borrowing under the Petri plan? (Maybe their position has evolved since they endorsed the Obama administration plan in 2010, and the group does in fact have concerns about it now.) It is unfortunate that the Committee didn’t think to ask Mr. Hartle to explain that glaring inconsistency.

Disclosure: The author worked for Rep. Petri from 2000 to 2005.


How Income-Based Repayment Can Cap, Reduce, or Eliminate Interest Rates on Student Loans

April 15, 2013

The president’s fiscal year 2014 budget request includes a proposal for setting interest rates on newly issued federal student loans. Rates would be fixed for the life of the loan and set at a rate equal to the interest rate on 10-year Treasury notes, plus 2.93 percent for Unsubsidized Stafford loans, the most widely available federal student loan. (Subsidized Stafford loans would be set at the 10-year Treasury rate plus 0.93 percent, and PLUS loans for parents of undergraduates and for graduate students set at 10-year Treasury plus 3.93 percent.)  The rate would not be subject to a nominal cap. The approach is similar to one highlighted a year ago on this blog and again this year in the New America Foundation paper Rebalancing Resources and Incentives in Federal Student Aid.

The fact that the president excluded a cap in his proposal (as did the New America Foundation) has rankled student aid advocates (see here, here, and here). We’ve argued that the new income-based repayment (IBR) program that became available last year for students who began borrowing after October 1, 2007 ensures that a borrower’s monthly loan payments are capped – which therefore makes it a more generous benefit than an interest rate cap. Further, the program’s 10-year and 20-year loan forgiveness terms reduce, cap, or eliminate the interest that a borrower must actually pay, depending on the situation.

How does it do that? A borrower’s payments under IBR are based on his income, and the total time he is required to repay is limited through loan forgiveness, so there is a limit to how much he can ever pay on his loans -- and that limit can make the nominal interest rate on the loan or the amount borrowed irrelevant.

In a recent blog post, the Institute for College Access and Success (TICAS) offers an example in which a borrower pays more in total lifetime payments when the interest rate on the loan is higher. Is that inconsistent with the above statement? Not at all.

The borrower in the TICAS example has $20,000 in debt, has an Adjusted Gross Income of $30,000, and presumed household size of 1 (i.e. not married/married filing separately and no children claimed as dependents). Therefore, we can plot the interest rate cap that IBR would provide on her loans at various debt levels and based on whether she will have her debt forgiven after 10 or 20 years.

IBR Interest Rate Cap 2.png

The Income-Based Repayment plan reduces and ultimately caps the borrower’s interest rate at 12.8 percent. After that point, any unpaid interest or principal balance on the loan will be forgiven due to the maximum term of 20 years under IBR. And if the borrower had $30,000 in debt, IBR caps the interest rate at a very low 3.6 percent. At $50,000 in debt, her interest rate is capped at 0.0 percent – given her income she won’t pay even as much as her initial loan balance, so her interest rate is irrelevant. Why the big differences in interest rate caps? Again, her total payments on her loan have a limit based on her income and the 20-year term of the loan -- so more debt must translate into a lower interest rate cap and lower debt results in a higher interest rate cap.

Now suppose the borrower with $20,000 in debt in the TICAS example works for a non-profit, thereby qualifying for public service loan forgiveness after 10 years of payments. With PSLF, IBR caps her interest rate at 0.9 percent. At $25,000 in debt the interest rate is effectively capped at 0.0 percent. These figures are so much lower than under the 20-year forgiveness becuase the total payments this borrower could ever make are much lower, all because the loan term cannot exceed 10 years.

And if the borrower has a child to declare in her household size, all of the numbers cited above are lower because the program increases the allowable income exemption for each dependent child in calculating the monthly payment. But rather than write out more examples, the table above is instructive. The information in the table is for a borrower who matches the income profile of the borrower in the TICAS example. We use the New America Foundation IBR calculator for all calculations. 

As the table above demonstrates, IBR provides very valuable benefits by reducing, capping or eliminating interest rates on federal loans. (However, the perverse incentives to borrow more and the windfall benefits for high-income high-debt borrowers, mainly graduate students should be addressed.) No doubt, a nominal interest rate cap written into law can provide even greater benefits for borrowers in certain circumstances. But is a cap necessary given the benefits of IBR and would it be worth the extra costs? Probably not, and the Obama Administration agrees.

Key Questions on the Obama Administration's 2014 Education Budget Request

April 11, 2013
Publication Image

President Barack Obama submitted his fiscal year 2014 budget request to Congress on April 10, 2013. The New America Foundation has reviewed the president’s proposals and generated a list of key questions that policymakers, the media, stakeholder groups, and the public should ask about the proposals.

Early Learning and PreK-12 Education

1. The president’s budget proposes to partner with states to provide high-quality pre-kindergarten programs for all low- and moderate-income 4-year-olds, funded with $75.0 billion over 10 years through a 94-cent increase in the federal tobacco tax. The corresponding budget documents provide some guidance on how quality will be defined, mentioning full-day programs, small class sizes and low child-adult ratios, but they are silent on other issues. How specifically will quality be defined? Will pre-K teachers be required to earn bachelor’s degrees or demonstrate specialization in early childhood education? What about states that want to make more investments in pre-K, but cannot meet the match required by the federal government? What safeguards will be put into place to ensure that the funding would not become another siloed funding stream?  And will any guidance be issued to encourage states to – in the long-term – fund pre-K and kindergarten the same way 1st through 12th grade are funded?

2. The president’s proposal includes $300 million for the Promise Neighborhoods program, a $240 million increase over last year. Some of the program’s funds will reside under a new inter-agency header, Promise Zones, in which housing, criminal justice, education, and economic growth efforts are all deployed within a single geographical area. The number of awards will be split between planning grants and implementation. Is the administration counting on sustaining this higher level of funding for the program moving forward? Should a relatively new program bring on so many new communities, rather than focusing on deepening services for existing grantees?

3. The president proposes $300 million for new competitive grants to encourage high schools to strengthen college and career readiness by redesigning traditional programs and creating partnerships with community colleges and employers so that students graduate with college credit and career skills. How would the Department of Education identify high-quality models that are likely to improve students’ postsecondary readiness, and would certain criteria be prioritized?  Would grantees be required to match any of the funding? 

And how would the High School Redesign competition interact with similar proposals? Dual enrollment, Advanced Placement (AP), early college high schools, and other accelerated programs would be supported in the president’s proposed $102 million College Pathways and Accelerated Learning initiative. The administration would simultaneously overhaul Career and Technical Education programs within high schools that operate under the Perkins Act through a $1.1 billion budget request. And an additional $32 million would supplement Perkins funds to address local workforce needs and support adult learners by allowing them to earn high school and college credit through dual enrollment. How would the department ensure these efforts complement, rather than compete with, one another? 

4. The president’s budget request includes $659 million for a School Turnaround Grants program. This would maintain spending for state School Improvement Grants (SIG), but would also expand the program to include all priority schools under No Child Left Behind (NCLB) waivers and add $125 million in competitive funding for districts to build capacity and maintain progress in schools nearing the end of their 3-year SIG interventions. Will the department issue guidance to encourage schools to add early learning efforts, like pre-K and full-day kindergarten, as part of school turnarounds? And what will the criteria be for districts applying for the new capacity-building grants? How will the department define successful district strategies to support persistently low-achieving schools? Districts’ lack of capacity has been one prominent criticism of the SIG program, but given that over $3 billion has been spent on SIG already, is the additional $125 million too little, too late?

5. The president proposes $215 million for the Investing in Innovation program (i3), an increase of $66 million. But nearly all of the increase ($64 million) would go toward a new program called Advanced Research Projects in Agency-Education (ARPA-ED) modeled after similar efforts in the Departments of Defense and Energy. The i3 fund provides competitive grants to school districts, nonprofits, and consortia to implement, validate, or scale up promising reform efforts. Would the i3 program continue to focus on certain reform initiatives, like teacher and leader effectiveness, or would the program shift focus to other areas, including early learning and student achievement in STEM subjects? Would ARPA-ED share the i3 focus? And how will the Obama administration ensure that ARPA-ED avoids redundancy with the Institute for Education Sciences?  

6. The president proposes to flat-fund the Assessing Achievement program at $389 million, which would replace State Assessments funding in NCLB. The Common Core assessment consortia, PARCC and SmarterBalanced, have been supported with $360 million in 2009 stimulus funds, set to expire in the fall of 2014 – before the tests are fully administered in the spring of 2015. The two consortia would be eligible to compete for an additional $9 million in funding under Assessing Achievement, while the remaining $380 million would be allocated by formula to states. Given pressure for additional assessments in PreK-3rd grade and untested subjects, technology upgrades and increased bandwidth, formative assessments, improved test security, aligned curriculum and professional development, and other supports, will states have sufficient resources to transition to the Common Core assessments while also maintaining and improving their other assessments? And is $9 million sufficient to complete and sustain the work of the Common Core assessment consortia during their first year of full implementation? What guidance will the department provide to help states and the consortia prioritize their activities heading into the critical 2014-15 school year?

Higher Education

7. The president proposes expanding the recently enacted, more generous Income-Based Repayment plan for federal student loans, Pay As You Earn, to all borrowers rather than just new borrowers as of October 1, 2007, and eliminating the tax on loans forgiven for borrowers. Last year, the New America Foundation argued for those exact policy changes – provided that Congress and the administration first address the perverse incentives and windfall benefits the program will provide to graduate and professional students and the schools that enroll them.                

If Pay As You Earn is expanded to all borrowers and loan forgiveness benefits are made tax-free, as the president is proposing, isn’t it even more important to rein in the program’s windfall benefits and perverse incentives? Does the administration have any thoughts on how to address these issues while maintaining the program’s benefits for lower-income and lower-debt borrowers?             

8. The president proposes setting interest rates on student loans at the 10-year Treasury note plus an additional 0.93, 2.93, and 3.93 percent for Subsidized and Unsubsidized Stafford and Grad PLUS loans, respectively.  The rate would adjust every year for newly issued loans based on the Treasury rate, but is fixed the life of the loan. The proposal closely mirrors one originally proposed by the Education Policy Program’s Jason Delisle.

Unlike Delisle's proposal, the interest rate in the president’s budget for Subsidized Stafford loans is lower than those for other loans. However, the Income-Based Repayment program makes the lower rate on Subsidized Stafford loans an unnecessary benefit, given that loans can always be paid as a low percentage of income regardless of the interest rate. What is the justification for the lower rate? Why provide an extra benefit for borrowers when Income-Based Repayment is available for struggling borrowers? Couldn't the budgetary resources used to provide the lower rate be put toward the Pell Grant program instead, where they are certain to help low-income students?

9. The president proposes a program that would allow non-accredited providers of learning to receive federal funding for two-year degrees that are both free to the student and high-quality, with demonstrable outcomes.  The goal of Pay for Success is to provide students with alternate pathways for high-quality, low-cost higher education.  Providers would front the costs and be reimbursed only when and if students succeed. This would allow learning acquired and/or certified through means as varied as MOOCs, work-based training, AP exams, and more to be packaged together to create a free, coherent, high-quality competency-based degree.

The budget documents indicate that demonstrated competencies, passage of field-appropriate licensing tests, and job placement are possible indicators of success. How will these indicators be determined? Will the agreed-upon indicators be transparent? How will the outcomes be verified? Will additional measures include acceptance of the two-year degrees for transfer by four-year institutions? How would this work if the “degrees” are not accredited? If students can demonstrate competencies and the outcomes are solid, what would be the justification for not accrediting these new degree programs? How would findings from this experiment on an outcomes-focused delivery model inform the broader conversation around higher education quality?

10. Providing students and families with better information in order to help them make more informed college-going choices is a recurring theme in the budget. It is highlighted as an area for state reform in the proposed $1.0 billion Race to the Top College Affordability and Completion competition and given as an example of an area to study under a $67.0 billion proposed higher education/financial aid research and evaluation program. And the president unveiled his College Scorecard in the 2013 State of the Union address to provide better, more actionable data to students in a user-friendly manner. Yet one of the main indicators on the Scorecard—employment—is essentially blank. Although the department has said that it is working to provide the information, it is not clear how or when that will occur. Given bipartisan interest in better postsecondary outcomes data, what is the department’s plan to provide accurate employment data to students? Does the president plan to make the Scorecard mandatory? If so, when? If the department wants to encourage states to provide better information, shouldn't it also lead by example?


Defending a College with a 0% Graduation Rate

April 1, 2013
Publication Image

It’s not often that you see members of Congress (or anyone for that matter) defending a college with a zero percent graduation rate. But that is exactly what is happening for Oregon’s Marylhurst University. Both of the state’s Senators and three of its representatives recently wrote a letter to the Department of Education defending the University against claims from the Department’s own College Scorecard that it has a 0% graduation rate.

Zero percent is certainly at odds with the rhetoric on the website of this small, open-admission, Catholic liberal arts school. Student success is in the first sentence of a lengthy and passionate case for cultivating ethical, engaged leaders capable of taking on the challenges of a rapidly changing world.

But talk is cheap and self-promotion is easy, which is why Republicans and Democrats have been calling for better, more comparable data that students can use to inform their college-decision making processes. Marylhurst, however, isn’t alone in tooting its horn. The Council for Adult and Experiential Learning recognized the university as a national leader for its "outstanding commitment to the expansion of lifelong learning opportunities and for innovative efforts to improve access and quality in academic programs for adult learners."

It turns out that adult learners are the problem. Or, more accurately, how the federal government counts (or doesn’t count) adult learners. The College Scorecard reports graduation rate data only of first time, full time students. However, just three percent of Marylhurst’s students fall into that category. The vast majority are working adults taking upper division courses part time in order to complete a degree started elsewhere. And these students seem to be doing well. Out of 911 undergrads enrolled last year, 204 graduated. But the success of these students doesn’t count, at least not according to the federal government.[i] Disregarding the majority of students at an institution is not fair. Not fair to the institution, not fair to students.

The Academic Graveyard Shift: The Costs of Declining Teaching Loads

March 29, 2013
Publication Image

A new report from the American Council of Trustees and Alumni and Education Sector, “Selling Students Short: Declining Teaching Loads at Colleges and Universities,” assigns tenure-line university faculty a remarkable amount of blame for the high price of college. As the report states, bemoaning faculty labor costs is common practice among critics of the academy, who frequently assume the single largest university budget category (usually faculty compensation) holds the most fat. To his credit, author Andrew Gillen moves beyond that simplistic assumption and seeks evidence of ineffective faculty spending. In doing so, he tells a compelling and concerning narrative about university products and faculty priorities: the instructional mission of American higher education is being short-changed, particularly for students and taxpayers. Unfortunately, the report’s conclusions ultimately overreach and overshadow its main value—generating greater policy discussion around the costs and products associated with faculty work.

Gillen uses federal data to demonstrate reductions in tenured and tenure-track (TT) teaching loads across institution types, between academic years 1987-1988 and 2003-2004. He provides a cohesive synthesis of factors widely thought to contribute to this outcome, with some emphasis on Massy and Zemsky’s concept of “the academic ratchet.” The academic ratchet explains that as faculty seek reputational prestige and career mobility through increased attention to their research responsibilities, they must, and readily do, decrease attention to instruction and other responsibilities. The report neglects to mention the other half of this framework, (“the administrative lattice”), which explains how administrators enable faculty to restructure their work: they expand their ranks, also at added cost. Data show administrative growth, both in terms of expenditure and added employees, has been prodigious in recent years.

March Madness: Do Colleges Cut Down the Net on Net Price?

March 27, 2013

This post originally appeared on the New America Foundation's In the Tank blog.

College basketball fans across the country bemoaned ruined brackets as they watched Harvard unseat the University of New Mexico in the first round of the NCAA March Madness tournament.  Of all the teams in this year’s bracket, Harvard graduates the highest percentage of its student body, and we've been thinking about how the other tournament schools stack up on this front, as well as on how they treat their lower-income students. Some of the traditional basketball powerhouses aren’t too shabby. Duke University, for instance, graduates 94 percent of its student body, and also does well by its low-income students, charging them relatively little to enroll.

March Madness: Do Colleges Cut Down the Net on Net Price?

March 27, 2013

This post originally appeared on the New America Foundation's In the Tank blog.

College basketball fans across the country bemoaned ruined brackets as they watched Harvard unseat the University of New Mexico in the first round of the NCAA March Madness tournament.  Of all the teams in this year’s bracket, Harvard graduates the highest percentage of its student body, and we've been thinking about how the other tournament schools stack up on this front, as well as on how they treat their lower-income students. Some of the traditional basketball powerhouses aren’t too shabby. Duke University, for instance, graduates 94 percent of its student body, and also does well by its low-income students, charging them relatively little to enroll.

Only 15 percent of Harvard’s 2010 enrolled students were from families with sufficiently low incomes to receive federal Pell Grants. And while Harvard charged the lowest-income students (those from families earning less than $30,000 a year) only a nominal amount of $423, few other schools matched up. Bucknell University, already knocked out of the tournament, charged more than $16,000 to those students – at least half the family income.

Meanwhile, a quarter of students enrolled at the University of Arizona – triumphant victors over Harvard – receive Pell Grants. And a third of La Salle University students are Pell Grant recipients. Michigan, which plays Kansas this week, enrolled fewer Pell students (15 percent), but charges a net price of only about $5,000.

Our NCAA brackets would certainly look different if we judged schools by the way they help low-income students afford their tuitions, rather than by athletic prowess. Check out the data on this page – and many more data points from the New America Foundation’s Federal Education Budget Project — to see a new side of your Final Four.

Take a look at how NCAA March Madness schools compare below. Click the table headers to sort ascending or descending on that particular column.

Murray Budget and Student Loans: Where’s the Money?

March 20, 2013

Education advocates have been lauding the budget resolution wending its way through the U.S. Senate. They praise the Senate budget resolution (aka the “Murray budget,” so named for Budget Committee Chair Patty Murray) for rolling back the increases in origination fees for student loans and for addressing the July 1 expiration of the 3.4 percent interest rate on Subsidized Stafford loans for undergraduates. These advocates have either been duped or are simply giving Senate Democrats a free pass: The Murray budget does not include funding for any changes to student loans – or any education programs on the entitlement side of the budget, for that matter.

Congressional budget resolutions are drafted each year by the House and Senate Budget Committees to set spending and revenue targets for at least the next five years. The budget resolution is broken down into budget functions that help set the limits on future spending for different agencies.

Each budget function has a “baseline funding” level, which refers to current law. If senators intended to leave education programs exactly as they are under current law, senators would set funding at the baseline in the budget resolution.But if the senators drafting the budget resolution want to “make room” for more spending on education programs like student loans – say, to extend the 3.4 percent interest rate on Subsidized Stafford loans – then the budget function for education (function 500) needs more funding in it than the baseline.

So if the Murray budget was serious about making changes to education programs, we could look at the education budget function and we would see an increase in funding above the baseline. For example, a one-year extension of the 3.4 percent interest rate on Subsidized Stafford loans would cost about $6 billion above baseline. But there is no such funding increase in the Murray budget. Education funding is exactly at baseline, and no additional funding is provided for education programs on the mandatory side of the budget, such as student loans (see table below).


Why did Senate Democrats opt not to include the additional funding in the budget resolution? Because that would have showed up as additional spending. Instead, the Senate Democrats included a “deficit-neutral reserve fund” for higher education programs that includes no spending numbers whatsoever. Why? Because that approach includes no spending numbers whatsoever. That way the budget resolution can have its cake and eat it too. Its supporters can boast about new spending for student loans but exclude that spending from any actual spending number in the budget resolution.

That is a convenient trick if you can get away with it. Education advocates seem willing to play along with a wink and nod – or maybe they have been duped. Perhaps they should ask Senate Democrats to show them where the money is for more spending on student loans. And remember, spending is measured in numbers, not words. Do not fall for the “reserve fund” trick.

Syndicate content