Knowing is half the battle

Last December, we wrote about three ways the U.S. Department of Education could and should be supporting colleges –low-borrowing colleges in particular – in offering federal loans.

A recent letter from the Department addresses one of these requests head-on, and was particularly timely because it was sent just after colleges received their draft cohort default rates for borrowers entering repayment in 2011. The letter emphasizes the importance of student access to federal loans, and the participation rate index appeal for low-borrowing colleges:

Access to federal student financial aid, including low-cost Federal student loans, increases the likelihood that students will have the financial resources to successfully complete the postsecondary education needed to build a better future for themselves, their families, and their communities.

We encourage institutions to provide access to the full range of student financial aid options available that enable millions of students to enroll and succeed in college….

We believe that the availability of the Participation Rate Index Challenge and Participation Rate Index Appeal could mitigate some institutions’ consideration of withdrawing from the Direct Loan Program due to sanctions triggered by high cohort default rates.

This letter will help keep colleges in the federal loan program, but more is needed.  The Department should still publish borrowing rates alongside default rates and allow low-borrowing colleges to appeal their rates in any year, as we previously recommended.  And now that they have published this letter, they should promote it at conferences and meetings with colleges.

Nonetheless, the Department’s recent action to help colleges understand the importance of federal loans and available appeals is an important step in the right direction.  As G.I. Joe famously says, “Knowing is half the battle,” and now colleges will be more likely to know.

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California Budget Proposal Includes Narrow but Important Cal Grant Fix

The California Governor’s budget proposal includes much to like for higher education. Deepened investments in public colleges and universities, as well as a fund for innovation in higher education, will serve to keep tuitions steady and make it easier for students to transfer and graduate on time. Community college students will benefit from expanded educational planning services and a focus on closing achievement gaps.

The budget plan also includes one narrow but very important improvement to the state Cal Grant program, the largest need-based grant aid program in the nation. Students who become ineligible because their family income rises above Cal Grant thresholds will be able to reenter the program should their income drop again. This modification is very similar to a bill introduced by Assembly Member Quirk-Silva last year (AB 1287), supported by TICAS and every statewide student group.

The Governor acknowledges that college affordability is a “critical outcome,” and there is a broad and growing consensus on the need to strengthen the Cal Grant program so that our lowest income students aren’t left behind. We had hoped the plan would have included more steps to increase the availability of need-based financial aid, which makes college more affordable for low- and truly middle-income students. While the plan points out that Cal Grants and community college fee waivers help to keep college within reach for some low- and middle-income students, many students continue to be left out of those programs, and many of those who receive Cal Grants get awards worth just one-quarter of their original value.

As expected, the budget plan does reflect last summer’s agreement to create a new non-need-based Middle Class Scholarship, with $107 million allocated for 2014-15. We continue to believe that the Legislature should consider improvements to the Middle Class Scholarship program to align it with longstanding state and institutional aid programs and target available dollars to students with at least some financial need.

We look forward to working with the Governor and Legislature to ensure that all of the state’s higher education investments work in tandem to increase college access and success.

- Debbie Cochrane, Research Director

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U.S. Department of Education Strikes Out on CDRs

In the last three months, the U.S. Department of Education has struck out on clarifying what cohort default rates (CDRs) mean for students and colleges, prompting some colleges to stop offering federal student loans. The Department needs to provide better guidance to colleges on how to lower their CDRs while providing timely assurances to colleges with low borrowing rates so they do not needlessly pull out of the loan program, denying their students the safest way to borrow. A new proposal to use program-level CDRs only increases the urgent need for action by the Department.

Strike One: A Murky Scorecard

In September, the Department released new CDRs for the nation’s colleges. But once again, it failed to provide the information necessary to interpret what the rates mean.

CDRs are the primary measure of college accountability. They measure the share of colleges’ federal student loan borrowers who default soon after entering repayment, an important measure of student outcomes. For colleges where most or all students borrow, CDRs can tell you a lot: high CDRs are a clear sign that students who attended that college are not faring well, and suggest that the college may not be a good investment for students or taxpayers. But for colleges where only a handful of students borrow, CDRs give fewer clues about how the colleges’ students are doing.

The problem is that the Department once again did not pair CDRs with colleges’ borrowing rates, as we have long asked them to do. That means that students from a particular college may appear very likely to default when, in fact, they are very unlikely to default because they are very unlikely to have to borrow at all. This is not helpful to students, journalists, or college leaders.

Strike Two: A Confusing Rulebook

Federal law acknowledges the importance of the borrowing rate in evaluating CDRs: colleges with high CDRs may lose eligibility for federal grants and loans, but colleges with few borrowers can avoid sanctions under what’s called a ‘participation rate index (PRI) appeal.’

Nonetheless, misunderstandings about CDRs and the PRI have sparked unnecessary fears in some colleges – particularly community colleges – that they will be sanctioned, leading some institutions to pull out of the federal loan program entirely. This is most obvious (but certainly not only true) in California, where borrowing rates at the vast majority of community colleges are in the single digits – well within the range eligible to appeal CDR sanctions.

Without access to federal loans, students who need to borrow to attend college must either drop out or turn to more expensive and riskier forms of debt, including private loans or credit cards. Yet community colleges in California continue to stop offering loans, citing fears of CDR sanctions as their rationale. We have long encouraged the Department to issue public guidance to colleges describing the appeals options available to them, and underscoring the importance of federal loan access for students, but to date it has not done so.

Strike Three: Silent Umpires

The type of sanction community colleges fear most is the loss of federal Pell Grants, which can occur after three consecutive CDRs at or above 30 percent. Colleges subject to this sanction lose Pell Grant eligibility immediately, but they can appeal the sanction if their borrowing rate in any one of the three consecutive cohorts is sufficiently low.

However, the Department will not confirm that the colleges’ borrowing rates are low enough to appeal sanctions until the college’s third consecutive high CDR, which is very late in the game. It is so late, in fact, that at that point there is no other way for the college to avoid sanctions, should its appeal be rejected, since it cannot influence default rates for years past. By year three, the college faces sanctions within mere months. With the stakes so high, it is no wonder that some colleges opt to stop offering loans long before a third consecutive high CDR. Simply put, colleges need to understand their risks and options on an annual basis so that they can work to reduce defaults and continue to offer federal loans.

The Department could easily inform colleges whether their CDRs will count towards sanctions, as we have recommended. Unfortunately, the Department has declined to do so, claiming that it would impose an “unmanageable workload” on its staff. However, the annual burden on the Department would be minimal, as few schools with borrowing rates low enough to qualify for the PRI have CDRs that would trigger sanctions in the first place. The Department also argued that colleges have sufficient time to avoid losing Pell Grant eligibility, since they can currently appeal when their third high CDR is in draft, rather than final, form. But this misses the point and ignores what we already know: without the right assurances from the Department earlier in the process, colleges will stop offering federal loans after their first or second year with high default rates.

The Next At Bat: Gainful Employment

While the Department has struck out when it comes to CDRs, it is still in the game, and the ongoing gainful employment discussions – which continue next week – underscore the need for them to act.

The Department’s latest gainful employment proposal would expand CDRs to measure program-level default rates (pCDRs) for career education programs, and cut off eligibility for programs where default rates are too high.  Existing protections – like the PRI appeal option – would carry over from CDRs to pCDRs, but that is little consolation for colleges given the current confusion and concern about PRI appeals. Most career education programs are located at community colleges, where borrowing rates are low and fears of sanctions are high. The Department needs to improve the PRI process to prevent more of these colleges from exiting the loan program – a trend that risks pushing more students to drop out or take out private loans, and reducing affordable career education program options instead of ensuring them.

- Debbie Cochrane and Matthew La Rocque

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TICAS Endorses Bipartisan Net Price Calculator Improvement Act Introduced by Reps. Cummings, Issa, and Hinojosa

Net price calculators, required on almost all college web sites since October 2011, can help prospective students and families look past often scary “sticker prices” and gain a better understanding of which schools they might be able to afford, before they have to decide where to apply. Unfortunately, our research has found that many of these online tools are difficult to find, use, and compare.

To make net price calculators more useful and accessible for students and families, we strongly support the bipartisan Net Price Calculator Improvement Act (HR 3694), introduced by Reps. Elijah Cummings (D-MD), Darrell Issa (R-CA), and Rubén Hinojosa (D-TX). This legislation builds on existing Department of Education guidance for where the calculators should be located on college web sites, how they incorporate military and veteran benefits, and what results they must provide. Additionally, the bill protects students’ privacy by prohibiting any personally identifiable information from being sold or made available to third parties.

The bill also allows the Department of Education to create a web site that lets students answer one set of questions and obtain net price estimates for multiple colleges at once. This would dramatically simplify the current time-consuming process of finding and filling out a different calculator on each college’s web site. The content and design of that central web site would be reviewed and consumer-tested before going live, to ensure that it meets the needs of students and families. Colleges would still be able to create their own customized net price calculators, as long as they meet the minimum requirements.

By making these tools easier to find, use, and compare, the Net Price Calculator Improvement Act will help students and families make more informed decisions about which colleges to apply to and attend.

For more information about net price calculators, visit our resource page.

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Want better data? Speak up now!

Much of the information we have on college costs, financial aid, enrollment, and completion comes from the U.S. Department of Education’s annual surveys of colleges, collectively called IPEDS. Researchers and policymakers rely heavily on IPEDS data, and the Department’s own consumer tools like College Navigator and College Scorecards do, too.

As important as IPEDS is, the data collected are far from perfect and opportunities to improve IPEDS as a whole are few and far between.  But there is one such opportunity now – the federal government is asking the public for comments on how to improve IPEDS for the next three years. Here are some of our biggest asks:

  • Collect data on cumulative debt at graduation for completers of undergraduate certificates, associate’s degrees, and bachelor’s degrees. The only currently available data on cumulative debt by institution are voluntarily reported, and as a result are incomplete. For example, the vast majority of for-profit colleges choose not to report these data. Better data could immediately be put to use in consumer tools like the College Scorecard and the President’s proposed rating system.
  • Collect graduation rates for Pell Grant recipients. This should be an easy ask of colleges since they’re already required by law to calculate graduation rates for Pell Grant recipients for the purposes of disclosure, and some are already reporting these rates voluntarily to U.S. News. But many colleges don’t comply with this disclosure requirement, and, even for those that do, there’s no easy way for consumers, researchers, journalists, or policymakers to find colleges’ Pell graduation rates across the board because the rates aren’t reported via IPEDS. Reporting the rates would create no extra burden on colleges and would serve as a check on noncompliant schools.
  • Collect graduation rates for part-time and non-first-time students immediatelyCurrently available graduation rates include only first-time students who enroll full time, leaving out substantial shares of entering students. The Department is finally poised to begin collecting graduation rates for part-time and non-first-time students, too, but has recently proposed delaying their collection until 2015-16. This delay is unnecessary.
  • Collect data on veterans’ outcomes. IPEDS already includes questions on veterans’ enrollment and access to services, so collecting information on these students’ outcomes – in the same way other students’ outcomes are tracked – is reasonable and the fastest way to obtain data on veteran students’ outcomes.
  • Collect better data on for-profit colleges’ spending. The Department’s proposed changes to IPEDS already include increasing the level of detail in for-profit colleges’ reporting of revenues, expenses, assets, and liabilities, as recommended by a technical review panel focused on improving the finance survey for for-profit colleges. While this represents a good first step, IPEDS should also collect data on expenditures for recruiting, advertising, and marketing.
  • Make it easier to combine IPEDS data with other federal data. The Department provides important data about colleges outside of IPEDS (such as cohort default rates, or CDRs). However, it is difficult to view IPEDS data side-by-side with data from other federal sources that use a different system for identifying colleges. Adopting common identifiers for colleges across all data sets would address this problem. In the interim, the Department should provide tools that help users combine these data sets, for both research and consumer information purposes.

TICAS outlined these and other recommended changes in the first and second rounds of comments to improve IPEDS collection. So far, the Department’s responses to these suggestions have focused primarily on the additional burden they would impose on colleges. In some cases – like the Pell graduation rate reporting, discussed above – this is simply not true. But in the cases where new reporting requirements might in fact increase burden, why not offset the burden by eliminating reporting requirements that are duplicative or have become obsolete?

The Department needs to hear from others that these changes to IPEDS are important and urgently needed. The proposed IPEDS collection is out for comment for the third time, with comments due November 14, 2013 at www.regulations.gov.

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Targeted IBR Outreach Is Underway: Great News for Struggling Borrowers, a Few Tweaks Needed

The U.S. Department of Education announced this week that it’s reaching out to about 3.5 million federal student loan borrowers who are carrying higher than average debt or showing signs of financial distress. The goal of the Department’s email campaign is to make sure these borrowers know about income-driven repayment options that might make their monthly payments more affordable and keep them from defaulting.

We’re thrilled that this piece of President Obama’s college affordability plan is being put into action. With rising student loan default rates and a job market still recovering from the financial crisis, the need is clearly urgent. Our Project on Student Debt developed the policy framework and spearheaded the coalition to create Income-Based Repayment (IBR), which became available to federal loan borrowers in 2009. We have since repeatedly called on the Department to do more to make sure borrowers are aware of IBR, including targeted outreach along the lines of this new effort.

Simply put, people can’t benefit from IBR and related plans like Pay As You Earn unless they know about them. They need timely, accurate, and usable information before extended forbearances cause their debts to balloon, delinquencies damage their credit scores, or defaults lead to even more severe consequences.

With that in mind, we think the Department could easily increase the impact of its outreach by taking the following steps. We suggest a couple of improvements that should make borrowers more likely to act on the important emails they’re getting from the Department:

Tell borrowers about the light at the end of the tunnel. The Department’s sample outreach email fails to mention that after 20 or 25 years of repayment in an income-driven plan, any remaining debt can be discharged.  This is a crucial feature of income-driven plans. But the sample email makes it sound like there is no time limit on payments, unless you qualify for Public Service Loan Forgiveness. It says, “When you make payments based on your income, your loans are paid off over a longer period of time than the standard 10-year plan. While this reduces your monthly payment amount, it also increases the total amount you pay over time. But if you work in public service, you may qualify to have your remaining loan balance forgiven after 10 years of payments.” The fix? The Department’s outreach should tell borrowers that income-driven plans not only lower your payments, they also cancel any debt remaining after 20 or 25 years in repayment.

Make it easier to for borrowers to get income-driven payment estimates. The sample email also provides a link for borrowers to view estimates of payments in income-driven plans. But when you click on “repayment estimator” you find yourself on the Department’s generic home page for federal loan borrowers: studentloans.gov.  The only way to see your estimated payments under all plans at once is to sign in to this site using your PIN, but there is no mention of a “repayment estimator.” If you don’t know what you’re supposed to do, you can easily get lost. The fix? Make the link go directly to the repayment estimator, and ultimately make the estimator available for prospective borrowers who don’t have PINs.

 

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U.S. Department of Education Issues New Rules on Student Loans, Strengthens Key Provisions for Distressed Borrowers

The U.S. Department of Education has released new final regulations that strengthen key protections for distressed borrowers with federal student loans. The regulations also make conforming revisions to reflect legislative changes related to student loans.

The new regulations will make it easier for borrowers to get out of default and repay their loans by ensuring that “reasonable and affordable” payments to rehabilitate a loan are, in fact, reasonable and affordable. Consistent with the law, the final regulations specify that the rehabilitation payment amount must not be a required minimum payment, a percentage of the borrower’s total loan balance, or an amount based on other criteria unrelated to the borrower’s total financial circumstances.

In response to public comments on the draft rules submitted this summer by TICAS and others, the final rules require that borrowers seeking to rehabilitate defaulted loans be initially offered a payment amount based on what they would pay in Income-Based Repayment (IBR), which caps monthly payments at 15 percent of a borrower’s discretionary income. The draft rules would have allowed payments based on the IBR formula only after borrowers were offered and then rejected a different amount calculated by servicers and based on a long and complex form. In a change of course, the Department ultimately required payments based on the IBR formula to be offered first, in response “to the numerous comments we received expressing concerns about the amount of personal financial information a borrower requesting loan rehabilitation would [otherwise] have to provide.”

In addition, the final regulations permit borrowers who have been delinquent on their loans for at least 270 days to be placed in forbearance based on an oral rather than a written request. Borrowers in forbearance don’t have to make payments, but their interest keeps accruing and then capitalizes when the forbearance ends, leaving them owing even more.

To try to prevent institutions from pressuring borrowers to request oral forbearances during the period when institutions are held accountable for student loan defaults, the rules limit any forbearance granted based on an oral request to 120 days and prohibit consecutive 120-day forbearances. In another improvement over the draft proposal, borrowers who are placed in forbearance based on an oral request will receive written information, as well as an oral explanation, of their repayment options and how they can exit forbearance, as TICAS had recommended. The Department is allowing loan holders, colleges, and guaranty agencies to implement this rule on November 1, even though they are not required to comply until next July.

The Department publicly acknowledges the evidence “that some institutions are aggressively pursuing their former students to compel them to request forbearance on their loans, primarily during the cohort period when the institution is accountable for student loan defaults.” As detailed in our public comments, it’s well documented that some for-profit colleges have engaged in such abuses at borrowers’ expense while receiving billions of dollars in federal student aid. TICAS has identified steps the Education Department should immediately take to prevent such abuses.

Soon to be published in the Federal Register, the new rules also improve students’ access to loan discharges when schools shut down before they can finish their studies.

 

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Federal Government Default Could Increase the Cost of College for Millions of Americans

As the possibility of Congress failing to raise the debt limit and the federal government defaulting on its obligations becomes more real, we looked at what impact this might have on federal student loans.

Since the U.S. government has never defaulted before, we cannot know for sure what impact it would have. However, when the government came close to defaulting in 2011, J.P. Morgan issued a report entitled “The Domino Effect of a US Treasury Technical Default.” It concludes that “any delay in making a coupon or principal payment by the Treasury — even for a very short period of time — would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the US economy.” The report estimates that a default would likely lead to a 20 percent decline in foreign demand for Treasuries over a one-year period, increasing the yields on 10-year Treasury notes by 50 basis points.

Enacted in August, the Bipartisan Student Loan Certainty Act of 2013 ties federal student loan interest rates to the 10-year Treasury note yield (as of the May auction) plus a fixed increment. So how much would a 50 basis point increase in Treasury yields cost college students and their families in higher interest payments on their student loans?

For a college freshman who starts school in fall 2014, takes out the annual maximum in subsidized and unsubsidized Stafford loans, and graduates in four years, it will increase the cost of college by about $1,000. That’s a 10% increase in interest payments over 10 years on the $27,000 she borrowed. If the government’s defaulting were to increase rates by 100 basis points, it would increase this student’s costs by $2,000 — a 20% increase in interest payments. For a graduate student who starts a two-year program next year, borrows the annual maximum in unsubsidized Stafford loans, and finishes in 2016, a 50 basis point increase would cost him about $5,000 more and a 100 basis point increase would cost him about $10,000 more in interest payments over a 25-year repayment period. (See the tables below for more details.)

In addition, J.P. Morgan and others expect that a default would slow economic growth, lowering family incomes and making it even harder for those already struggling to pay for college.


Undergraduate borrower taking out annual maximum subsidized and unsubsidized Stafford loan amounts, starting college in        2014-15 and graduating in four years

Scenario Amount
entering repayment
 Total payments
over 10 overs
Total interest
paid over 10 years
Based on current CBO
FY projections for 10-Yr T-Note yields
 $28,100  $37,150  $10,150
If 10-Yr T-Note
yields increase by 50 BPs
 $28,200  $38,150  $11,150
 Difference from
current projections ($)
 $100  $1,000  $1,000
 Difference from
current projections (%)
 0%  3%  10%
If 10-Yr T-Note
yields increase by 100 BPs
 $28,300  $39,150  $12,150
  Difference from
current projections ($)
 $200  $2,000  $2,000
  Difference from
current projections (%)
 1%  5%  20%

 

Graduate borrower taking out annual maximum unsubsidized Stafford loan amounts, starting college in 2014-15 and graduating in two years

Scenario
Amount
entering repayment
Total payments
over 25 overs
Total interest
paid over 25 years
Based on current CBO
FY projections for 10-Yr T-Note yields
 $45,100  $91,100  $50,100
If 10-Yr T-Note
yields increase by 50 BPs
 $45,450  $96,050  $55,050
 Difference from
current projections ($)
 $350  $4,950  $4,950
 Difference from
current projections (%)
 1% 5%  10%
If 10-Yr T-Note
yields increase by 100 BPs
 $45,750  $101,150  $60,150
  Difference from
current projections ($)
 $650  $10,050  $10,050
  Difference from
current projections (%)
 1% 11%  20%

Calculations by TICAS based on February 2013 CBO fiscal year projections of 10-Year Treasury Note yields from “The Budget and Economic Outlook: Fiscal Years 2013-2023,” http://1.usa.gov/162YKgi. The dependent undergraduate student takes out a total of $27,000 in Stafford loans ($19,000 subsidized and $8,000 unsubsidized) and the graduate student takes out a total of $41,000 in unsubsidized Stafford loans. Figures in the table are rounded to the nearest $50 and 1%.

Pauline Abernathy, Diane Cheng and Jessica Thompson

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CBO Projects Almost No Annual Growth in Pell Grant Costs (2012-13 to 2023-24)

The nonpartisan Congressional Budget Office (CBO) recently released a report that explores the growth in the Pell Grant program between 2006-07 and 2010-11, citing factors such as the economic downturn and legislated policy changes. We are planning to dig deeper into the CBO’s analysis over the coming weeks, but wanted to highlight one important point in the report.

Although the cost of the Pell Grant program increased substantially between 2006-07 and 2010-11, that pace of growth is not expected to continue. In fact, CBO projects almost no annual growth in Pell Grant program costs between 2012-13 and 2023-24, after adjusting for inflation. Over that entire 11-year period, the program’s costs are only projected to increase by 1% in real terms.

It’s clearly time for policymakers to stop asking whether Pell Grants are sustainable and focus instead on whether they’re sufficient. Even after recent increases, the maximum grant covers the smallest share of the cost of attending a four-year public college since the start of the program. Pell Grant recipients are more than twice as likely as other students to have to borrow to pay for college. The CBO data drive home the need for a comprehensive approach to financial aid and higher education policy, so that all students who are willing to study hard can afford to go to college and graduate.

For more information about Pell Grants, please visit TICAS’ Pell Grant Resource Page: http://www.ticas.org/pellgrant_resources.vp.html. For TICAS’ recommendations for increasing the effectiveness of Pell Grants, see our white paper at http://www.ticas.org/pub_view.php?idx=873.  

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New CBO Projections Spell Out Government Profits from Student Loan Deal

On August 12, the Congressional Budget Office (CBO) released its estimates of the subsidy rates on federal student loans before and after enactment of the Bipartisan Student Loan Certainty Act of 2013 signed by President Obama earlier this month. These CBO estimates show:

  • That the government will profit from Stafford graduate, graduate PLUS, and parent PLUS loans in every year over the next decade, and beginning in 2016 will make even more profit from them than had been projected under prior law.  Note that CBO does not separate estimates for unsubsidized loans to undergraduate students versus graduate students, so the unsubsidized line understates the profits CBO is projecting from Stafford graduate loans.
  • That the government will still profit off of subsidized Stafford undergraduate loans for the next two years (but less so than if the rates had doubled to 6.8%), after which subsidized loans will require a subsidy that is equal to or greater than the subsidy under prior law.

Ultimately, these estimates underscore the increased profits projected from federal student loans under the new law as well as the shift in costs to students starting a few years from now, especially graduate students and parents of undergraduates.

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