The currently proposed cut to the Competitive Cal Grant program would disproportionately affect community college students, who make up 73% of the program’s recipients. While the legislature has demonstrated its commitment to these students by keeping the program in their own version of the budget, its fate will remain unclear until Governor Schwarzenegger signs a budget, in late June at the earliest. Students who stand to lose their grants under the current proposal tend to be older, with lower incomes and higher GPAs than other Cal Grant recipients. As a result of their age, many are no longer eligible for the Entitlement Cal Grant which requires that one must have graduated from high school within the past year.
Over 69,000 financially eligible students applied for a Competitive Cal Grant by the March 2 deadline this year, and around 12,000 were tentatively awarded one. The California Student Aid Commission recently sent these recipients a postcard indicating that they may not receive their award due to the proposed budget cuts.
We recently heard from one Competitive Cal Grant recipient who had received this postcard but was confused about what it meant for her. After being rejected for a competitive grant last year – as five out of six eligible recipients are – this woman, a single mother of five who had previously gone on welfare to care for her child who was ill with cancer, was finally able to pursue her dream of a higher education.
But how can this hardworking, responsible woman make informed decisions about college if she doesn’t know how much aid she can expect to receive? How does she know whether to reduce her work hours, make childcare arrangements, or put down a deposit at the college she wishes to attend? All of this begs the question about the strength of the state's commitment to higher education and helping people improve their lives and the lives of their children by increasing their education and skills. And as this woman states quite eloquently, not only will her children’s lives improve if she is able to get an education, but the state will save money if she is able to exit the welfare system.
This woman’s story clearly illustrates students', and particularly non-traditional students', need for timely, clear, and accurate information about financial aid to make good decisions about college-going choices. For $57 million in state savings, we're taking this ability away from 12,000 would-be college-bound students who, as more highly educated individuals, are likely to give back to the state and their families in many ways as residents, employees, and parents. The stakes are too high to play budget roulette with California's future.
]]>Vassar College's plan to replace loans with grants for students with family incomes below $60,000 was the subject of several newspaper articles last week.
Meanwhile, the University of Arizona is implementing its "Arizona Assurance," first announced in early November, to replace loans with grants for students with family incomes below $42,400. Unlike Vassar's, the Arizona initiative has not attracted much attention from major media in the last four months.
This disparity in coverage is puzzling, considering the potential impacts of the two programs: federal data show that 428 applicants for financial aid at Vassar met the income criterion of the college’s new policy in 2006-07. At Arizona, that number was 4,281 – a tenfold difference that puts the absence of public institutions from the mainstream discussion of no- and low-loan announcements into glaring perspective.
Financial aid pledges to limit the use of loans in financial aid at elite private colleges are significant. They represent real savings for some families, and a mounting consensus that an unmanageable debt burden is unacceptable. But policymakers and the media should not forget that students with family incomes below $60,000 are much more likely to attend public colleges and universities than private ones – at a rate of six to one in 2003-04 (the last year for which reliable data of this sort is available).
The University of Arizona and other public institutions that have taken steps to reduce student debt burdens for low-income students deserve due credit. See here for a full list of institutions – public and private – that have instituted financial aid pledges.
We now have two such tests, me and a colleague. My colleague got quotes from seven lenders two years ago. This month she applied again to those same lenders. The results: four offered her a lower rate than two years ago, one offered a higher rate, one rejected her, and one had suspended operations. Combined with my results, this very small sample suggests that rates are unchanged or even down for people with good credit.
There’s another way to look at this, though: What was the lowest rate my colleague found two years ago compared to the lowest offer now? By that analysis, she would pay a rate one-tenth of a percentage point higher now than two years ago. (That’s because the one rate that had gone up was the one that was the lowest before). An increase, but a very small one.
Here are the details of my colleague’s loan offers. Two years ago (April 2006) My Rich Uncle offered her a rate of LIBOR plus 2.65 percentage points; now (March 2008) the rate is LIBOR plus 4.0, an increase of 1.35. In contrast, Access Group offered her the lowest rate this time around (LIBOR plus 2.75), a full 1.2 percentage points lower than that company’s offer two years ago. The rates from Bank of America, Sallie Mae, and Citibank had all dropped by one to two tenths of a percent. Education Finance Partners mysteriously denied her a loan this time, suggesting a co-borrower, while Loan to Learn has shut down its operations.
]]>Nonetheless, I persevered and got some actual interest rate and fee quotes, and the promissory notes to go along with them.
With all the doomsday stories about the credit crunch, we decided it was time to see if we could confirm that even someone with good credit (still me, despite tempting fate with all those loan applications) would have a tougher time getting a loan or would face higher charges. So last week I went back to two of the lenders who had offered me loans last year, National
City and Suntrust. I plugged in the same loan amount, degree program, and other details.
Their responses seemed to take a day or two longer than last year, which may be a result of some of the layoffs in the industry. But both of them got back to me with rate quotes and promissory notes. The rate at National City was higher than last year, by the equivalent of about half of one percentage point (0.25 higher interest rate, 3.5% higher fee, 20-year term). But the rate at Suntrust was exactly the same as last year: the one-month LIBOR index plus 2.5 percentage points, with no fee.
Now I'll see if I've ruined my credit rating by applying for these loans. Then I'll be able to test whether someone with bad credit can get a private loan. (Fortunately, even if my credit has been destroyed, I can always get Federal Stafford Loans because they require no credit check).
]]>UPDATE: We’ve looked more deeply into the issue of community college loan program participation since this post was published. Please see the issue brief, Denied, for a more thorough analysis of this issue.
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No one wants students to borrow unnecessarily or to borrow too much, but students who do need and want to borrow should be able to do so in the safest way possible. That is why the federal guaranteed student loan programs were created. The federal loan programs are entitlements, meaning that they were designed to be available to all students who apply for loans.
Sure, loans are not as desirable as grants, but these aren't just any old loans. As one California community college financial aid administrator explains federal loan aid to students: "See what happens if you go into your bank and ask for a loan at the same fixed interest rate of the federal student loans. Explain that you don’t want to pay it back for a few years – or be charged interest in the meantime. And while you're at it, you want to be able to delay your payments in the future if you ever hit hard times."
Clearly, the federal loan programs provide a more generous and safe way to finance an education than private student loans that offer none of these same benefits. But what about the colleges that don’t provide access to federal student loans? In our recent report, Green Lights and Red Tape, we documented the number of California community colleges that do not participate in federal loan programs, and questioned the decision to restrict access to this important source of financial aid.
Looking at community colleges nationally, it is evident that this isn’t just happening in California: in ten states, half or more of community colleges do not provide access to federal student loans!
Some colleges withdraw from the federal loan programs because too many former students have defaulted on their loans. There is a danger that excessively high default rates over several years can jeopardize a school’s ability to offer all federal aid, including grants. But under current rules, this is not an imminent threat to most community colleges. The vast majority of community colleges do offer loans and adequately manage their default rates, which suggests that withdrawal from the programs is an unnecessary precaution.
Default rates are not the only rationale for restricting borrowing: financial aid offices often cite the need to protect students from their own choices. Their students, you see, may not fully understand the implications of borrowing. Some students, they explain, aren’t committed enough to their education to finance it through credit. We do not doubt for a minute that these sentiments reflect real aid office experiences and challenges. But if it's protection that students need, why take away the safest borrowing option, inevitably driving some towards risky private loans and credit card debt?
Students and families rely upon college financial aid offices to provide informed advice about how to finance a college education. What should they make of statements like this (from a community college financial aid office’s web site), a typical example of how non-participating colleges address loan aid?
"Currently, our institution does not participate in the federal student loan program; however, you can independently get a private loan or non-certified loan to help pay for your educational expenses if you meet the lender’s requirements."
This isn't protecting high-risk students; it's throwing them to the wolves. Students and families trust college financial aid offices to provide informed advice about how to finance a college education. Neither this message nor the restriction of financial aid options helps the low-income and high-risk borrowers who financial aid offices serve.
Fast forward to now. I’ve been working at the Institute for four months, and since I've been here, learning about the misleading marketing practices of some lenders has prevented me from becoming a victim. I know that it’s not a good idea for my roommate to cash the check he received in the mail as an enticement to consolidate his student loans, but others might not be so aware.
A college degree does not equal a B.A. in Common Sense, much less Financial Literacy. While the entrance and exit counseling that financial aid offices provide to borrowers during college orientation, and just before graduation does not fully prepare most students for the onslaught of direct marketing they will receive about student loans, or all the decisions they’ll need to make during repayment.
New York Attorney General Andrew Cuomo's Direct Marketing Code of Conduct, would curtail many of these issues. It would prevent lenders from misrepresenting themselves as the government or as a student’s current lender. It also mandates that lenders mush inform borrowers of their federal loan options before taking out high interest private loans. Figuring out what to do with the rest of your life is surprisingly time consuming, so a little extra help from Congress would be a greatly appreciated protection on behalf of graduates everywhere.
Wrong. We're glad that people are thinking about ways to make college affordable, but like the music club that offers you ten "free" CDs but charges an arm and a leg for shipping and handling costs, these proposals aren’t all they’re cracked up to be. Average annual college costs at a community college add up to more than $12,000 after you factor in books, transportation, room and board, and other expenses (College Board). Tuition charges, which would be eliminated by these "free college" proposals, are only 18% of costs for a typical community college student (or only 4% in California, with the largest community college system in the country). While no college student would turn down free tuition, the price of textbooks and other educational expenses could leave students scrambling to cover the costs of "free" college.
The reality is that a student drawn in by the promise of free college is less likely to consider and apply for federal and state aid. After all, who needs aid to go to college if it’s supposed to be free? They may think they’re already receiving aid. A needy community college student with grant aid to cover tuition plus other expenses is likely in a much better position than the same student with free tuition, but no extra aid.
The message of "free" college is attractive, and we’re glad that national leaders are getting serious about making college affordable. But false promises can be hurtful if they serve to get students in the door without a way to succeed. The best way to make college free is to address true student costs and financial need by investing in financial aid for those who can’t afford it.
"Ideally, I'd like to see lenders disclose the mappings from credit scores to their rate tiers and not just the tiers themselves. Add a FICO Score Range column to your table. The lenders insist that they cannot or will not do this voluntarily because it reveals competitive information. But it's really all about obscuring the mapping from borrower characteristics to rates. Yes, if lenders had to publish their tiering, there'd be more competition. But isn't that the point? If lender X knows that lender Y's cutoff for LIBOR + 2.0% is FICO 750, lender X can potentially undercut with LIBOR + 1.8% at FICO 760. By making the mapping opaque, they minimize the opportunity for competition. But, frankly, it also probably has a lot to do with making it harder for borrowers to shop around by forcing them to apply to obtain rate information. Lenders don't want clear information because student loans are a commodity, and if they let it behave like one, supply and demand will drive down prices."
"It's especially egregious when a state agency protests against releasing detailed pricing models for competitive reasons. What they're saying is that if they release the data, their competitors will be able to undercut them on price. Why is that a problem? Either it will force ISLLC to cut prices, or their borrowers will go elsewhere to get lower prices. Either way ISLLC's mission to enable students to pay for college is met. Of course, more likely ISLLC is not adequately aligning pricing with cost, profiting from some students to subsidize others, and so will be prone to price competition on them. But the real problem is you have agencies thinking about profits first and public benefit second."
The budget stalemate in Sacramento is about to have serious repercussions for new and returning college students in California. Approximately 266,000 students are expected to receive Cal Grants to help cover fees, books, dorm costs and other expenses, but the agency that administers the Cal Grant will not have the funds for the scholarships until--unless--the state budget is approved. And with classes starting in the next couple weeks, it looks unlikely that this will happen in time to help students with initial college expenses.
We contacted several financial aid offices throughout the state to see how colleges were handling this, and it appears that the approaches vary in the different segments. At the University of California and some campuses in the California State University system, the colleges are dipping into other resources to front the aid with no discernable difference to students, at least in the short term. At other CSUs, fees covered by Cal Grants are not an issue because the college can allow the student to pay later, when the Cal Grant money arrives. However, the $1,551 that helps pay for textbooks, room and board, and other educational costs will not be dispersed. And it looks like community college recipients, whose only state grant funds come from the books-and-rent portion of Cal Grant B, won’t be receiving any Cal Grant money anytime soon.
These Cal Grant B recipients will then be most affected by the budget crisis, and three out of four of them attend a community college (45% of all Cal Grant Bs) or a CSU (29%) – the systems with the least resources to help tide students over until grant money arrives.
We estimate that as many as 137,000 students in these two segments alone may be impacted by this situation. Recent high school graduates in this population have an average family income of $20,573 for a family of 4. Older Cal Grant B recipients are even needier, with an average family income of $14,322 for a family of 3.
These are not students who can simply make ends meet without the grants designed to help make college accessible to them. At best, the inability to purchase required textbooks and supplies early in the term means that students will be unable to keep up in class; at worst, they may drop out of college without having had a fighting chance to succeed.
Our students deserve better.
Private or alternative loans comprise a growing share of student loans, despite being more costly than federal student loans. Students and parents are often unaware of the differences between private and federal loans, and many borrowers don’t know which they have until they enter repayment. Unfortunately, despite required informational sessions about federal loans, the majority of college financial aid offices are not doing much to educate students about private loans.
The National Association of Financial Aid Administrators (NASFAA) recently conducted a survey of how financial aid offices discuss alternative loans with their students, results of which can be found in their magazine, Student Aid Transcript. The survey results showed that 63% of financial aid offices do not address alternative loans at all during entrance and exit counseling, the information sessions required when federal loans are taken out and again when the student leaves school. And while 58% of financial aid offices do provide more information about financial planning and debt management than they are required to, only 25% offer in-depth counseling on alternative loans specifically.
Barnard College recently became part of this minority by requiring students or parents who apply for a private loan to talk with the financial aid office before Barnard will certify a students' enrollment (and access to the loan). The goal of these conversations was not to discourage people from taking out private loans, but just to be sure that they understood the differences, cost, and potential consequences involved.
Still, this simple policy change reduced alternative loan volume by 73% in one year. The college found that many who initially wanted an alternative loan were not aware of the associated risks and interest rates, and had not fully considered other viable options. Such a huge drop in private loan volume suggests that the students who were initially drawn to these loans might not have really needed them.
Preventing unnecessary and risky borrowing is good for students, and should be a goal of all financial aid counselors. If the drop in alternative loan volume experienced by Barnard College is anything near the potential alternative loan decreases possible at other colleges, the 73 of college financial aid offices that do not currently guide students through these decisions should consider doing so.
These numbers, and the differences between them, would of course be even larger if you extend repayment beyond the 10 years used in this example. In an uncertain economy, these examples tell you just how valuable that fixed 6.8% maximum interest rate is on federal student loans (and a maximum of 8.5% on parent loans), whether they carry the "subsidized" moniker or not.
"It is like the white house on the top of the hill," a staff member I interviewed at a community college said to describe the way many Latino / Hispanic students and their families view financial aid. The idea of receiving a free scholarship or financial assistance that does not need to be repaid seems too good to be true. Consequently, sometimes students do not apply for the financial aid they are eligible for.
There are other cultural factors for Latinos that can contribute to difficulties securing financial aid services and become impediments to college access. Some of these include: fear of debt; mistrust of lenders; and conflicts between family financial obligations and educational aspirations. While Latinos generally have a strong commitment to education, many believe that if you can't afford to pay for it up front, you can't attend. Such assumptions, along with a lack of awareness in the higher education sector about other cultural differences, make college seem unattainable to students who might otherwise be able to attend. The Los Angeles Times published an excellent story on this phenomenon in January 2007.
Attention to the challenges faced by Latinos in higher education is beginning to grow in the college access field. The Lumina Foundation just completed an important dynamic rich media report and web site on access and success for Latinos. Excelencia in Education also recently released survey results on enrollment and attainment for Latino students. The Chicano Studies Research Center at the University of California at Los Angeles released a report at the beginning of this month on the "mismatch" between Latino students’ aspirations and experiences titled, "An Examination of Latina/o Transfer Students in California's Postsecondary Institutions."
At the American Association of Hispanics in Higher Education, held in Orange County California in March 2007, Mari Luna De La Rosa and I presented The Strategy of Debt: How Hispanic Students Pay for College.This presentation introduced financial aid data and cultural factors that affect how Hispanic students use available aid. In an interactive presentation, we heard the perspectives of financial aid service providers and college administrators, highlighting the need to be aware of and responsive to cultural differences in financial aid service delivery.
The presentation was well-attended and received, demonstrating the need for dissemination of information that shapes understanding of financial aid among different groups. Given the debt aversion that exists among Hispanic students, and the resulting impact on college access, the Institute will explore how to better inform Hispanic students, families and administrators about college costs, debt, and the financing of higher education. ]]>
Tuition discounting is the practice of using institutional aid to adjust tuition levels to best match what students and families are willing to pay, a widespread trend that is tracked by annual reports from the College Board.
We recently used publicly-available federal data to get a sense of the phenomenon at private four-year institutions, and were surprised to find that almost half of private, four-year institutions with at least 1,000 students provide discounts to 90% or more of their students. Four out of five colleges (83%) provided discounts to at least half of their students. In many cases, the average discount was quite large.
What does this mean? Actual discounting strategies vary dramatically between colleges, and the numbers above do not distinguish between need-based and merit-based aid. Some colleges use their institutional aid to help meet the financial need of low-income students, increasing access; others use it to attract students with less or no need who serve to maximize the prestige of the institution. Because we cannot distinguish between pricing and aid strategies at individual colleges, we cannot say for sure.
But one recent analysis suggests that the overall picture is troubling: institutional aid, a larger source of financial aid than state and federal aid combined, goes to higher-income students at rates far exceeding those of federal and state aid. For dependent students, 46% of institutional need-based grant funding went to those with family income above the median, compared to 3% of federal aid.
Why is this interesting? These issues bring up a number of questions:
• When institutional aid ($10 billion) far outweighs federal and state aid combined ($7 billion), what does it mean for college access that institutional aid tilts to those with higher incomes? (NPSAS, dependent students only)
• What does 'need-based' aid mean when it’s almost evenly distributed across all income levels?
• What is the point of tuition increases when almost all students receive a discount? Does the "sticker shock" of high tuition scare low-income students away before they learn about available discounts?
• Should detailed institution-level data on discounting practices be made public?
Other resources on this topic:
Tuition Discounting, Not Just a Private College Practice, College Board
Tuition Discounting and Prudent Enrollment Management, Association of Governing Boards