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In his State of the Union address, President Obama called on Congress to postpone for one year the scheduled increase in student loan interest rates for loans issued for the upcoming school year. Without congressional action, interest rates on Subsidized Stafford loans for undergraduates will increase from 3.4 percent to 6.8 percent for newly issued loans. The president’s fiscal year 2013 budget, released last week, reiterated the proposal to postpone the rate increase.

The rate increase is the product of a 2006 Democratic campaign promise to cut student loan interest rates in half. Due to the cost of the original proposal, however, Congress limited the temporary 3.4 percent interest rate to a subset of student loans. The low 3.4 percent rate – compared to the 6.8 percent rate charged on Unsubsidized Stafford Loans for undergraduates, the most widely available federal student loans to all students regardless of income – is available only to undergraduate borrowers who qualify for Subsidized Stafford loans. To learn more about the history of the interest rates and the student loan program, check out this recently released Federal Education Budget Project issue brief.

As the debate over extending the current interest rate policy picks up, it’s worth examining which students actually qualify for the lower interest rate. This is especially important given that ultimately Congress granted the lower rate to only some borrowers to reduce the costs of the policy, instead of making it available to all borrowers as originally intended. Presumably, Congress limited the rate cut to undergraduate Subsidized Stafford recipients because they must meet a means test and are therefore the most deserving of additional benefits.

Yet data from a national survey – the National Postsecondary Student Aid Study (NPSAS:08) – cited in a Congressional Research Service memo and the president’s fiscal year 2013 budget reveals that “students across many income levels may be eligible for Stafford Loans depending on a number of financial considerations.” In fact, a review of these data shows that about a quarter of all Subsidized Stafford loans made to dependent undergraduate students are provided to families with gross incomes of $80,000 and above. About 13 percent of the loans are made to dependent borrowers from families with incomes of $100,000 and higher. These figures are in stark contrast to family income levels of students who receive Pell Grants – those grants are overwhelming awarded to the lowest income families.

While the needs-based formula that sets eligibility for Subsidized Stafford loans takes total family income into account, it also adjusts for cost of attendance. This means that middle and upper income borrowers can also qualify for these loans if they attend institutions with sufficiently high costs. It’s clear from the data that this provision means that Subsidized Stafford loans aren’t targeted to just students from low income families. As a result, the lower 3.4 percent interest rates the president has urged Congress to extend benefit borrowers from all income levels. That means the onus is on those who advocate extending the existing two-tiered interest rate policy to explain why the government should subsidize some middle and high income students twice as much as others. Sure, this system may cost less than providing the 3.4 interest rate to all borrowers, but is it fair? Is it good policy?

Countless journalists, advocates, and lobbyists claim that the government profits when students default on their federal loans. But this week’s release of President Obama’s fiscal year 2013 budget brings further evidence that nothing could be further from the truth. The budget includes a new section that explains more fully the estimated recovery rates on defaulted federal student loans. The recovery rate refers to the percentage of defaulted loan volume the government expects to eventually collect.

This newly-released information also contradicts those who argue that the government doesn’t bear any default risk in making student loans. That’s exactly the argument that a number of readers have made criticizing a recent Federal Education Budget Project (Ed Money Watch’s parent initiative) issue brief that concludes that the current fixed 6.8 percent interest rate on federal student loans isn’t a money-maker for the government, due in part to the cost of loan defaults.

Click here to read this full post on Ed Money Watch...

President Barack Obama submitted his fourth budget request to Congress on February 13th, 2012. The detailed budget request includes proposed funding levels for federal programs and agencies in aggregate for the upcoming ten fiscal years, and specific fiscal year 2013 funding levels for individual programs subject to appropriations. Congress will use the president's budget request to inform its consideration of tax and spending legislation later this year, including the fiscal year 2013 appropriations bill that will set specific funding levels for federal education programs. Fiscal year 2013 begins October 1, 2012.

In August of 2011, Congress signed the Budget Control Act which set appropriations funding limits for 2013 at $1.047 trillion (excludes funding for overseas military operations, emergencies, and other adjustments). This is $4 billion above enacted 2012 appropriations. That law also established a congressional committee to draft legislation that would reduce the deficit over nine years. The committee failed to meet its goals last year, triggering a pending “sequester” (across-the-board spending cuts) of the yet-to-be enacted fiscal year 2013 appropriations. While the pending sequester is scheduled under current law, the president’s fiscal year 2013 budget request proposes that Congress pass legislation to turn it off, maintaining the appropriations funding limit of $1.047 trillion for fiscal year 2013.  

Despite the minimal increase in total appropriations funding allowed under the Budget Control Act (pre-sequestration), the administration has proposed an overall increase for education programs for fiscal year 2013. In fact, under the president's proposal, the U.S. Department of Education would receive the largest increase (in absolute terms) in discretionary funding from fiscal year 2012 levels compared to any other non-security domestic agency.

The administration has proposed a $69.8 billion budget for education programs subject to the annual appropriations process, up from $68.1 billion in 2012. The increase is due to moderate funding increases for several programs, including Race to the Top, Work-Study grants, and the Teacher Incentive Fund. Other key programs, such as Title I Part A grants to local educational agencies, Individuals with Disabilities Education Act Part B grants to states, and Pell Grants would be funded at 2012 levels. In addition, the president is requesting $62.9 billion in fiscal year 2012 for education stimulus spending under his American Jobs Act proposal outlined in 2011. This funding is proposed in addition to the enacted fiscal year 2012 appropriations totaling $68.1 billion for the Department of Education.

The Federal Education Budget Project this week released an issue brief that provides a summary and analysis of the president's fiscal year 2013 education budget request.

Click here to view the full report.

President Barack Obama submitted his fourth budget request to Congress on February 13th, 2012. The detailed budget request includes proposed funding levels for federal programs and agencies in aggregate for the upcoming ten fiscal years, and specific fiscal year 2013 funding levels for individual programs subject to appropriations. Congress will use the president's budget request to inform its consideration of tax and spending legislation later this year, including the fiscal year 2013 appropriations bill that will set specific funding levels for federal education programs. Fiscal year 2013 begins October 1, 2012.

In August of 2011, Congress signed the Budget Control Act which set appropriations funding limits for 2013 at $1.047 trillion (excludes funding for overseas military operations, emergencies, and other adjustments). This is $4 billion above enacted 2012 appropriations. That law also established a congressional committee to draft legislation that would reduce the deficit over nine years. The committee failed to meet its goals last year, triggering a pending “sequester” (across-the-board spending cuts) of the yet-to-be enacted fiscal year 2013 appropriations. While the pending sequester is scheduled under current law, the president’s fiscal year 2013 budget request proposes that Congress pass legislation to turn it off, maintaining the appropriations funding limit of $1.047 trillion for fiscal year 2013.  

Despite the minimal increase in total appropriations funding allowed under the Budget Control Act (pre-sequestration), the administration has proposed an overall increase for education programs for fiscal year 2013. In fact, under the president's proposal, the U.S. Department of Education would receive the largest increase (in absolute terms) in discretionary funding from fiscal year 2012 levels compared to any other non-security domestic agency.

The administration has proposed a $69.8 billion budget for education programs subject to the annual appropriations process, up from $68.1 billion in 2012. The increase is due to moderate funding increases for several programs, including Race to the Top, Work-Study grants, and the Teacher Incentive Fund. Other key programs, such as Title I Part A grants to local educational agencies, Individuals with Disabilities Education Act Part B grants to states, and Pell Grants would be funded at 2012 levels. In addition, the president is requesting $62.9 billion in fiscal year 2012 for education stimulus spending under his American Jobs Act proposal outlined in 2011. This funding is proposed in addition to the enacted fiscal year 2012 appropriations totaling $68.1 billion for the Department of Education.

This issue brief provides a summary and analysis of the president's fiscal year 2013 education budget request.

Click here to view the full report.

President Barack Obama submitted his third budget request to Congress on February 13th, 2012. The budget request includes proposed funding levels for all federal programs and agencies in aggregate for the upcoming 10 fiscal years, and specific fiscal year 2013 funding levels for programs subject to the annual appropriations process.

It is important to remember that the president's budget request is a policy and budget proposal, but not legislation or law. Actual fiscal year 2013 funding levels for nearly all federal education programs will be determined through the congressional appropriations process that Congress aims to complete by the start of the new fiscal year, which begins October 1st, 2012. Policy changes and funding levels that the president proposes for education programs not funded through appropriations process (i.e. mandatory programs) are also subject to congressional approval.

In an effort to heighten the quality of debate on federal education policy, the New America Foundation's Federal Education Budget Project has reviewed the president's proposals and generated a list of key questions policymakers, the media, stakeholder groups, and the public should ask about the proposals.

Click here to view the full PDF.

In his State of the Union address, President Obama called on Congress to prevent federal student loan interest rates from doubling later this year. This is the culmination of decades of legislative changes to the federal student loan program. Few people are aware of the policies that led to the pending student loan interest rate increase and many question whether the 6.8 percent fixed interest rate charged on the most widely-available loans provides a real benefit to students.

The Federal Education Budget Project today released an issue brief regarding federal student loan interest rates. This issue brief details the history of interest rates on federal loans, including the decisions that led to today’s fixed rates and the pending rate increase. It also examines the popular argument that current rates are unfavorable for borrowers and disputes the claim that student loans earn revenue for the government. 

The timeline below shows the interest rates on federal student loans taken out in each year, as well as the Congressional action that led to these interest rates. Roll over the points in the graph for more information.

In his State of the Union address, President Obama called on Congress to prevent federal student loan interest rates from doubling later this year. This is the culmination of decades of legislative changes to the federal student loan program. Few people are aware of the policies that led to the pending student loan interest rate increase and many question whether the 6.8 percent fixed interest rate charged on the most widely-available loans provides a real benefit to students.

The Federal Education Budget Project today released an issue brief regarding federal student loan interest rates. This issue brief details the history of interest rates on federal loans, including the decisions that led to today’s fixed rates and the pending rate increase. It also examines the popular argument that current rates are unfavorable for borrowers and disputes the claim that student loans earn revenue for the government. 

The timeline below shows the interest rates on federal student loans taken out in each year, as well as the Congressional action that led to these interest rates. Roll over the points in the graph for more information.

Note: This post was updated on 02/02/2012 with new cost estimate information.

Last week President Obama called on Congress in his State of the Union address “to stop the interest rates on student loans from doubling in July.” That line surely left a lot of people (Washington’s education policy circles not included) wondering what in the world the president was talking about. Is Congress really planning to double the interest rate on federal student loans this summer? The answer is yes, no, and maybe. In other words, it’s complicated. What’s more, a newly released estimate from the Congressional Budget Office shows that the cost of the president’s request will weigh heavily in any debate on the proposal.

Interest rates on Unsubsidized Stafford student loans, which are federal loans available to all students, issued for this academic year (2011-12) are fixed at 6.8 percent. The same rate has been charged on these loans issued since July of 2006. However, the interest rate is fixed at 3.4 percent for a subset of federal student loans – Subsidized Stafford loans for lower-income undergraduate students – issued this academic year. That rate is only temporarily available, and beginning in the 2012-13 academic year, the rate on that subset of loans will be the same as for Unsubsidized Stafford loans, 6.8 percent. So yes, rates are set to double for newly issued loans made to a subset of undergraduates after July 1, 2012.

The seeds for the coming rate change were planted way back in 2006. In their 2006 campaign platform, A New Direction for America, House Democrats promised to “slash interest rates on college loans in half to 3.4 percent for students and to 4.25 percent for parents.” By the end of 2007, they had (technically) made good on their promise. But just like those credit card offers that promise a low interest rate, the rate cut was enacted with important details listed only in the fine print.

Once lawmakers realized that their campaign promise would, according to the Congressional Budget Office, cost $133 billion over ten years (a substantial sum), they opted to scale it back dramatically. That’s where the fine print comes in.

To reduce the cost of the rate cut, Congress cut rates in half only for a subset of loans – Subsidized Stafford loans – which are available only to borrowers from families with middle and lower incomes. While graduate and undergraduate students were previously eligible for Subsidized Stafford loans, the law made only undergraduate students eligible for the rate cut. It left rates unchanged for the larger Unsubsidized Stafford loan program as well as for PLUS loans for parents and graduate students despite their inclusion in the campaign pledge. Even so, those caveats still didn’t get the cost of the proposal down to the size lawmakers wanted.

So to further reduce costs, Congress slowly phased in the interest rate cut over four years and then turned it off such that only loans issued for the 2011-12 school year would carry rates of 3.4 percent (half of 6.8 percent). Subsidized Stafford loans issued to undergraduate students after that year would again carry a fixed rate of 6.8 percent. In short, the 2007 law “cut interest rates in half” for loans issued only this academic year – and only for certain undergraduate students.

As President Obama demonstrated in his address last week, the rate cut issue will loom large this election year and Congress will be under a lot of pressure to stave off the rate hike. Of course, if lawmakers thought the 3.4 percent rate was too costly to make permanent back in 2007 at $3.0 billion a year, it won’t be any cheaper to do it this time around. In fact, it will be a lot more expensive. An early estimate from the Congressional Budget Office says extending the rate cut for one year will cost about $5.9 billion and $45 billion to extend it for ten years.

That’s why President Obama has requested only a one-year extension of the rate cut. Sadly, that’s exactly the type of shortsighted policymaking that got us here in the first place.

In the Budget Control Act of 2011 (aka the debt ceiling agreement) Congress provided the latest round of supplemental funding for the Pell Grant program. The law included $10 billion for fiscal year 2012 for the program and another $7 billion for fiscal year 2013. The law offset the cost of that one-time supplemental funding by eliminating a type of federal student loan available to graduate and professional students — Subsidized Stafford loans. These loans will no longer be issued to borrowers as of July 1, 2012. While this is old news to some, it’s come to our attention that Ed Money Watch posts and Federal Education Budget Project issue briefs do not fully explain an important nuance in what this policy change means for graduate students. Let’s set the record straight.

Click here to read the full post on Ed Money Watch...

Congress completed the fiscal year 2012 appropriations process on December 17th, 2011, finalizing annual funding for federal education programs through September 30, 2012 at $68.1 billion, down $233 million from the prior year. It is the first year since 2007 that Congress did not increase total appropriations for education programs.

Congress is finally poised to vote on an omnibus spending bill that covers multiple federal agencies and finalizes fiscal year 2012 funding for the U.S. Department of Education. The bill, which is posted on the House Rules Committee’s website here, is expected to pass. As we wrote earlier this week, the pending omnibus bill funds the Pell Grant program at a maximum grant of $5,550 in part by tweaking  eligibility rules for the program and by reallocating subsidies for student loans.  That latter provision was part of a Senate proposal floated earlier this year and has undergone a rather odd mutation in the final bill.

Specifically, the provision ends the interest-free benefit on Subsidized Stafford loans during an undergraduate borrower’s six-month grace period after leaving school. This change produces savings that the pending bill then reallocates (spends) to Pell Grants in 2012 and subsequent years. The version proposed by Senate Democrats earlier this year would have permanently ended that benefit on all newly issued loans, generating some $2.9 billion in savings over five years and $6.1 billion over ten years. All of those savings would have been allocated to Pell Grants, though not all in 2012. 

The provision in the omnibus appropriations bill Congress is set to vote on also ends the grace period interest benefit, but only for loans issued between July 1, 2012 and July 1, 2014. Loans issued after those dates would again qualify for the benefit. A temporary repeal of the benefit saves only about half as much over five years as a permanent repeal and saves nothing in later years. Subsequently, it allows for less spending to be reallocated to Pell Grants.

From a student’s point of view, the pending change is likely to sow a bit more confusion in an already-confusing set of loan terms and repayment rules. For example, a borrower who begins a four-year program in 2012 and borrows only Subsidized Stafford loans will have some loans that qualify for the 6-month grace period benefit and some that do not.

Some observers will defend the temporary repeal of the interest-free benefit as a way to get just enough savings to shore of the Pell Grant program in the near term without reducing student loan benefits any more than necessary in future years. In other words, the policy is meant to take only what is immediately needed. It’s also likely that the Senate proposed to repeal the interest benefit reluctantly earlier this year, and probably felt it had to pull back from a full repeal after conceding to the House on some Pell Grant eligibility changes in the final omnibus bill.

Regardless of the negotiating strategy, or how the short term funding compromises stacked up, the temporary repeal is bad policy. Congress should either leave it as is, and find savings to support Pell Grants elsewhere, or repeal it permanently. Besides, Congress is going to need all of the savings from a permanent repeal, and then some, when the temporary emergency funding for Pell Grants (including the 2009 stimulus, the 2010 Student Aid and Fiscal Responsibility Act, the repeal of year-round Pell Grants, and the 2011 Budget Control Act) finally comes to an end.

In 2014, Congress will need to appropriate some $31 billion to maintain the maximum Pell grant. That will make this year’s heroic effort to appropriate $22.5 billion feel like a very light lift. Congress should do what it can now to shore up the Pell Grant program for the long term.