Pell Grants

New Report: Rebalancing Resources and Incentives in Federal Student Aid

January 29, 2013
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New America's Education Policy Program has a new report out today that presents a comprehensive package of reforms to the existing federal student aid system for higher education. The Education team makes a compelling case for the need for reform:

In short, the present federal financial aid system is no lon­ger up to the demands of the times. It was built in a differ­ent era and has evolved haphazardly over the decades, in response to fiscal exigency and interest group pressures. It has become unwieldy, inefficient, and overly complicated, in a way that wastes taxpayer dollars and fails to provide institutions and students with the resources and incentives they need to complete high-quality college degrees....Taxpayers and students need an aid system that is simpler, more understandable, more effective, and fairer.

In particular, they propose reforms that dramatically strengthen the Pell Grant program, simplify the federal student loan program, eliminate education tax breaks which currently favor higher-income families, boost programs that support disadvantaged middle and high school students, and make institutions of higher education more accountable to both students and taxpayers.

Rebalancing Resources and Incentives in Federal Student Aid

  • By
  • Stephen Burd,
  • Kevin Carey,
  • Jason Delisle,
  • Rachel Fishman,
  • Alex Holt,
  • Amy Laitinen,
  • Clare McCann,
  • New America Foundation
January 29, 2013

EXECUTIVE SUMMARY

The federal financial aid system is no longer up to today’s demands. Built in a different era, its haphazard evolution over the decades has made it inefficient, poorly targeted, and overly complicated. With the need for higher education never greater and college growing increasingly unaffordable, students deserve a streamlined aid system that is more understandable, effective, and fair.

An Overview of Our Student Aid Reform Proposals

January 30, 2013

[The New America Foundation’s Education Policy Program on Tuesday released a comprehensive package of policy proposals that would provide an overhaul of federal financial aid. The report, Rebalancing Resources and Incentives in Federal Student Aid, calls for specific changes to grants, loans, tax benefits, college outreach programs and federal regulations to provide more direct aid to the lowest-income students, while strengthening accountability for institutions of higher education to ensure that more students are able to earn affordable, high-quality credentials. Yesterday, we explained why student aid reform is needed. In today's post, we provide an overview of our proposals.]

In Rebalancing Resources and Incentives in Federal Student Aid, we offer more than 30 specific policy recommenda­tions that are designed to create a streamlined federal student aid system that is more understandable, effective, and fair. Taken together, the package of proposals in our report is budget neutral over the 10-year period from federal fiscal years 2013-2022.

Pell Grants

The Pell Grant program is the cornerstone of federal stu­dent aid. In 1972, when the program was created, a Pell Grant covered most if not all college costs for large num­bers of low-income students. But as college prices have soared over the years, the system has become less and less effective. Moreover, the program is now facing a major “funding cliff” in the 2014 fiscal year and each year there­after.

The Case for Student Aid Reform

January 29, 2013

[The New America Foundation’s Education Policy Program today released a comprehensive package of policy proposals that would provide an overhaul of federal financial aid. The report, Rebalancing Resources and Incentives in Federal Student Aid, calls for specific changes to grants, loans, tax benefits, college outreach programs and federal regulations to provide more direct aid to the lowest-income students, while strengthening accountability for institutions of higher education to ensure that more students are able to earn affordable, high-quality credentials. In today's post, we make our case for why student aid reform is needed.]

When Rhode Island Senator Claiborne Pell helped create the college student aid program that would become his legacy, American higher education looked very different than it does today. In 1972, the typical college student paid the equivalent of $526 per year in tuition and fees, in today’s dollars, to attend a public university in-state. Private college tuition was often affordable, and undergraduate borrow­ing was all but unheard-of. There were no “for-profit” colleges as we know them now. The large majority of all public support for higher education came in the form of direct appropriations to colleges and universities from states.

The world has changed since then. Profound shifts in the structure of the global economy have put a premium on high-skill jobs that require advanced credentials while many well-paying blue-collar jobs have disappeared. Students have flooded onto college campuses, in America and, increasingly, around the world. At the same time, col­leges and universities began a decades-long campaign in the early 1980s of constant price increases that continues, unabated, today. This happened in part because states, eager to cut taxes and facing rising costs for health care and public safety, reduced the portion of their budgets dedicated to higher education. At the same time, colleges competing for students and prestige ramped up spending year after year.

The Net Price Myth

November 26, 2012

[This blog post ran first at The Chronicle of Higher Education]

The concept of “net price”—what students actually pay for college after financial aid is subtracted from published tuition rates—has become increasingly important  in discussions of college affordability. It was prominently featured in last month’s annual College Board pricing report and accompanying news-media coverage, and has been promoted through tools like the U.S. Department of Education’s net-price calculator.

The fact that many students pay substantially less than sticker price is significant, and deserves to be part of the conversation. But it shouldn’t give anyone false comfort about the magnitude of the long-term college-affordability problem.

Most colleges are nonprofit and spend all the money they get, so there are three big numbers to watch here: (1) how much colleges spend per student; (2) how much money comes into the system from sources other than students; and (3) how much students and their families pay out of pocket. Colleges prefer to ignore (1) as a contributing factor to unaffordability and focus on the broadly correct argument that (2) and (3) vary inversely: If state subsidies decline or endowments take a hit, then student charges must rise in order to maintain spending. Similarly, if Pell Grants go up, then students pay less out of pocket.

That’s all generally true. But ignore (1) at your peril because college spending is the driving force behind affordability or lack thereof in the long run. External subsidies and student charges are both limited in how much they can increase over time by a combination of overall growth in economic output (particularly as it’s distributed among families of college-age students) and the political economy of government fiscal policy.

Subsidized Stafford Loans Obsolete and Regressive Due to New Income Based Repayment

November 15, 2012

Back in 2010, the National Commission on Fiscal Responsibility and Reform (aka the Simpson-Bowles commission) recommended as part of its deficit and debt reduction proposal that policymakers end the interest-free benefit on Subsidized Stafford student loans. These loans are a subset of student loans awarded to borrowers who meet an income and cost-of-attendance formula test. The proposal was met with howls from student and borrower advocates who rushed to point out that students would leave school with more debt if policymakers eliminated the interest benefit, which stops the interest clock while borrowers are enrolled in school and, in some cases, for up to three years after.

Nevertheless, upon the request of the Obama Administration, Congress ended the benefit for graduate students in 2011, and moved the money to Pell Grants. That left the benefit intact for undergraduates, but probably not for much longer. It costs a whopping $4 billion a year, while the Pell Grant needs an extra $5.8 billion next year and $8.9 billion the following year to stave off a cut in benefits.

If lawmakers end the Subsidized Stafford interest benefit for undergraduates to provide more funding for Pell Grants—and they should—expect student and borrower advocates to again argue that the changes will increase student debt burdens. Except this time, the critics will have to include a big caveat that will undermine their case.

Subsidized Stafford loans now provide regressive benefits. That is, they target benefits to borrowers earning higher incomes in repayment. That is due to the new Income-Based Repayment (IBR) plan for federal student loans that took effect this month.  

The new plan (“New IBR”) sets a borrower’s payments at 10 percent of discretionary income and forgives any debt after 20 years. Those benefits effectively make Subsidized Stafford loan benefits redundant for borrowers who earn a lower or middle income in repayment.[1] Borrowers earning higher incomes, on the other hand, will still earn benefits from Subsidized Stafford loans in the form of reduced total payments.

Here is another way to understand this point. Borrowers will leave school with higher loan balances if policymakers eliminate the interest-free benefit on Subsidized Stafford loans. However, borrowers’ monthly and total payments under IBR are based on their incomes, not loan balances, and because the repayment term is set at 20 years (loan forgiveness) regardless of loan balance, New IBR ensures that the only borrowers who make higher payments as a result of having a higher loan balance are those with higher incomes.  

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At what income level does this matter? There isn’t a magic number, but undergraduates are limited in how much federal loans they can take out. That allows us to run scenarios through the New America Foundation IBR calculator and see what borrowers will pay on their loans based on set income profiles, with and without the interest-free benefit on Subsidized Stafford loans.[2] The results are displayed in the table below.

In this analysis, we first assume the borrower’s debt is the maximum amount that a dependent undergraduate can borrow if he is 1) eligible for the full amount of Subsidized Stafford loans, plus the remaining amount of Unsubsidized Stafford loans, plus accrued interest while in school or 2) if he is eligible only for Unsubsidized Stafford loans plus accrued interest. The resulting loan balance at graduation after five years of borrowing under the first option is therefore $33,448, of which $23,000 is in Subsidized Stafford loans; and under the second, is $39,296, all in Unsubsidized Stafford loans.

Next we developed five borrower profiles, each with a different starting income and income growth rate. Borrower 1 has a starting income of $22,000 that increases by three percent every year, up to $38,577 in year 20. Borrower 2 has a starting income of $40,000 that increases by three percent every year, ending at $71,400 twenty years later. Borrower 3 has a starting income of $25,000 that increases by nine percent annually, reaching $128,542 in year 20. Borrower 4 has a starting income of $50,000 that increases by three percent every year, ending at $87,675 in year 20. Borrower 5 has a starting income of $40,000 and increases six percent each year, reaching $121,024 after twenty years.

As the table shows, under New IBR, the only borrowers who benefit from the additional benefits of Subsidized Stafford loans are those who earn a middle income right out of school, or those who eventually make a high income. Even then, the borrowers reap the benefit of a Subsidized Stafford in their last payments, not in their first years out of school. Their payments under IBR are based only on their incomes, not their loan balance, loan type or interest rate.

This brings up another key point. Not only are the added benefits of a Subsidized Stafford loan regressive, but borrowers earn the benefits in the form of a shorter repayment term—their final year(s) of repayment. Therefore, they collect a benefit when they theoretically are most able to repay.[3]

In short, with the availability of New IBR, Subsidized Stafford loans provide no additional aid to borrowers who need it most, while reducing payments for borrowers who are not struggling to repay. That should help persuade lawmakers and the student aid advocacy community that it would be prudent policy to end the Subsidized Stafford benefit and use the money instead to aid lower income college students through the Pell Grant program. The New IBR plan is now by far the most beneficial repayment plan available to low-income borrowers, so much so that it renders other, more poorly targeted benefits obsolete.

President Obama should include that policy proposal in his forthcoming budget request to Congress, citing the benefits of his administration’s New IBR as the justification for ending Subsidized Stafford loans.

There’s another lesson in here, too. Federal student aid is an incoherent mix of complex benefits and rules that overlap and cancel each other out in ways that virtually no one understands. For that we may thank the lawmakers (and the advocates who encourage them) who have added to, tweaked, and changed eligibility rules for these programs time and time again without even a hint of a broad plan. It’s time for a wholesale redesign of federal student aid.  



[1] Subsidized Stafford loans also provide a protection against “negative amortization” when borrowers repay through IBR. For three cumulative years after leaving school, any unpaid interest accrued each month on a Subsidized Stafford loan is forgiven. In other words, a borrower’s Subsidized Stafford loan balance cannot grow for up to three years. However, lower income borrowers are unlikely to benefit from this protection.

[2] The New America Foundation IBR calculator also accounts for the negative amortization benefit of Subsidized Stafford loans. For a detailed explanation of the calculator please see the New America Foundation report, Safety Net or Windfall? Examining Changes to Income-Based Repayment for Federal Student Loans.

[3] Subsidized Stafford loans will reduce the amount of loan forgiveness that a lower-income borrower ultimately receives, which thereby slightly reduces the tax liability the borrower incurs on the debt forgiven at the end of his twentieth year of repayment.

How the Pell Grant Program Overtook PreK-12 Education Programs

November 14, 2012

In 2009, President Obama and a Democratic Congress passed the American Recovery and Reinvestment Act (ARRA), an economic stimulus package that included large, one-time cash infusions for some of the federal government’s largest education programs.  But since then, Congress and the president reset funding for key PreK-12 programs back to their prior funding levels and haven’t increased it since. Meanwhile, they’ve ensured that the Pell Grant program for undergraduate students from low-income families maintained the one-time funding gains and then some. Will a second-term Obama administration continue this Pell-at-the-expense-of-everything-else policy?  First, let’s review how policymakers got here.

Under the stimulus bill, Title I funding for disadvantaged PreK-12 students grew by $10 billion.  Special education state grants under Part B of the Individuals with Disabilities Education Act (IDEA) nearly doubled, with an extra $11.3 billion, in addition to the program’s regular 2009 appropriation of $11.5 billion. And the Pell Grant program for low-income college students got a $15.6 billion add-on to its 2009 appropriation of $17.3 billion.

Since then, lawmakers have boosted the U.S. Department of Education’s budget overall by a healthy sum (especially when compared with other agencies), up from $59.2 billion in fiscal year 2008 to $68.1 billion in 2012. Amidst that healthy increase, however, lawmakers kept Title I funding and IDEA funding essentially flat.

What explains the overall funding increase? A big part of it went to Pell Grants. But there is more to the explanation. After the stimulus money had run out for other education programs, lawmakers approved four additional years of emergency supplemental funding for Pell Grants, which coincided with a separate increase to an entitlement funding stream for the program that started in 2008. The result may be the largest funding increase for any federal education program in history—while other programs remained flat.

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Here’s the kicker: That emergency supplemental funding lawmakers approved for Pell Grants will run out this year. So the program needs another infusion of funding of about $5.8 billion, according to the Congressional Budget Office, just to keep it going in its current form. The following year that figure jumps to $8.7 billion. Over the next 10 years, the total gap is $76.5 billion.

Over the coming weeks and months, it’s time for lawmakers to starting thinking about smart ways to reform the Pell Grant program and put it on a sustainable funding path—but also to ensure that the program serves low-income college students well. PreK-12 programs have a lot riding on that outcome.

Our Wish List for President Obama’s Second Term

November 7, 2012
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Now that President Obama has been reelected, and he has more time to sit back and read Higher Ed Watch, we are presenting our wish list for his second term. [And Mr. President, while you're at it, we're sure you'll enjoy our posts from last week highlighting your first term's biggest higher education hits and misses!]

Among other things, we (the authors of this post) would like to see the Obama administration do the following:

  • Develop long-term solutions for revamping the federal financial aid programs, rather than continuing to scramble to come up with stop-gap measures to shore up funding for these programs in the heat of high-stakes budget battles.
  • Finalize the financial aid shopping sheet and scorecard—and make them mandatory. Students and families need clear, consistent, useable information at key points in their decision-making process. Given that many institutions currently benefit from the lack of this information, voluntary adoption of these efforts will accomplish very little.

President Obama’s Biggest Higher Ed Misses

November 2, 2012

With the presidential election fast approaching, we are taking a closer look at President Obama’s higher education record. Yesterday, we highlighted the administration’s most significant accomplishments in this area. Today, we are examining the administration’s most significant blunders and missed opportunities.

So without further ado, here are the Obama administration’s biggest higher ed misses:

1. Fighting to Keep the 3.4% Interest Rate: Eager to woo the youth vote and tap into America’s anxiety about student debt, the Obama administration launched an all-out “don’t double my rate” PR campaign earlier this year aimed at stopping Congress from allowing the temporary 3.4 percent fixed interest rate on federally-subsidized Stafford loans to revert to 6.8 percent. Not wanting to be on the wrong side of this popular issue during an election year, Republicans and Democrats lawmakers made national headlines for their bipartisan efforts to maintain the lower rate. Largely left out of this debate, however, was any acknowledgement of how small the benefits of this fix would be: after all, it only extended the 3.4 rate for another year, only applied to a subset of new borrowers (those who qualify for subsidized Stafford loans), and only would save eligible borrowers about $9 a month. And it cost the government $6 billion. With the Pell Grant program facing a multi-billion dollar funding cliff, it’s a shame that the administration spent so much political and financial capital on a one-year gimmick that provided neither meaningful relief to financially-distressed borrowers in the short term nor to the Pell Grant program over the long haul.

President Obama’s Greatest Higher Ed Hits

November 1, 2012

With the presidential election only days away, we thought it would be a good time to take a closer look at President Obama’s higher education record. In this post, we highlight the administration’s five greatest hits. Tomorrow, we will examine the administration’s five biggest misses.

So without further ado, here are the Obama administration's most significant higher ed accomplishments:

1. Reforming Student Loans: President Obama achieved his single most significant higher education victory in March 2010 when he signed into law legislation ending the wasteful practice of subsidizing private lenders to make federal student loans. Overcoming the fierce opposition of the student loan industry, the Obama administration and Democratic Congressional leaders eliminated the Federal Family Education Loan program, which had long been racked by corruption, and shifted to 100 percent direct lending, which delivered the same federal loans to students at a much lower cost for taxpayers and without all the scandals. And despite dire warnings from the industry and its allies in Congress about the risks of moving thousands of colleges out of FFEL and into direct lending, the U.S. Department of Education pulled off the transition without disturbing even a single student’s access to federal student loans.

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