Pell Grants

According to R. Barbara Gitenstein, president of the College of New Jersey, the model financial aid award letter will not solve the college affordability problem. She’s right. It also won’t solve global warming or cure cancer since that’s not its intention either. The purpose of the model aid letter is not to rein in college costs, but to provide students with something they desperately need—clear, comparable information about their personal financial aid offers.

In an opinion piece published by both The Huffington Post and Inside Higher Ed, Gitenstein’s main argument for why a model aid letter isn’t necessary hinges on her belief that it is too similar to existing voluntary efforts:

I think we can all agree that colleges and universities should be open and honest with prospective students about the actual cost of attaining a degree, not just enrolling for a year. Providing information that allows for simple, accurate comparison of institutions is a worthwhile goal, but I believe that adding a few data points to [the Voluntary System of Accountability's (VSA) College Portrait] would be a better strategy than implementing the [model aid letter].

The VSA’s College Portrait, which was developed by a consortium of four-year, public universities, can be a helpful resource to students and families. However, as the name suggests, it is voluntary. This is a huge problem—of the more than 6,600 Title IV institutions in America, only 300 are represented in the VSA’s database. If everyone could “agree that colleges and universities should be open and honest with prospective students” regarding college costs, then the voluntary resource would include 100 percent—not five percent—of institutions. 

Today the Department of Education released the first round of its much-anticipated Gainful Employment (GE) data, giving us a peek into how programs and institutions might fare under the new regulations. These rules, which went into effect last year, are meant to address concerns about poor outcomes for students in vocational, career-focused programs that receive federal financial aid. Although institutions in all sectors (public, private, and for-profit) have “gainful employment” programs, GE was widely seen as the Department’s attempt to regulate the for-profit higher-education industry, whose students borrow federal loans and default on them at rates that are far disproportionate to their numbers.

Today’s data are informational only—they don’t result in sanctions for programs or institutions. While the data contains few surprises, they underscore the need for a more systematic approach to holding institutions that receive federal financial aid accountable for a bare minimum of outcomes.  

Last week a subcommittee in the Senate passed an appropriations bill to fund nearly all federal education programs for fiscal year 2013, which starts October 1, 2012. That isn’t big news because the details of a final bill that would be viable in both the House and Senate are contingent on some major roadblocks: It’s an election year; the Labor, Health & Human Services, and Education Appropriations bill is the most contentious funding bill; automatic, across-the-board spending cuts loom in January; and so on. The bill is even less newsworthy because the Pell Grant program is temporarily on sound financial footing and no year-end funding crisis is in play as in past years. That’s why many might miss that the Senate bill solves next year’s Pell Grant funding crisis—well, just about.

To read the full post, visit Ed Money Watch.

Last week a subcommittee in the Senate passed an appropriations bill to fund nearly all federal education programs for fiscal year 2013, which starts October 1, 2012. That isn’t big news because the details of a final bill that would be viable in both the House and Senate are contingent on some major roadblocks: It’s an election year; the Labor, Health & Human Services, and Education Appropriations bill is the most contentious funding bill; automatic, across-the-board spending cuts loom in January; and so on. The bill is even less newsworthy because the Pell Grant program is temporarily on sound financial footing and no year-end funding crisis is in play as in past years. That’s why many might miss that the Senate bill solves next year’s Pell Grant funding crisis—well, just about.

First off, recall why this year is an easy one for Pell Grant funding and why fiscal year 2014 and each year thereafter are not.

For the past four years, Congress has provided both regular annual appropriation and temporary funding for Pell Grants. The temporary funding is available through fiscal year 2013, but not beyond. If Congress doesn’t renew that funding next year at $7.8 billion, lawmakers must cut the maximum grant size and/or tighten eligibility rules. Let’s call this $7.8 billion the funding cliff.

In other words, this year’s funding bill (fiscal year 2013) is the last one before the cliff, taking a lot of pressure off of lawmakers for this year. Moreover, past funding bills actually overfunded Pell Grants by a cumulative $2.1 billion, and that money is available for Congress to spend on the fiscal year 2013 funding bill. It’s as if Congress reached into its pocket and unexpectedly found a wad of cash worth $2.1 billion just for Pell Grants. That “found money” means Congress could provide $1.8 billion less in the fiscal year 2013 appropriations bill than they provided last year while still supporting a maximum grant of $5,645.

That’s where the Senate bill makes an unexpected move to address next year’s $7.8 billion funding cliff. The bill doesn’t provide less for the regular appropriations in 2013, even though it could without cutting grants. It provides the same amount as in 2012. That effectively allocates the $2.1 surplus to the fiscal year 2014 grant and reduces the funding cliff by $1.8 billion. (It’s less than $2.1 billion because the costs of the program are higher compared to the prior year.)

Next, the Senate bill wrings savings from the federal student loan programs—as the president recommended in his fiscal year 2013 budget request—by cutting off the in-school interest subsidy on Subsidized Stafford loans after a student is enrolled beyond 150 percent of the normal time to complete a program and by reducing fees the Department of Education pays to guaranty agencies to rehabilitate federal student loans. The bill also would continue to award Pell Grants to eligible students attending distance learning program, but exclude room and board costs in calculating the grant.

According to a Congressional Budget Office estimate, those changes would make $3.5 billion available for Pell Grants in fiscal year 2014, reducing the funding cliff by the same amount. Indeed, the Senate reallocates those funds into the fiscal year 2014 Pell Grant.

Based on our math, that means the Senate bill closes the fiscal year 2014 funding cliff for Pell Grants by $1.8 billion, plus $3.5 billion, or $5.4 billion in total. Put another way, only about $2.4 billion of the cliff would remain when Congress begins drafting the fiscal year 2014 appropriations bill this time next year. That number is small enough that Congress could feasibly increase the annual appropriation at that time to reach the necessary $25.3 billion.

Of course, that is still only a one year fix. The fiscal year 2015 the funding cliff is still there.

As was mentioned earlier, Congress has a long way to go in completing the fiscal year 2013 Labor, Health & Human Services, and Education Appropriations bill. Even so, the version of the bill that the Democratic majority on the Senate subcommittee passed last week shows how lawmakers can take a few steps that would have a minimal impact on students while also addressing the 2014 Pell Grant funding cliff.

Last Thursday, I participated in an event organized by the National Community Tax Coalition on expanding college access and completion that highlighted several approaches to connecting more low-income students with a college degree.

These days, anyone who follows the news can recite statistics on student debt. The media has repeated countless times phrases like “there is $1 trillion in outstanding student debt” and “borrowers have an average of $23,300 in loans.” But do these numbers really mean what the media, policymakers and advocates think they mean? Which is, do these numbers tell how much debt the typical student carries? Not at all.

First and foremost, it’s important to clarify that “$1 trillion” refers to the total outstanding balance of the entire universe of student loans. That’s all loans from federal and private sources, for undergraduate or graduate students attending or who attended any type of school. The loans could have been taken out in September of 2011 for the current school year or they could have originated in 1995 but have not been repaid yet.

Similarly, that $23,300 number, which comes from a New York Federal Reserve Bank study of a representative sample of all outstanding loan balances as of 2011, refers to the average student loan balance only for students who took out loans. It excludes students who have already paid their loans off or who did not take out any loans.

Despite their ubiquity, these numbers don’t actually paint a picture of student borrowing as experienced by the typical borrower. Yet most press accounts imply that the average student loan balance for borrowers reflects the student loan balance for the average borrower.

In fact, most borrowers carry student loan balances well below the average. According to that same study, the median student loan balance is $12,800. This means that half of borrowers owe less than that amount and half owe more. Similarly, 75 percent of borrowers owe less than $28,000, and 90 percent owe less than $54,000 currently. While the press can certainly cite the average loan balance at $23,300, they should also make clear that most borrowers currently owe significantly less.

Now consider the discussion about debt owed by recent graduates. The most recent survey for the Baccalaureate and Beyond dataset, collected by the National Center on Education Statistics, provides data on cumulative student loan balances as of 2009 for the graduating class of 2008. These data show that the average student loan balance was $25,619 for students that took out loans.

But once again, the average borrower owed far less than that amount. Specifically, the data suggest that the typical borrower (the borrower with a loan balance at the 50^th percentile) owed $19,857 one year after graduation. Seventy-five percent of borrowers owed less than $33,857 and 90 percent owed less than $50,000. On the other end, 25 percent of borrowers owed less than $10,000.

It is also important to note that the Baccalaureate and Beyond data show that 65.6 percent of students took out loans. So that means that 34.4 percent of graduates of the class of 2008 had no loans to begin with.

This is why the distinction between average and median student debt, and the distribution of debt among percentiles of borrowers matters. By focusing on average student debt, journalists, policymakers and advocates are skewing the discussion on student debt toward one extreme that affects a minority of borrowers. They’ve convinced their audience (and likely themselves) that the average loan balance (which is disproportionately affected by outlier loans with particularly large balances) should drive the discussion, not the debt of the average student borrower, nor the debt levels of the majority of borrowers.

As the discussion on student debt continues, journalists, policymakers and advocates should bear in mind what the data cited above say about the typical borrower: she is in less debt than the average loan size figures would have us believe.

This blog post was originaly published on the National Community Tax Coalition's blog WorkForward.

The wrangling over the jump in student loan rates scheduled to take place on July 1^st has placed renewed focus on making college affordable. This is critical time to be having this conversation because the value of a college degree is only increasing in the post-recession economy, but, so is the cost of acquiring it.

While Congress has debated extending the 3.4 percent interest rate on Subsidized Stafford loans issued this year to undergraduates, advocacy groups are gearing up for a debate on longer-term reforms. They know the odds don’t favor Congress adopting a one-year extension of the lower rate again next year. Besides, spending $6 billion to save college graduates $9 a month isn’t a great deal for borrowers or taxpayers. So it’s good that student aid advocates want a better plan. But they aren’t off to a great start. They are gathering support for an outrageously expensive proposal that turns a blind eye to far more worthy aid, like Pell Grants.

The student loan interest rate proposal that is dominating discussions among advocates and other stakeholders would provide borrowers with variable interest rates that would be capped at the current fixed rates of 6.8 percent on Stafford loans and 7.9 percent on PLUS loans for parents and graduate students.

The rate on all newly-issued federal loans would be adjusted annually based on interest rates on short-term (three month) U.S. Treasury debt, plus a markup of two to three percentage points to partially offset costs. Today, that would translate into an interest rate of about 3 percent. If short-term U.S. Treasury rates rise, the rate borrowers pay would too, though it would never exceed 6.8 percent. Such a proposal would represent a return to the policy of the 1990s and early 2000s, except the cap on the variable rate then was 8.25 percent.

This variable-rate-with-a-cap proposal would give borrowers a “heads-I-win, tails-you-lose” arrangement. If short-term rates stay low, borrowers benefit. If short-term rates rise, the loans convert to low, fixed rates and the borrower wins again. When short-term rates decline, the fixed-rate loan converts back to a variable rate, and the borrower wins again.

Somebody may have figured out how to hit the "easy" button on applying for financial aid for college. This could have a big impact on college enrollment of the lower-income students who are most likely to miss out on a college education due to cost.