Higher Education

Senate Appropriations Panel Approves 2014 Spending Bill

July 15, 2013
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For more details on early education in the Senate Appropriations Committee Labor-HHS-Education bill, check out this post from our sister blog, Early Ed Watch.

The Senate Appropriations Committee voted last week to approve a fiscal year 2014 spending bill for the Departments of Labor, Health & Human Services (HHS), and Education. (Fiscal year 2014 starts this October 1.) That development is a reminder that key funding decisions for education programs are wending their way through Congress, and that the House and Senate could not be further apart in their proposals.

While the House hasn’t yet published or voted on an education appropriations bill for 2014, it indicated earlier this year that it would reduce overall funding substantially – from $150 billion in 2013 to $122 billion next year – for the Departments of Labor, Health & Human Services (HHS), and Education.

Why the big cut? The House wants to conform to the spending limit set forth in law by the Budget Control Act of 2011, which requires total appropriations funding be cut by $18 billion from fiscal year 2013 to 2014, to $966 billion. But the House also wants to hold defense spending harmless in those cuts, with domestic programs making up the difference. (For more details, check out our April issue brief on this issue, Federal Education Budget Update: Fiscal Year 2013 Recap and Fiscal Year 2014 Early Analysis, and our May post, House Could Set Education Funding Back to Year 2001 to Fund Defense.)

Senate Democrats, meanwhile, are ignoring the $966 billion overall appropriations limit for fiscal year 2014, and instead drafting bills within a $1.058 trillion limit. The president, for his part, supports that higher level.

Leaving aside the gulf between the House and Senate, the Senate’s committee-passed Labor, HHS, and Education bill totaling nearly $166 billion gives us some clues about senators’ priorities in the budget fight that looms in the latter half of the year. (See table below for more details.)

For most programs, the Senate appropriations bill would reverse the across-the-board spending cuts (sequestration) that took effect earlier this year, and would actually increase funding for many programs. The Senate Appropriations Committee would increase the two largest federal K-12 programs, Title I grants to school districts and special education grants to states, from 2013 levels, even over the pre-sequester total. The committee would also reverse sequestration for Improving Teacher Quality State Grants and the Teacher Incentive Fund, but wouldn’t increase funding over those levels. It would bump up Impact Aid slightly from 2013 pre-sequester totals.

Under the bill, the Obama administration’s signature competitive grant programs, Race to the Top (RTT) and Investing in Innovation (i3), receive funding for new competitions next year. The Department of Education would run a Race to the Top college affordability and completion competition, rather than the early learning and K-12 ones it has already run. But the bill would appropriate only $250 million for the competition, shy of the $548 million it received last year pre-sequester and well short of the administration’s requested $1 billion. It would fund i3, meanwhile, at $170 million, above the $149 million provided in 2013. The committee also approved a healthy increase in funding for state data systems, from $38 million last year to $75 million.

Another of the administration’s own initiatives gets a mention, too: preschool. The Senate Committee explains that the president’s “Preschool for All” program isn’t included in the appropriations bill because the administration requested mandatory funding for it, which is provided outside the appropriations process. (Sen. Patty Murray [D-WA] has said she plans to introduce this portion of the pre-K plan separately.) But the Senate panel did include the president’s requested $750 million for Preschool Development Grants to help states build systems, as well as a $1.6 billion increase to Head Start, much of which will go to the White House’s proposed Early Head Start-child care partnerships.

On the higher education side, the Committee maintains a maximum Pell Grant award of $4,860, which, when combined with supplemental entitlement funding, brings the total figure to an estimated $5,785. It also awarded small funding increases to several pet projects, including international education and the high school intervention programs TRIO and GEAR UP. The president’s request for $250 million for a First in the World higher education competition was not granted.

In total, funding for the Department of Education – and for discretionary spending across these three agencies – would increase next year. But as explained above, it’s so far from what the House has indicated it will support that the two committees may as well be on different planets. It’s too early to say what the ultimate House-Senate agreement looks like for fiscal year 2014 education funding, but not too early to predict that a lot of squabbling lies ahead.

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Four Corrections to Senator Blumenthal’s BuzzFeed Post

July 11, 2013

BuzzFeed’s lead story today is a post by Senator Richard Blumenthal (D-CT) on 11 Reasons Why Congress Needs to Fix Student Loan Rates Now. But the post, despite its extensive use of graphics and charts, gets some very basic facts about the student loan issue wrong. Perhaps the most glaring of these is his claim that “10 million students nationwide will lose $1,000 per year from the higher [loan] rates”. Some students do stand to lose about $1,000 – but over 10 years, not annually. That’s a big difference – a monthly increase of about $9 instead of $90.

Blumenthal’s post contains a few other major discrepancies. Like the fact that 7.4 million students receive Stafford Loans, rather than 10 million that he mentions. Here are the four big problems that we spotted:

1. On July 1, only SOME student loan interest rates doubled for SOME students.

According to the BuzzFeed post, “your student loan rates doubled” on July 1. True, rates did increase – but only on a small subset of loans. The rate change only affected Subsidized Stafford loans, which made up less than a third of Stafford loan volume issued last year. And though Blumenthal cites 10 million as the number of students affected, the White House says about 7.4 million students will receive Subsidized Stafford loans next year.

Source: New America Foundation, U.S. Department of Education

2. No, it's $1,000 over 10 years, not $1,000 annually.

Blumenthal wrote that students will lose $1,000 annually because rates on some loans doubled on July 1. But that isn’t accurate. The $1,000 figure refers to the additional cost to students over the life of a typical ten year loan. In other words, Blumenthal overstates the impact of the higher interest rate by a factor of ten.

Here’s how the math works. But first, a GIF to keep your attention:

Source: gifBase

The rate change, as we’ve said, only affects Subsidized Stafford loans. The limit on those loans is a maximum of $5,500 per year from a student’s third year of college on (in the first year it’s $3,500, and in the second, $4,500). And Subsidized Stafford loans don’t accrue interest while the student is in school.

That means the most a student could pay on his Subsidized Stafford loan under the new rate is about $2,000 in interest, compared to about $1,000 with the 3.4 percent rate. In other words, a student will pay about $1,000 more over the 10-year life of the loan. That’s about $9 more per month – to borrow an analogy from Allyson Klein at Education Week, less than the monthly cost of a Spotify Premium subscription.

Source: New America Foundation

Blumenthal isn’t the only one confused by this $1,000 number. We found countless other examples – from Center for American Progress, Youngist, StudentDebtCrisis.org, and Sen. Mary Landrieu (D-LA), among others – of confusion about the whether the $1,000 refers to a one-year or a 10-year number.

So to clarify one more time, we’re talking a maximum of about $1,000 per loan over the standard, 10-year repayment period for that loan. Not annually.

This confusion all probably stems from an AP report of comments made by President Obama. Obama said: “If Congress doesn’t act by July 1st, federal student loan rates are set to double.  And that means that the average student with those loans will rack up an additional $1,000 in debt.  That’s like a $1,000 tax hike.  I assume most of you cannot afford that.  Anybody here can afford that?  No.” AP interpreted this to mean a $1,000 annual hike.

3. The government doesn’t profit off student loans.

Blumenthal says: “The government profits off these student loans, while you suffer.”

It’s a nice piece of rabblerousing, but it’s wrong. In fact, the government loses money on Subsidized Stafford loans – about a $12 loss for every $100 lent.

Looking at the cost estimates produced by the Congressional Budget Office, you might think otherwise. That’s because Congress requires CBO to use inaccurate accounting plans that even the CBO says are out of whack with the true costs of the program.

The accounting practices CBO uses, which are dictated by the Federal Credit Reform Act, calculate the costs of the program using the risk factor on Treasury bonds. They don’t account for the risks of the loan program – namely, the fact that borrowers are much more likely to default on their loans than the entire U.S. government is to default on its debt. The Department of Education is predicting a 23% default rate on Subsidized Stafford loans for the 2014 cohort.

Source: Dylan Matthews at Wonkblog

CBO (and President Obama’s fiscal commission, and economists at the Federal Reserve, and the Financial Economists Roundtable) recommends using fair value accounting instead, and even issues fair value estimates for the loan program. Under fair value accounting, the U.S. loses money on Subsidized Stafford loans most years.

4. The solution has nothing to do with banks

Blumenthal ends with a proposal he cosponsored with Sen. Elizabeth Warren (D-MA) – the Bank on Student Loans Fairness Act. It would set rates on Subsidized Stafford loans at 0.75% for one year’s worth of loans, the rate the Federal Reserve sets on emergency lending to banks and one that costs banks, which usually have access to much lower rates. But the plan is based on a fundamental misconception of how student loans work. And it’s not much of a deal for students if it only lowers rates for one year.

Source: Facebook.com/JoeManchinIII

A better solution is being negotiated on Capitol Hill this week. A bipartisan group of senators, led by Sens. Joe Manchin (D-WV) and Angus King (I-ME), issued a proposal last week that is now being renegotiated to gain support in the Senate. The plan will tie interest rates to the 10-year Treasury note (1.81 percent for the 2013-14 school year), plus 1.8 percent for undergraduates, 3.4 percent on graduate Stafford loans, or 4.5 percent on PLUS loans. The rates will be capped at 8.25 percent for undergraduates and 9.25 percent for graduate students and PLUS loans. It’s a long-term solution that will end the annual bickering that has afflicted Congress each year, provide lower rates to all students next year (not just Subsidized Stafford borrowers), and cost taxpayers nothing.

Blumenthal’s not the only one getting some of the facts wrong – we have a long list of misreported details in the student loan interest rate debate that has dominated Congress over the last two months.

Turns out just because something is published on BuzzFeed doesn’t mean it's true.

Skills Beyond School: An International Look at American Higher Education

July 11, 2013
Within the United States and abroad, Career and Technical Education (CTE) often exist in a world completely separate from that of traditional postsecondary education. This divide is exacerbated by the sometimes baffling array of options available to students upon completion of secondary school. With such a wide variety of degrees, certifications, credentials, career training, and other learning opportunities, it can be a challenge for students to discern which options provide superior quality, accurately value the benefits of their options, and determine the clearest pathway toward the career to which they aspire.
 
Yesterday, the Education Policy Program at the New America Foundation hosted an event marking the release of a new report by the Organization for Economic Cooperation and Development (OECD) that underscores these significant challenges for students entering the United States higher education system.
 
While emphasizing the urgency of the challenges our higher education faces, the OECD report also provides recommendations and action items for addressing them. The action items put forward by the OECD report are aligned toward building quality, transparency, and continuity between and within these presently disparate pieces of the American education system. For more information about the recommendations of the report, see yesterday’s post on the report. Strengthening the integration of CTE with secondary learning and other postsecondary education options is a critical piece in addressing the needs of students, as they navigate their pathways to the workforce.
 
Throughout the event, 20 distinguished speakers and panelists shared their insights about the challenges facing students today and their wide-ranging consequences for the labor market and the economy if these inefficiencies in education and training remain. As Amy Laitinen, deputy director of higher education at the New America Foundation, pointed out, “The OECD’s report uses the word ‘risk’ 41 times, and it’s for a good reason: most prospective students don’t know the expected earnings of the credentials they’re seeking and employers don’t know what students with these credentials actually know or can do.”
 
The U.S. Department of Education representatives speaking at the event were receptive to the report’s findings, and emphasized their commitment to reform. During her remarks yesterday morning, Brenda Dann-Messier, assistant secretary for the Office of Vocational and Adult Education and acting assistant secretary for the Office of Postsecondary Education at Department, emphasized the need for greater clarity amidst the higher education landscape. “Postsecondary CTE programs cannot exist in isolation from higher education, K-12, or systems for workforce training. To achieve their maximum potential, they must be part of a broader career pathways system for all students in order to meet our education and skills challenges in the future.”
 
For who were unable to attend the event yesterday, a webcast – featuring an overview of the report findings, followed by three panel discussions on the three primary issue areas identified by the report – is available on the New America website in full. An infographic produced by the New America Foundation that depicts the report’s main components is also available here.

The Vibrant Diversity of America’s Career and Technical Education “System?”

July 10, 2013
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Today, the OECD released a comprehensive review of Vocational Education and Training (VET) in America, A Skills beyond School Review of the United States. While those immersed in the higher education landscape might find many of the recommendations familiar, echoing calls for reform advanced by a wide range of education stakeholders, the review provides a refreshing outside perspective on Career and Technical Education (CTE) and higher education more broadly.
 
The report is charitable in their praise of the ‘vibrant diversity’ brought forth by the United States’ decentralized postsecondary CTE system. The overarching recommendation put forth by the review is to balance this approach with a more strategic pursuit of quality, coherence, and transparency. In the context of what the review further refers to as ‘The US ‘system’ of CTE,” it becomes clear that the American system of postsecondary CTE is in urgent need of reform.
 
Authors Malgorzata Kuczera and Simon Field quickly address central issues facing postsecondary education in the United States, highlighting three broad recommendations – funding for quality, anchoring credentials in the needs of industry, and building transitions that work – which are bolstered by several more specific action items.
 
1.      Substantially strengthen quality assurance in postsecondary education and its links to title IV student aid.
 
The review outlines six considerations that provide urgency for the strengthening of quality assurance. Many of these recommendations, especially in regard to federal financial aid reform, coincide with the recommendations put forward by the New America Foundation in the report, “Rebalancing Resources and Incentives in Federal Student Aid.”
 
While many of the considerations put forth by the authors point toward new reforms, it is worth pointing out that the third points to current requirements of quality assurance that are not being enforced. Citing the 2010 U.S. Government Accountability Office (GAO) investigation of several (vibrant) private for-profit institutions, they point out the finding that four institutions clearly promoted fraudulent practices, and all made ‘deceptive or otherwise questionable statements’ in materials for students. While pursuing further reform is necessary, reviewing the implementation of prior efforts is equally important. 
 
2.      Establish a quality standard for certifications and obtain better data on both certifications and certificates.
 
In a section aptly entitled “Confusing choices and quality challenges” the authors begin with the following data from the U.S. Department of Labor: “Tour guides can choose from among nine credentials; chemical technicians decide between 22, while computer network support specialists can choose out of no less than 179 different credentials.” And it is incredibly difficult to determine whether those nine tour-guiding credentials lead to either higher wages or career advancement. The report points out that the American National Standards Institute (ANSI) estimates that less than a fourth of certifications currently offered would meet the standards that their organization has published. If the GAO conducted an investigation of American certification programs, they may find a great deal of ‘deceptive or otherwise questionable statements’ being made to students about the value of the credentials they are offering.
 
3.      Building transitions in CTE into postsecondary programs, within postsecondary education, and to the labor market.
 
The final recommendation distinguishes between the differentiated needs at each transition point within postsecondary CTE – not only entering from secondary school and exiting to the workplace, but also the unique challenges faced by students who seek to move between institutions. While funding for quality and establishing standards for certifications would go a long way in addressing some of these transition challenges, especially in regard to information asymmetry, the authors also point toward strengthening CTE in high schools as a method for building stronger transitions. It harkens back to a discussion in the first chapter pointing out America’s partiality for generalized high school education – or aversion to anything that could be perceived as “tracking.” The authors’ perspectives on building high school CTE transitions are a noteworthy addition to the review.
 
The diversity of CTE in the United States has by and large created a “system” that is not optimally serving students. While decentralization can promote rapid response and innovation, in absence of discerning funding, quality assurance, reliable information, and clear pathways forward, decision-making is a quagmire for students. In one way, the CTE system is quite vibrant – it is alive, constantly changing and evolving. As reforms move forward, it will be important to implement flexible approaches that will grow with the ever-changing landscape of labor and careers throughout the country.

The Mythical College Savings Penalty

July 8, 2013

Richard Vedder has a column over at Bloomberg View today exposing what he labels the "stealth tax" on family savings. Citing uncited "considerable anecdotal evidence," Vedder claims that savers pay almost three-quarters of their earnings for college, a much higher rate than a family of comparable wealth with no savings. It's an alarming argument, but it's also a largely unsourced account, lacking lacking any information about how savings and their treatment in financial aid calculations actually work.

Most Families Save Through Mortgages or Tax-Advantaged Accounts...

Financial aid formulas do not treat all savings as the same. Most middle-income families today save money either though building up home equity or making use of tax-advantaged retirement savings vehicles like 401(k)s, Individual Retirement Accounts (IRAs), Roth IRAs, etc. Someone under 50 can contribute $17,500 to the 401(k) and $5,500 to the IRA, netting them $23,000 in annual savings plus whatever they are building up through a mortgage. And since accounts are for individuals, a married couple with two incomes could potentially double those amounts. It's after these limits that folks would likely turn to other investments that do not have special tax treatment.

 ...And the Federal Government Doesn't Touch Them for Student Aid Calculations

The Free Application for Federal Student Aid (FAFSA) does indeed ask students (and parents if the student is a dependent) for information on their assets. But the instructions for the form (see page 2) explicitly exclude: the value of the home the parents/student live in, retirement plans, such as 401(k)s, non-education IRAs, pension plans, annuities, etc., and life insurance In other words, before the family has entered a single cent, the form already excludes the predominant savings vehicles used by most families. 

Remaining Assets are Heavily Discounted

Knocking out retirement plans and main residences still leaves behind other assets, such as stocks or mutual funds held outside of tax-advantaged accounts or other real estate holdings. But what remains is then heavily discounted by the formula the federal government uses to calculate aid eligibility. The federal formula immediately assumes about 45 percent of the assets do not exist thanks to an asset protection allowance. It then only considers 12 percent of that already reduced amount to generation a contribution from assets that is functionally pennies of every dollar in assets. And even after that, only about 40 percent or so of parents' combined income and assets are used to generate the actual contribution. The result is that $100,000 in non-retirement savings adds at most a few thousand dollars to the expected contribution. (If you want to follow the whole process yourself check out page 9 here or put in different values into the Department of Education's FAFSA4caster.)

You Get Credit for Assets, But Not for Most Debts

Another suggestion in Vedder's argument is that free-spending is actually rewarded. But apart from non-business real estate, where the amount counted is the value minus remaining debts, balances on credit cards, auto loans, etc. are not deducted treated as "negative" assets. And the contribution from assets cannot be negative, so you can't use being underwater on a second home to try and offset contributions from income.  Heavy debts may reduce the amount of cash in checking and savings accounts treated as assets, but the large protection allowance probably makes that meaningless. 

So how much is that savings penalty really?

Vedder's example for the savings penalty involves two otherwise identical families that both make $125,000 a year, with one having $100,000 in savings and the other having nothing. If the $100,000 is held entirely in retirement accounts, then there's no difference in the expected contribution for the thrifty versus free-spending families. If those additional savings are held in assets that are counted, then the contribution for the saver is about $4,000 higher. Yes, that's a bigger contribution, but the family also has $100,000 more in assets to make paying for college easier and avoid debt. If anyone thinks that's an unfair trade and would like to trade me $100,000 for $4,000 feel free to contact me. 

A Glimmer of Truth in Institutional Aid

While Vedder's argument falls apart with respect to federal aid, it's nearly impossible to evaluate his claim with respect to institutional aid.  That's because many of selective, private nonprofit institutions rely on additional documentation through the CSS/Financial Aid Profile to calculate aid based upon a completely opaque and customized "Institutional Methodology." There is no public base formula and it varies by school so there's no way to compare it to the federal formula. (The Financial Aid Journal has a summary here and a less clear brochure from College Board is here.) The institutional formula does include houses, so it's possible that those who save though their homes could be hit more than non-savers, but it still relies on a very low share of assets--between 3 and 5 percent depending on the level.  

Wrong Argument, Mostly Right Conclusion

The irony is that while Vedder's arguments on the savers' tax are dubious, his conclusion that aid determinations should rely largely on income alone makes a lot of policy sense. At this point, getting rid of assets is the next logical step in FAFSA simplification, as that section  presents a lot of questions that take much more time to answer than those related to income and make little difference in the end result. It would also lay the groundwork for experimenting with awarding aid based upon older income information straight from the IRS or other changes that could make it even easier for students to get aid. Sure it might have some small effect on contributions for richer people, but probably not enough to offset the gains at the other end of the income spectrum. 

Simplifying the federal formula will go a long way, but it won't do enough as long as a select group of colleges keep relying on additional information and opaque formulas to generate aid estimates that are wildly different than what the federal government suggests. Such machinations in the name of rooting out every last little false positive do nothing to help lower-income students understand what college is actually going to cost and likely increases confusion for everyone about how their aid packages really work. And that's before colleges start deviating from the expected contribution through so-called merit aid, tuition discounts, gapping, and the like. When it comes to stealth penalties, the issue isn't taxing savers, but what schools are doing for low-income students and how they get there.

It’s Official: Interest Rates on Subsidized Stafford Loans Double

July 1, 2013

Interest rates on a subset of federal student loans officially doubled today from 3.4 to 6.8 percent. The rates apply only to newly issued Subsidized Stafford loans, affecting about 7.4 million students next year. But the increase in interest rates could have been prevented – and many members of Congress tried.

The scheduled increase has been circled on many stakeholders’ and policymakers’ calendars since Congress granted a one-year reprieve last summer. Unlike last year, though, Congress debated a host of reform proposals, many of them market-based (tied to the rate on the 10-year Treasury note), rather than just a simple one-year extension. The latest plan, a bipartisan proposal from Sens. Joe Manchin (D-WV), Angus King (I-ME), Tom Coburn (R-OK), Richard Burr (R-NC), and Lamar Alexander (R-TN), was immediately rejected by Senate Majority Leader Harry Reid (D-NV).

Though the House and Senate haven’t yet managed to agree on a plan, it is still possible that Congress could vote to retroactively reset the rates before students start school in the fall. Working with Slate, we developed a calculator that explores several of the proposals on the table: the bipartisan Senate plan, a similar proposal from President Obama, a temporary extension of the 3.4 percent rate, and the now-effective 6.8 percent rate. Enter your loan amount for next year, and see what your interest rates and monthly payments could be under each of the plans:

Bipartisan Student Loan Interest Rate Reform Bill Released in the Senate

June 27, 2013

Would Senate Democrats walk away from a chance to cut interest rates and payments on student loans below where they would be if Congress enacted a one-year extension of current policy – a 3.4 percent interest rate for Subsidized Stafford loans and a 6.8 percent rate for Unsubsidized Stafford loans? Would they turn down a bipartisan plan to spend an estimated additional $30 billion over the next five years to lower rates for millions of borrowers? We will soon find out.

Today, a bipartisan group of senators officially introduced legislation, the Bipartisan Student Loan Certainty Act, that would lower rates and payments on student loans below an extension of the current 3.4 percent rate on Subsidized Stafford loans. The bill, led by Sens. Manchin (D-WV), Burr (R-NC), Coburn (R-OK), Alexander (R-TN), and King (I-ME), would tie fixed interest rates on newly issued student loans to the 10-year Treasury note rate – 1.81 percent for the 2013-14 school year – plus a markup of 1.85 percent on undergraduate Stafford loans, 3.4 percent on graduate Stafford loans, and 4.4 percent on PLUS loans.

The rates on the loan would be fixed for the life of the loan, but each year of loans would carry a new rate. The bill would maintain the existing cap on consolidation loans of 8.25 percent, a provision included (albeit not explicitly) in an earlier proposal from Sens. Coburn and Burr.

We’ve written a lot over the past few weeks about this bipartisan Senate proposal and in a recent analysis compare it to other plans. The benefits under the bipartisan plan exceed those of others proposals because it lowers rates on both types of loans undergraduates receive, Unsubsidized and Subsidized Staffords. And because Unsubsidized Stafford loans accrue interest while a student is in school, lowering rates on those loans reduces the amount of debt borrowers have when they leave school, cutting monthly and total payments, too.

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Why is the Democratic leadership in the Senate actively trying to defeat this bipartisan bill? And why are student and advocacy groups egging them on? Because they are worried that interest rates might, sometime in the future, on average, end up higher under the proposal than under current law (i.e. 6.8 percent). In that case, 6.8 percent would be a better deal they argue.

Senate Democrats and advocacy groups, in other words, have put their money on a big move up in long-term interest rates. Sure, they could be right, although the 10-year Treasury note would have to return to its 2007 pre-recession level for the rate under the bipartisan plan to exceed 6.8 percent. But what if they are wrong about future interest rates? What if rates stay lower for longer?

Take a look at Congress’ track record on picking interest rates for student loans. The rates are currently fixed at 6.8 percent because back in 2001 legislators picked that number based on Congressional Budget Office interest rate projections.

That should be reason enough to get Congress out of the business of setting student loan interest rates. But armed with another Congressional Budget Office interest rate projection (which simply extrapolates average interest rates from the past into the future), Democrats and advocacy groups are busy making tables and charts showing exactly where interest rates are headed, all to make the case that 6.8 percent is a good rate.

According to Sen. Durbin (D-IL), student groups have told Democratic lawmakers to let the rate on Subsidized Stafford loans double to 6.8 percent rather than consider any of the alternatives currently being floated. When Congress picked the 6.8 percent rate in the early 2000s, student groups rejoiced. They were sure it was a great deal for students. They even took out full page newspaper advertisements thanking Congress for "lowering rates." Later, as everyone knows, Democratic lawmakers and student advocates cried foul when rates plunged but the 6.8 percent rate remained. Could they be wrong again? 

Check back with Ed Money Watch for more details in the coming week.

Harkin Interest Rate Proposal Costs Students More than Bipartisan Bill

June 25, 2013

Less than a week before interest rates are scheduled to double on some federal student loans, yet another proposal has surfaced in the Senate. Sen. Tom Harkin (D-IA), chair of the Senate Health, Education, Labor, and Pensions Committee, is reported to be circulating a proposal similar to one Sens. Manchin, King, Coburn, and Burr released last week, only his plan includes lower rates on Subsidized Stafford loans (but higher rates on Unsubsidized) than the bipartisan Senate proposal and Senator Harkin adds a cap on rates.

Harkin’s plan ties rates to the 10-year Treasury-note rate, plus a 1.5 percent markup for Subsidized Stafford loans; a 3.4 percent markup on Unsubsidized loans; and a 4.5 percent markup on PLUS loans. Stafford loans would be capped at 8.25 percent, and PLUS loans would be capped at 9.25 percent. (Consolidation loans, currently capped at 8.25 percent, would no longer have a cap.) The Manchin-King plan, on the other hand, would start with the same 10-year Treasury rate with a 1.95 percent markup on undergraduate Stafford loans; a 3.4 percent markup on graduate Stafford loans; and a 4.4 percent markup on PLUS loans.

Yesterday, we compared monthly payments for a hypothetical student taking out the maximum in Subsidized and Unsubsidized Stafford loans for four years of school, under several of the existing proposals. (We used the current Treasury rate as a basis for our estimates.) Today, we’re adding the Harkin proposal to those estimates. Readers should note that the bipartisan proposal is still a better deal for undergraduates than the Harkin proposal. And because the bipartisan bill reduces the interest rate for both Subsidized and Unsubsidized loans, more students will  get a better deal.

The bipartisan Senate proposal achieves lower loan balances and overall interest rates for undergraduates than the Harkin plan because it charges graduate students more than undergraduates on Unsubsidized Stafford loans. We think charging graduate students higher rates to provide undergraduates lower ones is smart policy. It’s also progressive. Student loan borrowers with graduate degrees are hardly an economically oppressed class. Meanwhile, too many Americans struggle to obtain an undergraduate degree.

Maybe progressives could learn a thing or two from Sens. Manchin (D-WV), King (I-ME), Coburn (R-OK), and Burr (R-NC). The bipartisan proposal is a better deal for students, and it’s a better solution to the problem.  

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Student Loan Interest Rate Compromise: Numbers on the Bipartisan Senate Plan

June 24, 2013

A bipartisan group of senators (King, Manchin, Burr, and Coburn) is reportedly drafting a bill that would prevent interest rates on Subsidized Stafford loans from doubling on July 1. Their proposal would set market-based interest rates on all newly issued federal student loans. It looks similar to proposals from Senators Coburn (R-OK) and Burr (R-NC), President Obama, and the New America Foundation. How does the proposal compare to other options for setting rates? We decided to run the numbers.

You can read the full post on our Ed Money Watch blog.

Senate Interest Rate Compromise on the Way – and it Saves Students Money

June 24, 2013

A bipartisan group of senators (King, Manchin, Burr, and Coburn) is reportedly drafting a bill that would prevent interest rates on Subsidized Stafford loans from doubling on July 1. Their proposal would set market-based interest rates on all newly issued federal student loans. It looks similar to proposals from Senators Coburn (R-OK) and Burr (R-NC), President Obama, and the New America Foundation. How does the proposal compare to other options for setting rates? We decided to run the numbers.

The interest rates would be set at the 10-year Treasury yield plus a 1.9 percent markup for undergraduate loans; a 3.4 percent markup for graduate Stafford loans; and a 4.4 percent markup for Grad and Parent PLUS loans. Media reports indicate that the plan produces budgetary savings over 10 years with a 2.0 percent markup on undergraduate loans, and the bill’s sponsors are likely to further reduce the rates to ensure the compromise proposal is budget neutral. That puts the markup for undergraduate Stafford loans in the 1.9 percentage point range.

Using this information, we ran scenarios comparing the bipartisan Senate bill with an extension of current policy (3.4 percent Subsidized Stafford, 6.8 percent Unsubsidized), current law (both loan types at 6.8 percent), and the president’s proposal, which also pegs fixed-rate loans to the 10-year Treasury note but adds a different markup to that rate.

Our calculations are a bit more complicated than others so as to be more accurate. We account for the fact that undergraduate borrowers typically borrow both Subsidized and Unsubsidized Stafford loans. Our calculations are based on an undergraduate who borrows the maximum in both loan types.

And we account for the fact that lower interest rates on Unsubsidized Stafford loans reduce the amount of debt borrowers have when they leave school (interest accrues on these loans while borrowers are enrolled, so a lower rate means less interest added to the total loan balance while in school). That effect lowers a borrower’s monthly and total payments. We also hold the 2013-14 interest rate constant for four years of borrowing. We don’t profess to know where interest rates are headed; instead, we assume today’s rates are constant.

The tables below show the average interest rate at repayment, the debt at repayment, and the monthly payment under a 10-year fixed repayment plan under each interest rate scenario outlined above for an undergraduate who borrows the maximum. The bipartisan Senate plan provides nearly identical terms as the president’s plan when translated into monthly payments, though the Senate plan has simplicity going for it—both loan types have the same interest rate. More importantly, both plans would be better for students this year than letting the 3.4 percent rate expire, or even extending it.

06242013 Weighted Interest Rate Comparis

The bipartisan Senate proposal could increase the budget deficit by $30 billion in the next five years, a cost that some Senate Republicans are willing to swallow in exchange for a market-based rate. That sure looks like the bipartisan compromise that everyone says they want to see more of in Washington. Amazingly, other Democratic lawmakers cannot decide if a $30 billion rate cut is enough, because interest rates might, sometime in the future, on average, end up higher under the proposal than under current law, negating that new spending. They are, in other words, holding out for a sure thing and more money to boot. But what if rates stay lower for longer? By holding out for more, Democratic lawmakers will have torpedoed their only chance at providing students and parents a shot at those lower rates.

Student advocates and Democratic lawmakers may be looking a gift horse in the mouth. 

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