The NY Times reports that although the federal government’s recently-expanded income-based repayment program is more affordable for some students, it may come with a hefty, and unexpected tax burden. The federal government will generally forgive whatever loans are left after 10 to 25 years of income-based payments; however, unless you attend a program for teachers or take a job in public service, you will have to pay income taxes on that forgiven debt. For someone who attended graduate or professional school and racked up six-figures of debt, the tax could easily be five-figures and, perhaps most worrisome, would be due immediately.
So, how many people could have to face this formidable tax and what would it amount to for the average borrower? The Education Department estimates that approximately two million people had applied for income-based repayment as of Oct. 31. About 1.3 million of those applicants qualified for reduced payment, another 440,000 applications were still pending. According to the article, “400,000 borrowers from 2012 through 2021, each with a beginning average loan balance of about $39,500, would each eventually receive loan forgiveness of about $41,000.” The amount forgiven can be larger than the original balance because of accrued interest payments. Depending on your tax bracket, the federal tax on $41,000 of forgiven loans could amount to over $10,000 and, if you live in a state with income taxes, you’d need to deal with those as well.
That said, since $41,000 is more than double what is given to the average Pell recipient over four-years, a $10,000 tax payment could be considered fair. The New America Foundation and others have argued that the new repayment program provides only marginal benefits to low-income borrowers, but “generous benefits to borrowers with higher federal loan balances” who have the potential to earn high incomes later on. As The Quick and the Ed notes, someone who earns $400,000 at the high-point of their career may still receive over $80,000 in loan forgiveness. In the latter situation, a large, lump-sum tax payment is likely very fair.
The article provides some useful resources for those who are participating in the income-based repayment plan and those who are considering it, including:
Here is a quick look at some recent happenings in the world of higher education:
- The College Scorecard confuses students and lacks desired information, says a report released today by the Center for American Progress (CAP). The College Scorecard, which President Obama proposed last February, is an online tool to help students compare colleges’ costs, completion rates, average student-loan debt, and more. The CAP asked focus groups of college-bound high-school students for their opinions on the scorecard’s design, content, and overall effectiveness. Student responses indicated that they did not understand the scorecard’s purpose; they would like the ability to customize the scorecard according to their interests; they want more information on student-loan debt; and they would prefer seeing four-year graduation rates, rather than six-year rates. The CAP report includes recommendations for improving the readability and usability of not just the scorecard, but of government disclosures in general.
- The U.S. House of Representatives passed the STEM Jobs Act on Friday by a 245 to 139 vote. The bill would eliminate the “diversity visa program,” which currently distributes 55,000 visas per year to people from countries with low rates of immigration to the U.S. Those visas would instead go to foreign graduates from U.S. universities who earn advanced degrees in science, technology, engineering or mathematics (STEM). Proponents of the Republican-backed bill say it would keep “highly trained, in-demand” workers in the U.S., boosting the nation’s economy and preserving its global competitiveness. While the White House and most Democrats support the expansion of STEM visas, they oppose the bill’s attempt to eliminate the diversity visa program. Consequently, the measure is unlikely to pass the Democrat-controlled Senate.
- The overlapping agendas of Texas, Florida, and Wisconsin governors could signal a new Republican approach to higher education policy, says Inside Higher Ed. The three governors agree on cost-cutting strategies such as requiring some colleges to offer $10,000 bachelor’s degrees; limiting tuition increases at flagship institutions; linking institutions’ graduation rates to state appropriations; and letting performance indicators, such as student evaluations, determine faculty salaries. Although the governors’ proposed reforms appeal to some voters, “actions taken by all three have been sharply criticized not only by faculty members and higher education leaders in their states, but also by national leaders, who view the erosion of state funding and increased restrictions on what institutions can do a breach of the traditional relationship between state lawmakers and public colleges and universities.”
One of several recent Pell Grant changes has made it harder for some students to finish school and earn a degree, according to Inside Higher Ed. Effective July 1st this year, the federal government decreased the duration of Pell eligibility from 18 semesters to 12 semesters as a means of both cutting costs and incentivizing students to graduate on time. While most students take less than 12 semesters to earn their bachelor’s degree, existing Pell recipients (who expected to receive 18 semesters of eligibility) were not grandfathered in when the changes took place.
Of the estimated 62,000 students affected by the change, colleges say the hardest hit were transfer students and students who have attended some college, but never earned a degree. More specifically, many impacted students seem to be those who:
- Left school before graduating, but have returned to complete their degree;
- Transferred, or “swirled,” between multiple schools—a growing trend in higher education;
- Enrolled with a for-profit institution, but transferred elsewhere before graduating; and/or
- Changed programs multiple times within the same school.
According to an “informal tally” by the California State University system, about 6,100 of the system’s students (4 percent) lost Pell Grant eligibility because of the new 12-semester limit.
Since some students who lose eligibility may not be able to afford to continue their education and earn a degree, this change could conflict with the government’s emphasis on improving graduation rates and increasing the number of degree-holders. However, as Congress gears up to deal with impending sequester cuts, the financial benefits of these types of tough decisions are increasingly likely to outweigh the nonfinancial costs.
A recent Insider Higher Education article describes the inventive deals that a handful of public universities are pursuing in an effort to keep tuition rates from rising. By offering tuition freezes in exchange for either (1) increased state funding or (2) individual student efforts to graduate on time, universities hope to meet public demands to stabilize tuition and also ease the financial burden of doing so.
1. Public institutions can afford tuition freezes if states pick up the slack. On several occasions, the University System of Maryland has successfully encouraged state lawmakers to “buy down” potential tuition increases. And just last Friday, the University of Minnesota’s Board of Regents accepted a proposal to freeze undergraduate resident tuition if the state provides an additional $42.6 million over the coming two years. This approach has been successful in some states, but the article mentions a major problem: “many states simply don’t have the money or the political will to invest in education at the moment.” However, even when schools do not expect to receive more state support, these proposals may at least spark conversations about the crucial linkage between falling state appropriations and rising tuition rates.
2. Benefits of better on-time graduation rates may be enough to offset costs of tuition freezes. Getting more students to graduate sooner can improve a university’s ranking, lower its students’ average debt, and make room for more incoming students. For some schools, this is enough incentive to provide tuition freezes in a targeted manner. Last week, leaders of the Indiana University system offered to freeze tuition for students who have earned 60 credits by the end of their sophomore year and are, therefore, on track to graduate within four years. Additionally, UT-Austin will pilot a program next year that would award students who receive Federal Direct Unsubsidized Loans with $1,000 of loan forgiveness for each semester they stay on pace to graduate in four years. UT-Austin’s Director of Student Financial Services said the program could save students up to $12,000 over the course of their education.
As public institutions continue to face dwindling state appropriations and increased pressure to stabilize tuition, we may see more of these innovative proposals.
The NY Times reports that researchers at the Brookings Institution have summarized why college is worth it. Their chart shows the percent of people at each income level who have various levels of educational attainment. Not surprisingly, the conclusion is that more education opens the gateway to better, higher-paying jobs.
A few findings to consider:
- Of the Americans who earn over $150,000, 82 percent had a bachelor’s degree.
- An individual with only a high school diploma is twice as likely, relative to someone with a college degree, to earn less than $40,000 per year.
- Conversely, an individual with a college degree is 9 times more likely to make over $100,000 and 13 times more likely to make more than $200,000 per year when compared to someone with only a high school diploma.
Although half of all UW undergraduates graduate with zero debt, even when factoring in debt, college is still a great investment. The same researchers developed another chart showing the return on investing in one’s higher education relative to the return on investing comparable tuition money in the stock market, long-term Treasury bills, housing, corporate bonds or gold.
Once again, the numbers show that postsecondary education opens the door to higher-paying jobs and more opportunities.
The Institute for Higher Education Policy recently published a brief addressing the complexity and confusion surrounding the issue of college affordability. Written by Sandy Baum and Saul Schwartz, Is College Affordable? In Seach of a Meaningful Definition succinctly addresses several familiar issues:
- The conflation of increased or high prices with low affordability (where the former is dealt with by all, the latter is dependent on a family’s resources).
- Misperceptions about cost/affordability created by the hard to discern difference between sticker prices and net prices for any given family.
- Difficulties shifting from perceiving public higher education as a service heavily subsidized for all to a service that parents and students are primarily reponsible for funding.
- Lack of framing affordability of higher educaiton within the context of a long-term investment that you pay for over time with an expectation that the long-term return warrants the cost.
The authors provide some general policy recommendations, including simplifying financial aid and pricing processes, communicating more clearly the monetary and non-monetary payoffs associated with higher education, strengthening protections in cases where higher education does not pay off for some students, and increasing investment in public subsidies aimed at lowering the price for low-income students.
This brief is a quick and valuable read. For more information, check out coverage of the brief at Inside Higher Ed as well.
The US Departments of Treasury and Education teamed up to analyze higher education and economic data, and released a short report that highlights the following familiar points:
- Education is correlated with higher earnings: median weekly earnings for a worker with a BA degree are now 64% higher than for a worker with only a high school degree.
- Education is key to socio-economic mobility: almost half of children born into the bottom income quintile remain there as adults compared to only 20% of those who receive a degree.
- Funding cuts result in higher tuition: Public funding for institutions has, on average, declined from 60% of revenue to less than 40% over two decades while tuition revenue has increased by almost the same amount of the decline.
As a result of the above, federal financial aid has become an increasingly important contributor to college affordability, comprising over half of all grants and loans awarded to students. While protecting and increasing federal funding for aid is imperative, the report makes clear that states and institutions will have to make changes as these trends continue or broad access to higher education in the US will be at serious risk.
The US Department of Education released their second annual ranking of universities by cost. Users can rank institutions by tuition rate (sticker price) or by a net cost of attendance measure. Institutions are also ranked by annual percentage increases in these measures. The Department presents these data as a tool to help students and families find good educational and financial fits when selecting an institution, and also aims to publically identify and shame institutions that increase tuition the most.
While any attempt to centralize and simplify higher education data to facilitate easier consumer evaluation and comparison is an important effort, there are many potential unintended consequences relating to both the measures used and in aggregating this type of information across such a large, varied set of institutions. Economists Robert Archibald and David Feldman address some of these problems in an Inside Higher Ed piece published today.
Slow economic recovery and continuing high unemployment rates have significantly increased concern about student borrowing levels. OPB’s latest brief provides basic information and data about student borrowing (in the US and at the UW) to help contextualize such concerns.
Released last week by the Brown Center on Education Policy at Brookings, Beyond Need and Merit: Strengthening State Grant Programs describes the scope and type of state grant programs across the US, and provides recommendations for improvement. Such programs currently provide over $9 billion in aid to students each year and comprise, on average, approximately 12 percent of total state funding for higher education. However, they vary widely in number, complexity, eligibility criteria, grant amounts, and efficacy.
Average annual tuition at a public four-year institution in the US is just over $7,000, and the average state grant disbursed to students ranges from $44 in Alaska to over $1,700 in Sourth Carolina (averaging $627 across all states). While 73 percent of all such aid is disbursed based primarily on financial circumstances, many states have adopted large, merit-based programs in recent years that direct grants to non-needy students. For example, the report notes that in Louisiana, where the average annual household income is $45,000, 45 percent of total state grant funds went to students from households with income above $80,000.
Ultimately, the report focuses on ways to potentially streamline state grant programs and better target their resources to those students who need them most in order to increase the impact on both college access and completion. Major recommendations include:
- Focus grants on students with financial need, who have been shown by research to be most postively affected by grant aid.
- Simplify grant programs to the extent possible while still being able to target resources to needy students. Straightforward applications, early knowledge of awards, and effective net-price calculators all have a positive impact on application and enrollment rates for students with financial need.
- Consolidate multiple programs where possible, including converting state required tuition set-asides to state grants to avoid the appearance that the students are subsidizing needy students instead of the state.
- Create financial incentives for students while they are enrolled by requiring minimum but attainable grades and steady progress toward completion.
- Consider targeting resources to non-traditional students, including those who are older, part-time, and placebound.
- When resources are constrained, ration grant aid in a way that is clear and predictable for students.
- Consider state grant aid incentives in concert with federal and institutional aid to ensure that programs are not operating at cross purposes.
- Evaluate existing programs as well as test and evaluate new approaches.
Although not discussed much in the report, Washington State has one of the most generous state grant programs in the nation, even though it currently does not have enough funds to accomodate all qualified students. 98 percent of Washington grant funds are awarded based on student financial need and the average grant per student is nearly $900, compared to the national average of $627. Washington State Need Grant funding and policy has and will continue to be key to maintaining college affordability as scarce resources have necessitated rising tuition while household incomes are stagnant. This report provides some useful guidelines for ensuring that taxpayers receive the best return for each dollar invested in student success.
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