Office of Planning and Budgeting

Christy Gullion, Director of Federal Relations, recently provided an update on the sequester–the large, automatic federal spending cuts originally scheduled to take effect January 1st of this year, but delayed until March 1st thanks to a last-minute, bipartisan deal.

For background information, please see our most recent post on the topic as well as the brief put out jointly by the UW offices of Federal Relations, Planning & Budgeting, and Research.

Two years ago at the annual Council of Independent Colleges, a group of private-college presidents advocated for limiting the amount of financial aid awarded on criteria other than need—usually referred to as “merit-based” financial aid. Although the presidents received an enthusiastic response from the Council, little action followed. However, last Saturday at this year’s Council meeting, the conversation was revisited and two encouraging developments suggest progress may be more conceivable this time.

First, the presidents unveiled a draft “statement of principle,” which they hope will unite colleagues who believe that meeting financial need should be the highest priority of aid policies. Titled “High Tuition/High Discount Has No Future,” the statement articulates that the merit-aid/tuition discounting model is unsustainable and those signing their support acknowledge they’ve contributed to the problem. The statement cites a 2009 study that found “the increased use of merit aid is associated with a decrease in enrollment of low-income and minority students, particularly at more selective institutions.”

Second, David L. Warren, president of the National Association of Independent Colleges and Universities, revealed information from preliminary conversations with U.S. Justice Department officials regarding ways in which groups of presidents could discuss their tuition and/or financial aid policies without penalty and, hopefully, reach collective agreements to make college more affordable. This is significant as the Overlap Group, a set of elite universities that joined forces on admissions and financial-aid decisions for several years, faced antitrust charges by the federal government in 1991. The federal case effectively ended any meaningful collaboration on such topics, keeping schools in the dark about each other’s financial aid and admissions strategies.

“The fear, obviously, is that unilateral disarmament” in the merit-aid race won’t work, said one of the efforts’ leaders according to The Chronicle. Presidents worry that increasing need-based aid and decreasing merit aid, which is used to attract top students, will result in less robust enrollment and less prestige. But hopefully between the statement of principle, which could align presidents behind common goals, and discussions with the federal government, which could result in permissible collaboration, some progress will be made and the game of financial-aid chicken can end.

Yesterday, the Senate and House of Representatives approved legislation to avert the fiscal cliff. The deal postpones the automatic, across-the-board spending cuts—known as “the sequester”—by two months and increases tax rates only for individuals earning over $400,000 and couples earning over $450,000. The bill also preserves funding for Pell Grants and extends for five years the American Opportunity Tax Credit (AOTC), which allows students and their parents to claim up to $2,500 a year for tuition and college expenses.

For details, please see the blog post provided by Christy Gullion, Director of Federal Relations, and the articles provided by Inside Higher Ed and The Chronicle

Christy Gullion, Director of Federal Relations, recently provided an update on the fiscal cliff–the combination of large decreases in federal spending and simultaneous increases in income taxes set to take effect January 1st. For background information, please see the brief put out jointly by the UW offices of Federal Relations, Planning & Budgeting, and Research.

A bill introduced to the House of Representatives earlier this month by Rep. Thomas E. Petri, a Wisconsin Republican, would overhaul the federal student-loan programs. Under the proposal:

  • Monthly payments would be capped at 15 percent of discretionary income—the new income-based repayment program currently caps payments at 10 percent of discretionary income.
  • Payments would be withheld directly from paychecks—essentially eliminating the potential for defaulting, a welcome thought for schools with high default rates (predominately for-profits) which are at risk of losing eligibility to participate in federal aid programs.
  • Interest accrual would be capped at 50 percent of a loan’s total at the time of graduation—good news for borrowers, often low-income, who take upwards of 10 years to repay loans.
  • Subsidies would be eliminated that currently pay interest while undergraduates are in college—a means of offsetting the cost of capping interest, but potentially detrimental to low-income students.
  • Loan forgiveness after a certain number of years (usually 20 or 25) would be eliminated—this could dissuade students from entering public-service careers for which loans are currently forgiven after 10 years.

The proposed system resembles those used in the U.K., Australia, and New Zealand. If passed, the new rules would only impact new loans.

While some components of the bill could be beneficial, such as the cap on interest accrual, many other components appear problematic. The Chronicle reports that the National Association of Student Financial Aid Administrators expressed support for the proposal saying, “We need to make it as easy as possible for borrowers to stay on the straight and narrow.” But others, such as the advocacy group Institute for College Access & Success, worry the bill would “take away some key tools for managing federal student debt,” such as forbearance and deferments.

Since similar proposals from Rep. Petri have had little success in the past and since his latest bill has no cosponsors, the bill is unlikely to be passed. However, it could be discussed during next year’s Congressional debate over reauthorizing the Higher Education Act, which expires at the end of 2013.

Last Wednesday, eight Democratic senators sent a letter to the U.S. Department of Education (ED) asking Education Secretary, Arne Duncan, to investigate strategies that some for-profit colleges allegedly use to falsely lower their cohort default rates (CDRs)—the rate at which student borrowers default on federal loans. Institutions with high CDRs can face penalties including a loss of eligibility for federal student aid programs.

The letter cites a recent Senate Committee report, which presents evidence that for-profits routinely use two tactics
in particular to manipulate CDRs:

  1. “Encouraging or even harassing borrowers” into forbearances or deferments, which can delay default until after the
    period for which CDRs are typically reported; and
  2. Manipulating campus and program categorizations in a way that makes their default rates artificially low.

The senators argue that “for-profit schools should not be able to use administrative smoke and mirrors to circumvent regulations that protect students and taxpayers, and the department should take action to prevent these tactics.” Some for-profits have admitted to using such strategies to “manage” their CDRs, but they deny that doing so conflicts with their students’ best interests.

For-profits consistently average higher default rates than all other higher education sectors.  Of the students who began repaying loans in 2009, 22.7 percent of students at for-profits defaulted within three years, while only 11 percent of public students defaulted in that timeframe, and only 7.5 percent of private nonprofit students. In contrast, the UW’s three-year CDR was an impressively low 3.1

Comparing for-profits’ two-year CDRs with newly-reported three-year CDRs reveals a major, and potentially damning, discrepancy. Fifty percent more students from for profits’ defaulted in the three-year timeframe than in the two-year timeframe. The senators say this “raises serious questions about how widespread the use of such tactics may be across the sector.”

ED has yet to respond to the senators’ letter.

Check out Christy Gullion’s latest post about a possible to deal to avoid the federal fiscal cliff.

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.”

Here are a few noteworthy headlines from the past few days of higher education news:

  • History professors at the University of Florida are fighting a proposed differential tuition strategy that would hold tuition rates stable for “high-skill, high-wage, high-demand” degree programs for at least three years.  Most STEM degrees made the list of majors recommended for this tuition freeze, while core Humanities disciplines (such as history) did not.  The Governor-commissioned task force responsible for the proposal said, “The theory is that students in ‘non-strategic majors,’ by paying higher tuition, will help subsidize students in the ‘strategic’ majors, thus creating a greater demand for the targeted programs and more graduates from these programs, as well.”  Supporters feel such an approach will provide taxpayers with the maximum return on their investment and “improve the university system overall.”   However, the opposition, championed by a number of history professors, argues the strategy would detract from the university’s prestige and lead to a less “richly educated” workforce.  Over 1,300 faculty from Florida and beyond have petitioned Florida Governor Rick Scott to seek faculty input for future decisions regarding Florida’s higher education system.  This particular form of differential tuition contrasts with the more typical, cost-driven approach, under which students in majors that cost the university more to provide (such as STEM fields) are charged higher tuition than students studying less expensive subjects (like history).
  • Carnegie Corporation President, Vartan Gregorian, is advocating for a presidential commission on higher education to “generate the kind of attention and urgency that the circumstances demanded for the nation to keep its competitive edge.”  The commission’s mandate would be to address the many challenges confronting higher education (cost, access, etc.) and help policy makers determine its future.  Given the drastic demographic, technological, and economic changes already occurring in higher ed, Mr. Gregorian believes now is the appropriate time to discuss nation-wide reform.
  • Apprenticeships are becoming more popular in the U.S. as a means of bridging the disconnect between what students learn in college and what their future employers actually want them to know.   Several Harvard professors, inspired by Germany’s “dual system” of providing students with practical job-related skills and theoretical instruction, are working with six states to establish apprenticeship programs.

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