Many of the white papers sponsored by the Bill & Melinda Gates Foundation’s Reimagining Aid Design and Delivery project have focused on modifications to the Pell program and/or student loans and repayment (including the two I summarized previously, found here and here). However, the white paper released on Wednesday by the Center on Postsecondary and Economic Success takes a different approach. It argues that by making tax-based student aid more beneficial to low and middle-income students, the federal government could save billions of dollars, direct those savings to the Pell program and improve the financial aid system as a whole.
Current tax-based financial aid provides high-income families with much larger tax deductions, since the value of the deductions is linked to a family’s marginal tax rate. As The Chronicle notes, “a $100 tax deduction, for example, is worth early $40 to a high-income household but only $10 to a lower-earning family.” To remedy this issue and refocus the benefits of aid onto low-income families, the Center proposes increasing the refundable portion of the American Opportunity Tax Credit (AOTC). The Center also recommends eliminating nonrefundable tax credits, such as the Lifetime Learning Credit (LLC), since they do not benefit households that pay no income tax (i.e. low-income families).
The table below shows the percent distribution of student aid by type and income category in 2013. As you can see, Pell Grants (in blue) primarily benefit low-income families, whereas tax-based student aid (in purple) does the opposite. Another interesting table from the Tax Policy Center can be found here.
The paper includes three alternative proposals for making tax-based aid more helpful to low-income students and simultaneously boosting college access and completion. It also discusses three options for improving performance measures used in student-aid policies.
“Aligning the Means and the Ends: How to Improve Federal Student Aid and Increase College Access and Success” is the Institute for College Access & Success’s (TICAS) white paper for the Reimagining Aid Design and Delivery project, sponsored by the Bill & Melinda Gates Foundation (see our recent post for more information). Some of the report’s suggestions have been echoed in other white papers and publications, such as simplifying the federal financial aid application process, making the Pell program a mandatory federal budget item, and fostering more understandable and comparable reporting of college costs. The paper’s others recommendations include:
- Holding colleges accountable not only to the percentage of student borrowers who default on loans (represented by the currently-used cohort default rates), but also to the percentage of students who take out loans in the first place. TICAS proposes denying federal aid to colleges that score below a certain threshold on a combined index of the two measures. The group also recommends increasing federal aid to colleges scoring above a certain threshold. The amount of additional aid would be determined by how much Pell funding their students receive.
- Shoring up the Pell Grant. TICAS proposes doubling the maximum Pell grant award, to about $11,000 a year, and extending the eligibility timeframe from 6 years to 7.5.
- Creating a single federal student loan with no fees and a fixed interest rate. The rate would be low while students are in school and would rise, by a fixed amount with a cap, when they leave.
- Streamlining repayment plans, replacing multiple options for income-based plans with only one. Delinquent borrowers would automatically be placed in the income-based plan; but, a non-income-based option would be available to other borrowers. TICAS wants to leave borrowers with a choice, but argues they need real counseling—not just disclosure—to help them decide.
- Eliminating higher education tax benefits and sending the savings to Pell Grants and monetary incentives for states and colleges. If tax benefits are preserved, the group recommends restructuring them into an upgraded American Opportunity Tax Credit aimed at helping low- and moderate-income students.
TICAS’ paper outlines a few ways the government could fund these proposals in addition to potentially eliminating higher ed tax benefits. As The Chronicle nicely summarized, those options include, “limiting the benefit of itemized tax deductions, taxing private equity and hedge-fund income like other income, and removing or reforming tax-exempt bonds for private nonprofit colleges.”
The Gates Foundation has joined the nation’s financial aid conversation and is attempting to rethink how policies and practices can not only help maintain access (in the face of flagging state support and rising tuition prices), but also help students succeed. In September of last year, the Gates Foundation launched its Reimagining Aid Design and Delivery project, which provided 16 organizations with funding to develop and publish innovative financial aid strategies aimed at encouraging college completion. One of the 16 organizations, the New America Foundation, recently released its white paper, which recommends bolstering Pell Grants, limiting student loan options, and removing higher ed tax benefits.
To improve “both the effectiveness and sustainability of Pell Grants,” the New America Foundation recommends:
- Making the Pell program a mandatory federal budget item;
- Increasing the maximum grant faster than is currently scheduled while restoring summer grant support;
- Limiting Pell eligibility to 125 percent of a program’s length;
- Providing additional federal funding to public and private-nonprofit colleges that have a large proportion of low-income students and high graduation rates; and
- Requiring four-year colleges that enroll a small percentage of low-income students and charge more than $10,000 per year (after financial aid) to match some of the Pell dollars they receive with need-based aid from institutional funds.
The plan, which is intended to be “budget neutral,” recommends that the Pell Grant changes be funded by:
- Eliminating the American Opportunity and Lifetime Learning tuition tax credits, tax-advantaged savings plans for education, and the student loan interest deduction;
- Ending the Supplemental Educational Opportunity Grant program; and
- Encouraging borrowers to refinance old student loans into direct lending.
The authors also recommend consolidating federal student loan programs into a single, “enhanced” Stafford Loan system as a means of simplifying the student loan system and reducing the potential for default. This would involve:
- Automatically enrolling all federal student loan borrowers in income-based repayment plans;
- Eliminating subsidized undergraduate loans;
- Setting student loan interest rates via a fixed formula that adjusts to market conditions;
- Ending the Grad PLUS and Parent PLUS loan programs;
- Increasing borrowing limits slightly to $40,000 total for undergrads and $25,500 per year for grads; and
- Limiting federal student loan eligibility to 150 percent of a program’s length.
Although some (if not many) of these ideas are politically unpopular, the authors argue that their recommendations must be implemented together in order to be effective. However, it seems more likely that Congress will cherry-pick specific suggestions to pursue or perhaps ignore the report’s policy proposals altogether. The Gates Foundation hopes their project will, at the very least, stimulate discussion about reforming financial aid.
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
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:
- “Encouraging or even harassing borrowers” into forbearances or deferments, which can delay default until after the
period for which CDRs are typically reported; and
- 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.
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:
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.
Last Friday, the U.S. Department of Education released its annual update on federal student loan cohort default rates (CDRs) and, although national CDRs are gloomily high, UW’s rates are impressively low. As the Department is in the process of switching to a more accurate three-year CDR measure, this year’s report includes both the FY 2010 two-year and the FY 2009 three-year CDRs. These rates represent the percentage of student borrowers who failed to make loan payments for 270 days within two or three years, respectively, of leaving school.
The Department provides breakdowns of its data by institution type, state and school. Here are some key findings:
- The FY 2010 two-year CDR increased from 8.8 to 9.1 percent overall. Public institutions increased from 7.2 to 8.3 percent, private nonprofits increased from 4.6 to 5.2 percent, but for-profits decreased from 15.0 to 12.9 percent (though their two-year CDR is still the highest).
- The FY 2009 three-year CDR is 13.4 percent overall (this is the Department’s first year reporting three-year data) with public institutions at 11 percent, private nonprofits at 7.5 percent, and for-profits at 22.7 percent.
- UW’s three-year CDR is a remarkable 3.1 percent—more than 10 percentage points below the national average.
- UW’s two-year CDR increased slightly from 1.4 to 2.1 percent, but is still well below the national average.
- The State of Washington’s three-year CDR is 11.3 percent—below the national average, but still above approximately half the states.
Unfortunately, the Department does not release loan default rates disaggregated by student demographic (even though it collects this information), which prevents schools from identifying and catering assistance to students with the most need. While third-parties have conducted studies indicating that Pell Grant recipients and Latino students are more likely to default on loans, schools and legislators need better data from the federal government in order to fully identify at-risk groups and mitigate rising default rates.
The Pell Grant program, the largest federal student grant program, was expected to be $20 billion short of the $40 billion price estimated for FY12 (which ended July 1). However, the Department of Education surprised many with newly-released data showing the federal government not only spent well under that estimate at only $33.4 billion, but in fact $2.2 billion less than FY11.
Recently, Pell eligibility increased dramatically as college enrollments rose and the recession continued to impact family/student income. This trend continued in FY12 and, interestingly, the dip in Pell spending occurred despite a 58,000 increase in Pell recipients—to almost 9.7 million. In fall 2011, nearly one quarter of UW freshmen were Pell eligible.
Reasons for the decline in Pell spending include:
- The elimination of the year-round, or summer, Pell Grant, which allowed students to qualify for two awards in a year.
- More students attending college part time as part-time status reduces Pell award amounts.
- Fewer students attending for-profit institutions, which tend to enroll students who qualify for larger awards. Recent bad press and slumping enrollments have hit for-profits hard. Consequently, the number of Pell recipients at for-profits declined by 108,000 students, to roughly 2.1 million, and accounted for $1.4 billion of the decrease.
The drop in Pell expenditures is a relief for most lawmakers as they face next year’s “fiscal cliff” and must address both the impending tax hikes (when Bush tax cuts expire) and the automatic spending cuts (as mandated by the sequester). The Obama administration and congressional Democrats have resisted financial aid-related budget cutting, maintaining the maximum Pell award of $5,550 and writing specific protection for Pell Grant funding into the Budget Control Act. However, recent financial straits have already caused the federal government to eliminate several student loan programs such as the previously-mentioned summer Pell Grant, the six-month grace period for loan repayment, subsidized Stafford Loans for graduate students, and incentives for early loan repayment. With the sequester and difficult budget decisions looming on the horizon, it is safe to say that no funding is safe.
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