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Last week the Government Accountability Office (GAO) released a report highlighting weaknesses in the Department of Education’s budget estimates for income-driven repayment (IDR) plans for federal student loans. The Department agrees with and is already working to implement many of the GAO’s recommended changes to its methodology, some of which will increase estimated costs, while others will decrease them.

Meanwhile, most of the media coverage of the report has focused on GAO’s projection that $108 billion of loan principal will end up being forgiven under IDR and Public Service Loan Forgiveness (PSLF) for loans taken out between 1995 and 2017. However, this does not mean those loans will cost taxpayers $108 billion. The amount of debt forgiven is only one part of the equation to determine the net cost of IDR plans to the federal government. A borrower can receive forgiveness in an IDR plan and still pay more in total than she would have under a different repayment plan.

Consider a borrower with $40,000 in federal loans and $40,000 in adjusted gross income (AGI) in her first year out of school. She would pay almost $8,000 more in total in the Pay As You Earn (PAYE) plan than in a 10-year fixed repayment plan ($57,000 versus $49,000), even though she would receive nearly $8,000 in forgiveness under PAYE.* The GAO recognizes this fact in their report, agreeing that “it is possible for the government still to generate income on loans with principal forgiven, particularly if borrower interest payments exceed forgiveness amounts.” (p. 50).

Ultimately, the cost of the federal student loan program is determined by comparing how much the government lends with the amount that borrowers pay back and the cost of administering the program. Doing this, analysis of CBO data reveals the government is actually making money from the federal student loan programs. In fact, CBO estimates savings of $81 billion from federal student loans over the next 10 years alone, even after accounting for increased enrollment in IDR plans.   

Access to affordable, income-driven payments and a light at the end of the tunnel are essential for borrowers in an era of rising college costs and student debt. The GAO reported last year that 83% of borrowers in PAYE earned $20,000 or less in annual income, and recommended that the Department increase outreach to help more struggling borrowers learn about and enroll in IDR plans. IDR provides real relief for borrowers and helps them stay on top of their payments. Data show that borrowers in IDR are less likely to default or become delinquent than borrowers in standard plans.

Nonetheless, while IDR helps ensure that federal student loan payments are affordable and helps prevent default, it neither reduces college costs nor ensures that students and taxpayers are getting value for their investment in college. More needs to be done to strengthen college accountability and reduce student debt. For example, students need better information on program costs and outcomes, and the gainful employment rule needs to be enforced to ensure taxpayers are not subsidizing career education programs that consistently leave students with debts they are unable to repay. You can read more about our national policy agenda to reduce the burden of student debt here

* Note: these calculations assume that the borrower is single, her AGI increases 4% a year, and the average interest rate on her loans is 6.8%. Total amounts paid and forgiven are adjusted for inflation.

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Headlines have raised concerns about the costs of providing borrowers with affordable monthly payments tied to their income, and more recently, concerns about the cost of providing relief to students defrauded by Corinthian and other predatory colleges. However, analysis of Congressional Budget Office estimates released last month reveal that CBO is projecting that the federal government will make $81 billion in profit over the next 10 years from student loans even after accounting for the costs associated with income-driven repayment programs.[1] That’s, on average, nearly $8 billion per year.

With the federal student loan program projected to generate billions in profits, the government should swiftly discharge the debts of defrauded students, many of whom are currently struggling to repay loans from schools that left them worse off than before they enrolled. Both the borrowers and taxpayers will be better off when these borrowers are able to move on to quality educational programs and productive work.

Going forward, our proposal for  one simple, affordable undergraduate loan includes an interest rate calculation that better reflects the government’s cost of borrowing and administering the loan program than the current formula (in place since 2013), which should reduce the likelihood that student loans generate consistently large profits for the government. We also propose streamlining the multiple income-driven repayment plans into one improved plan to keep payments affordable by capping payments at 10% of discretionary income and forgiving any remaining debt after 20 years, as proposed in the AFFORD Act introduced by Senator Jeff Merkley. However, when student loans do generate exceptionally large profits for the government, as is true today, we urge Congress and the Administration to use those funds to lower the cost of college for low-income students, rather than allow them to disappear into the federal budget.

 

[1] Calculations by TICAS and CBPP using data from the Congressional Budget Office (CBO), August 2016 baseline. Figures represent projected budget authority (BA) between 2017-2026, including $1 billion in lower expected costs due to sequestration. Figures for the total student loan program include the Direct Loan program, FFEL program, and administrative costs.

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In an effort to hold colleges accountable, the U.S. Department of Education measures how many borrowers from a college default on their loans – a “cohort default rate” which measures just the tip of the borrower-distress iceberg. In conjunction with its College Scorecard, the U.S. Department of Education has also begun releasing college repayment rates, which measure the share of borrowers paying down the principal balance on their federal loan debt.  

As the Department states in its College Scorecard documentation, default rates “can be manipulated through the use of allowable nonrepayment options like deferments and forbearances” which serve to temporarily keep default rates down and colleges in compliance with federal limits on defaults. Indeed, some for-profit colleges have admitted to doing just that.

While available default and repayment rates have some differences (most notably, default rates include graduate students and the repayment rates do not), they are comparable enough to identify trends and outliers. Comparing default rates and repayment rates tells you about how many students have avoided default but still aren’t paying down their loans: perhaps they’re delinquent, in forbearance or deferment, or in a repayment plan where their balance is growing rather than shrinking. And in schools where default rate manipulation is occurring, this group of borrowers – the missing middle group of those neither in default nor paying down their loans – will be atypically large. 

Across all schools, this missing middle group makes up about 22 percent of borrowers three years into repayment on average. But at 481 schools, 40 percent or more of borrowers are neither in default nor paying down principal. The vast majority of these schools (79%) is for-profit colleges, including Kaplan University which previously hired private investigators to track down former students to put them in forbearance. It includes CollegeAmerica, sued by the U.S. Department of Justice for violating rules on incentive compensation and by the Colorado Attorney General for fraud. It includes National College, which last month was ordered to pay $157,000 to the state of Kentucky for its years-long refusal to comply with a subpoena related to potential job placement rate falsification. It includes now-shuttered Westwood College, which had faced charges of deceptive marketing and recruiting for years and been sued by the Colorado and Illinois Attorneys General. Computer Systems Institute and Marinello Schools of Beauty, both of which were cut off of federal aid after this year having been found in violation of several federal rules, also made the list. This missing middle group also makes up more than half of all borrowers at some Everest College campuses that remain open for business. While Everest schools have new corporate management, the former CEO had this to say about managing cohort default rates during a 2011 investor call: “Forbearance, as you well know, is a pretty easy, just a question you have to agree to it and you’re on your way.”

​Forbearance abuse for the purpose of evading accountability is well documented in the for-profit college sector, but has not been documented at other types of institutions. The pie chart below shows the distribution of schools where 40 percent or more of borrowers are neither in default nor paying down their loans three years into repayment, and the list of schools is available here

 

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New Department of Education data released in conjunction with the College Scorecard clearly show how much student loan repayment rates vary by whether or not a student completes their program and the type of school a student attends. Repayment rates in the College Scorecard measure the percent of undergraduate federal student loan borrowers making any progress on paying down their debt (i.e. the share that have paid down at least $1 of their balance when they entered repayment).

As shown in the table below, borrowers who do not complete their program are less likely to be paying down their debt than those who graduate (56% versus 77%). We also found that, for both students who finish their programs and those who do not, repayment rates vary substantially based on the type of college they attend, with students who attend for-profit colleges being the least likely to be paying down any of their federal student loan balance. 

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The U.S. Department of Education recently released new data on college costs, outcomes, and debt in conjunction with their College Scorecard – a helpful tool for students and families and a treasure trove of data for analysts. 

We took a look at the data to find some of the schools where debt problems are particularly severe: the schools at which the majority of students borrows, and a minority of borrowers is paying down their debt three years into repayment. We identified 605 schools that met these criteria. For-profit colleges make up more than three-quarters (79%) of the 605 schools. Of the remaining 125 colleges that meet these criteria, 67 are nonprofit colleges and 58 are public colleges. 

These data are detailed in the table below, and a list of the 605 schools is available here

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Statement of Pauline Abernathy, executive vice president, TICAS:

“We congratulate Amazon for deciding to stop promoting Wells Fargo’s costly private education loans. Private loans are one of the riskiest ways to pay for college, with none of the flexible repayment options and consumer protections that come with federal student loans. And Wells Fargo’s rates are among the highest at more than triple the undergraduate federal student loan interest rate of 3.76%. Undergraduate students under age 24 can borrow up to $31,000 in federal student loans, regardless of their income, and more if they’re older. Students should consider other schools if a school requires them to take out a private loan.”

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For more information on the differences between federal student loans and private loans see:

Consumer Financial Protection Bureau Q&A
U.S. Department of Education Side-by-Side


See our previous statement on the July 21, 2016 announcement from Wells Fargo and Amazon that they’re teaming up to promote costly private loans to college students.

TICAS Statement on Wells Fargo/Amazon Deal to Dupe Students into Taking Private Loans

“This is the kind of misleading private loan marketing that was rampant before the financial crisis. It is a cynical attempt to dupe current students who are eligible for federal students loans with a record low 3.76% fixed interest rate into taking out costly private loans with interest rates currently as high as 13.74%. Amazon and Wells Fargo are trumpeting a 0.5% discount while burying the sky-high rates on these private loans and without noting that they lack the consumer protections and flexible repayment options that come with federal student loans. Also buried in the fine print is a note saying, 'Wells Fargo reserves the right to modify or discontinue interest rate discount program(s) for future loans or to discontinue loan programs at any time without notice.' Private loans are one of the riskiest ways to finance a college education. Like credit cards, they have the highest rates for those who can least afford them, but they are much more difficult to discharge in bankruptcy than credit cards and other consumer debts.”

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Read the Washington Post article featuring Pauline Abernathy and our statement

 

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Earlier this week, in the wake of negotiations with the Legislature, California Governor Jerry Brown signed the 2016-17 state budget into law. Disappointingly, it includes no increases to the number of Cal Grants available for low-income students, and even takes money out of financial aid by redirecting $42 million in unspent Middle Class Scholarship (MCS) program funds elsewhere.

On the other hand, there are a few positive developments in the budget agreement for California students and college affordability. The maximum Cal Grant B will be increased by $22 thanks to 2014 legislation by Senate pro Tem Kevin de León which was formalized through the budget. The Full-Time Student Success Grant (FTSSG), created in last year’s budget agreement, is being expanded to allow more full-time California Community College students to receive an additional $600. The budget also includes funding to support innovative efforts at community colleges to improve students’ access to financial aid programs and strengthen coordination with local education agencies, among other goals.

Interestingly, as requested by the Assembly, the budget agreement also calls upon the Legislative Analyst’s Office (LAO) to study the ways in which state-based financial aid can be strengthened to reduce low- and middle-income Californians’ reliance on student loan debt by helping students cover more of their college costs. Among the options the LAO will study is the consolidation of the state’s many financial aid programs – including Cal Grants, the MCS, the FTSSG, and institutional aid programs at the community colleges, California State University, and University of California.

There are several components of this study that make it worth watching:

  • The focus is on total college costs – not just tuition. For most California students, tuition and fees are a fraction of total costs; at the CCCs, for example, where fees are among the lowest in the nation, non-tuition costs including room, board, transportation, books, and supplies can represent more than 90 percent of the total cost of attendance. Yet state and institutional aid programs are currently designed primarily to subsidize tuition and fees.
     
  • It includes all public colleges. Within California public colleges, only the University of California has been able to implement a strategy designed to bring the total cost of college within reach. At others, including the community colleges where the majority of low-income students enroll, there simply aren’t enough resources available to do so. This helps to explain why it is often more expensive for low-income students to attend a community college than a public four-year institution.
     
  • It acknowledges that the burden of debt falls most heavily on lower income students. There’s a widespread misperception that existing grant aid programs bring college within reach for low-income students, whereas higher income students must take on debt. However, existing data doesn’t bear that out: At UC, graduates with family incomes under $53,000 are much more likely than graduates from higher income groups to have debt.

Taking a step back to assess how California’s many financial aid programs are working together is key to understanding and addressing some of the underlying inequities facing low- and middle-income students in affording and succeeding in college. There’s no way to know at this point what will come of this study, but the fact that the study was requested and the specific parameters provided are encouraging signs that the Legislature and Governor recognize that the status quo – which shortchanges low-income students and the colleges that serve them – needs improvement.  

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The cost of going to college is more than just tuition: it includes textbooks, transportation, housing, food, and other personal expenses. Long defined by federal law, these combined costs are called the “cost of attendance” (COA). Colleges are required to give the U.S. Department of Education (the Department) estimated COAs for their students every year. These estimates play an important role in determining students’ financial aid eligibility, and in helping students and families understand the full cost they’re likely to face at a particular school. But some estimates greatly understate those costs because of the way the Department collects them.  

Bear with us while we explain the problem and what we learned about its implications.


How Costs are Estimated and Reported

Because students’ costs can vary widely depending on their living situation, colleges often develop three distinct COA estimates: for living on campus, at home (with family), and off campus (without family). Colleges have considerable discretion over how they estimate each type of cost that comprises the COA, but federal law specifies which types to include: some are for all students, such as textbooks and room and board (housing and food), while others, such as childcare or disability services, are applied only to students who need them.[1]

Schools report their COA estimates[2] by type of cost and by living status through the Department’s Integrated Postsecondary Education Data System (IPEDS) Student Financial Aid (SFA) survey. These figures are used in consumer-facing websites, as well as to calculate the “net price” estimates displayed on tools like the College Scorecard and on many colleges’ Net Price Calculators. (Net price is COA minus grants and scholarships: it’s what students need to cover through savings, earnings, and/or loans.) 

These tools provide students and families with more meaningful cost estimates than typical sticker price listings, but their accuracy is undermined by the fact that they rely on incomplete COA data. This is because the IPEDS SFA survey does not let schools report estimated room and board expenses for students living at home as they do for students living on campus or off campus without family. Why not? It may be that those who designed the IPEDS COA survey questions presumed that schools do not account for any room and board costs in their COA budgets for students living at home, or even that these students don’t incur living costs in the first place. However, for many students, living at home isn’t free; a 2015 survey of low- and moderate-income Wisconsin students found that three in four students living at home purchased food and 39 percent paid rent. Unsurprisingly, then, we have seen that many colleges do recognize that students living at home incur expenses for room and board, and factor them into their COA estimates as federal law allows (and used to require). Wherever this is the case, federal data on college costs and net prices are understated.


Our Analysis

To better understand the scope of the problem and its implications, we selected a random sample of 50 colleges (25 public four-year and 25 public two-year schools) and collected COA data from an alternate source: student aid budgets posted on college web sites or available from financial aid offices. We limited our analysis to schools that reported at least 10 percent of students living at home.[3] For each of these schools we examined whether their COA estimate for students living at home included a room and board allowance, and, if so, how much that allowance was. Our findings confirmed colleges’ widespread acknowledgement that students living at home face significant room and board expenses.

Of the 41 colleges for which we were able to collect alternative COA data to compare with IPEDS,[4] we found:

  • All 41 colleges assume some room and board cost for students living off-campus with family, contrary to assumptions that schools provide no such allowance.
  • Room and board allowances for students living at home range from $1,350 to nearly $8,000 per year. Two-thirds of the colleges (27 out of 41) listed allowances of $3,000 or more.
  • Two of the 41 colleges appear to have reported room and board allowances for students living at home to IPEDS by adding them into the “other expenses” category. While doing so results in more comprehensive federal calculations of costs and net price, this practice runs counter to IPEDS instructions, which state that room and board costs are not to be reported for these students.[5]
  • Thirty-nine of the 41 schools provide room and board allowances that are partially or completely excluded from IPEDS reporting.

         Las Positas College Net Price Calculator*

        *Results for a student living at home with less                            than 30,000 in family income


Implications for Cost and Net Price Estimates

These exclusions have significant impacts on colleges’ cost and net price estimates. For example, Las Positas College – a community college in California – estimates that students living at home have room and board costs of $4,518 in 2013-14. Yet the institution’s net price calculator (NPC) lists an estimated room and board budget of $0, because the school used a federal NPC template that drew on incomplete IPEDS COA data for 2013-14. Had the NPC properly factored in room and board costs, the net price listed for a low-income student living at home would have been $7,407, more than two-and-a-half times the listed net price of $2,889.

How much of an impact it has on college-level figures, or aggregate figures at the state- or national-level, depends on the share of a college’s student body that lives at home. At 24 of the 41 colleges we analyzed, more than half of the students used in the calculation of federal net price by income lived off-campus with family. This means that:

  • Federally collected and widely used COA figures for these colleges are often understated by thousands of dollars, as they don’t reflect the comprehensive COA budgets colleges develop.
  • The net price calculations displayed in consumer tools like the College Scorecard can be substantially understated.
  • Personalized estimates provided by colleges’ own NPCs might be understated if they use the federal NPC template.

The exclusion of these room and board costs in the federal data affect net prices for community colleges more than other types of schools, because community colleges have the greatest share of students captured in the data living at home. However, the problem isn’t limited to public, two-year schools. There are more than 1,000 colleges in other sectors across the country where at least half of students counted in the federal net price data live at home.


The Solution: Collect Room and Board Estimates for All Students

Consumer tools that rely on federal data are designed to provide students and families reliable and comparable college cost estimates – something they cannot do given the way COA data are currently collected in IPEDS. Fortunately, the solution is simple: Expand the IPEDS SFA survey to include room and board estimates for students living at home.


[1] The standard cost categories are tuition & fees, room & board, books & supplies, and other expenses (transportation & miscellaneous personal expenses).

[2] Colleges report COA estimates for first-time, full-time, full-year students. Estimates include standard cost categories that apply to all students, but not specialized cost categories.

[3] Enrollment by living status is reported for first-time, full-time Title IV aid recipients.

[4] At the remaining nine colleges, we could not find COA budgets listed on their websites and did not receive responses to our queries about COA. Our analysis incorporated the latest available cost of attendance budgets through the 2015-16 academic year, and cost of attendance data reported to IPEDS for 2013-14, the latest available survey year for IPEDS SFA net price by income cohorts.

[5] 2015-16 IPEDS survey materials make clear that for students living off-campus (with family), room and board costs are not reported, only other expenses.

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Earlier today, California Governor Jerry Brown unveiled his updated budget proposal for 2016-17. It includes a small but important expansion to a community college financial aid program created last year, which helps low-income students enroll full time. Under the expansion, the benefit will extend to more students enrolled in career technical education programs.

However, there’s more that can and should be done in the 2016-17 state budget to make college affordable for more Californians. As we’ve noted previously, this budget – as did the last – assumes unrealistically high spending in the Middle Class Scholarship (MCS) program. Funding for the program is set by law, and the amount that has been set is more than enough to serve the students eligible for the program, both now and in the foreseeable future. 

In 2015-16, about $34 million of the appropriated amount went unspent, and now that the year is almost over the Governor is proposing to spend those funds elsewhere. We project that even more of the appropriated MCS funding – $41 million – will go unspent in 2016-17. In the same year, hundreds of thousands of eligible Cal Grant applicants will not receive grants because too few are available, and many others will struggle to cover non-tuition costs with a grant that has not kept pace with inflation. 

Leaving unnecessary appropriations in the budget either to return to the state’s coffers at the end of the year, or be reallocated one year at a time, is a wasted opportunity. In future years, as the scheduled MCS appropriation increases, the amount unspent will be even higher.

There have been several successful efforts to strengthen Cal Grants in recent years, including the last two state budget agreements, which increased the size of low-income students’ non-tuition grants (2014-15) and the number of awards available (2015-16), and 2014 legislation by Senator Kevin de León which further increases low-income students’ non-tuition grants each year. Even after these increases, however, low-income students remain either unserved or underserved by the Cal Grant program. This year, Senator Marty Block has a bill (SB 1357) that would increase the non-tuition award for community college students. Assemblymember Jose Medina has legislation (AB 1721) that would both increase the number and size of Cal Grants available, both of which are top priorities for more than 20 higher education advocacy, student, civil rights, business and workforce groups across the state.

Clearly, the Legislature has the will to strengthen college affordability.

In unveiling his updated proposal, the Governor underscored the need for fiscal restraint. Luckily for legislators seeking to improve college affordability, there is a way to strengthen Cal Grants in 2016-17 within budget constraints. In both the Assembly and Senate budget subcommittees, recent hearings on financial aid have included discussion about unspent MCS funds going forward and whether they should be tapped to increase the number of Cal Grants available for low-income students. As soon as next week, these committees will vote on these very issues. Given the substantial need within the Cal Grant program, we urge the Legislature to reduce the ongoing scheduled MCS appropriations, and invest the savings into strengthening Cal Grants for low-income students as almost two dozen organizations have recommended

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We’re big advocates of providing students and families with tools and information to help them decide where to go to college and how to pay for it, and the Obama Administration deserves credit for making huge progress in this area. They created the College Scorecard, released new college-level data, and encouraged schools to use its voluntary “Shopping Sheet” format for financial aid award letters. Without the Shopping Sheet, college financial aid packages can be incredibly difficult to decipher and compare. It serves the same purpose as the standard window sticker required on all new cars since the 1950s—to provide key information in a consistent format so consumers can more easily understand their options.

Unfortunately, the Shopping Sheet and College Scorecard currently display different cumulative debt figures, such that the same institution can appear to be a low debt school on the Shopping Sheet and a high debt school on the College Scorecard.  While the College Scorecard shows the median debt of program completers only, the Shopping Sheet displays the median debt of all students entering repayment, regardless of whether they completed their program.* Including non-completers in the median debt calculation will often produce lower debt figures because non-completers borrow for a shorter period of time, sometimes only a semester or two before leaving a program. This is especially true for colleges where many students borrow but fail to graduate. As a result, the debt figure included on the Shopping Sheet inadvertently makes colleges with low completion rates (and high borrowing rates) look much more affordable than they actually are. This makes it harder for students to determine where they are likely to graduate without burdensome debt.  

The College Shopping Sheet Should Show Median Debt Among Completers, Just Like the College Scorecard

The table below demonstrates just how different the debt figures for the same school can be when you include all students entering repayment versus only program completers, particularly at colleges with low graduation rates.** For example, the median debt of completers at Ashford University is nearly three times higher than the median debt figure of all students who borrowed ($32,813 versus $11,190). This difference can be explained by the fact that 79 percent of students drop out of Ashford before they accumulate as much debt as those who complete their program. A similar difference is also evident at the University of Phoenix-Online, where 80 percent of students do not complete their program.

Differences in Median Debt Calculations


The problem is compounded when you compare schools with low and high graduation rates. To illustrate the potential magnitude of the impact of completion rates on median debt, we looked at median debt figures for Ashford University (where just 21 percent of students graduate) and Stanford University (where 95 percent of students graduate). While the typical Stanford graduate has 63 percent less debt than the typical Ashford graduate ($12,224 versus $32,813), the median debt among all students for the two schools is nearly identical ($11,190 versus $11,500).  Similarly, students at University of Phoenix-Online Campus and Florida State University have nearly identical median debt figures when non-completers are included. But the schools have dramatically different graduation rates (20 percent versus 76 percent), and graduates of the University of Phoenix-Online Campus typically have 67 percent more debt than graduates of Florida State University ($35,500 versus $21,250).

Students shopping for schools based on affordability are aiming to graduate with a degree, and should be informed about the debt they can expect when they accomplish that goal.  We’ve previously called attention to the problems with combining the debt levels of completers and dropouts (e.g., here and here), and we praised the Department last year for putting the median debt at graduation on the College Scorecard. We’re disappointed that the Department did not put median debt at graduation on the Shopping Sheet as well this year. Given the Department’s efforts to highlight colleges that do a good job of graduating students, it is particularly surprising that the Shopping Sheet uses a debt metric that makes colleges with high borrowing rates and low completion rates look more affordable than they are. We hope the next version of the Shopping Sheet will show debt for completers only, so students and families will know how much debt they can expect to have at graduation from different colleges.

* In addition, Shopping Sheet figures reflect one year of data, i.e., median cumulative federal student loan debt for undergraduates entering repayment in 2013-14, while Scorecard figures represents the same metric for those entering repayment in 2012-13 and in 2013-14 (pooled).

** Calculations by TICAS on data from U.S. Department of Education, College Scorecard.  Graduation rates shown here measure the share of first-time, full-time students who started in 2006-07 and 2007-08 who completed their programs within 150% of normal time by 2013-14. Median debt figures represent cumulative federal student loans borrowed for undergraduate education among borrowers who entered repayment in 2012-13 and 2013-14.

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