Blog

Borrowers are now one step closer to having a more streamlined process to keep their federal student loan payments affordable. Currently, borrowers struggling with payments can enter repayment plans that base monthly payments on their income, but they are required to update their income information every year. More than half of borrowers miss the annual deadline and the consequences can be severe – unaffordable spikes in monthly payment amounts that increase their risk of delinquency and default, as well as interest capitalization that can add substantial costs.

For example, a single borrower with $25,000 in debt (6.8% interest rate) and $25,000 in adjusted gross income (AGI) would owe $60 a month under the Pay As You Earn (PAYE) plan, but would owe $288 a month – over four times more -- if he or she missed the income recertification deadline.

TICAS, along with bipartisan groups of lawmakers in both the House and the Senate, other advocates for students and consumers, higher education leaders, financial aid administrators, and loan servicers have all advocated to reduce the likelihood that borrowers end up in delinquency or default by automating the annual recertification process (what is commonly known as “multi-year consent”). In response, the U.S. Departments of Treasury and Education recently announced an agreement to allow borrowers to provide permission for their annual income to be updated automatically using their existing tax data. Borrowers will be able to revoke that permission at any time. The move received bipartisan praise.

Automating the annual recertification process is a common-sense improvement that will help borrowers stay on top of their student loan payments. This change will also reduce the paperwork burden on student loan servicers. Now, it is incumbent on the agencies to work together to promptly implement the agreement to make multiyear consent a reality for borrowers and servicers, and for Congress to ensure that they have sufficient funding to do so.

Soon to be reintroduced in the new Congress by Representatives Bonamici (D-OR) and Costello (R-PA), the bipartisan SIMPLE Act also takes aim at the cumbersome annual recertification process for borrowers enrolled in income-driven repayment plans. In addition to requiring that borrowers can have their income automatically updated each year, the bill would dramatically reduce defaults by automatically enrolling severely delinquent borrowers who have not made a payment in four months into an income-driven plan. With a record eight million federal student loan borrowers in default, and one in four borrowers either delinquent or in default, these common-sense measures are urgently needed.

Posted in

| Tagged

California Governor Jerry Brown last week released his proposed 2017-18 California state budget, which includes a proposal to phase out the Middle Class Scholarship (MCS) program. The MCS program, created in 2013, was designed to serve California students from families with incomes above typical Cal Grant income thresholds (above about $80,000 at the time) and up to $150,000 who don’t receive much other grant aid. For reference, median household income in California is just under $62,000 in 2015 dollars.

Since the program was created, we have raised questions about whether the money would be better spent on the lower income students who face the highest financial hurdles getting to and through college. We still believe this to be the right question. However, data from the California Student Aid Commission (CSAC) show that some lower income students do receive MCS awards. During the 2015-16 academic year, about 6,300 students (13% of all MCS recipients) had incomes within the Cal Grant B income range (up to about $50,000 for a family of four), and an additional 12,700 students (26% of all MCS recipients) had incomes within the higher Cal Grant A range (up to about $90,000 for a family of four). We estimate that these 19,000 students – who represent 39% of all MCS recipients in 2015-16 – received up to 51% of MCS grant dollars.

Why is a program designed to help upper-middle-income students also helping lower income students? Because there are substantial gaps in the state Cal Grant program, which is designed to help lower income students pay for college. Most critically, there are not enough Cal Grants available for all students who apply and meet the financial and academic requirements. Whereas recent high school graduates are entitled to a Cal Grant, all other eligible Cal Grant applicants must compete for a very limited number (25,750) of awards. In 2015-16, there were 14 eligible applicants competing for every grant, with over 300,000 turned away. The CSAC data suggest that some of these students who qualify for but don’t get a Cal Grant end up getting an MCS grant instead.

The huge gap between the number of applicants eligible for competitive Cal Grants and the number of awards available contributes to the substantial affordability challenges facing low-income students. While not by design, the MCS program has helped to fill a narrow slice of that gap, and it is important that the Legislature protect this progress if the MCS does get phased out. Redirecting the $117 million annual MCS allocation to the better targeted Cal Grant program would result in over 18,000 more competitive awards per year, increasing qualified applicants’ chances of receiving a competitive grant from one in 14 to about one in eight. And redirecting $60 million – the 51% of annual MCS spending that we estimate goes to students with family incomes within Cal Grant thresholds – is the least that should be done, particularly if the goal of phasing out the MCS program is to protect financial aid for lower income students.

Posted in

| Tagged

Earlier this year we published a map of California that showed the differences in net price – the full cost of attendance minus grants and scholarships – for low-income students at public colleges in nine regions across the state.  Counterintuitively, our analysis showed that low-tuition institutions may not have low net prices.  In many cases a California community college (CCC) – by far the lowest tuition school – had a much higher net price than the nearby University of California (UC) or California State University (CSU) campus.  Since publishing our map we have gotten many questions about why this is, given how different tuition levels are across the colleges.    

One important factor is that the total costs of college are not nearly as different for students across the segments as their tuition charges might suggest.  Total costs include tuition and fees, books and supplies, housing and food, transportation, and other college-related expenses.

Certainly, higher tuition colleges cost more overall than lower tuition institutions before financial aid is taken into account.  But they do not cost exponentially more.  Total college costs go far beyond tuition and fees for students at all types of colleges: the California Student Aid Commission estimates that in 2015-16, students at any college living off campus without parents – the way that most students at all three public segments live – incurred about $18,000 in non-tuition costs.  While there are sizeable differences in tuition and fees alone, compared to the total cost of attending a CCC, the total cost of college was only 23 percent more at CSU and 59 percent more at UC.

Another factor that drives net prices is the amount of grant aid available to students at each college.  Grant aid – money that does not need to be repaid – reduces the amount that students need to pay out of pocket for college.  It comes primarily from the federal government, the state, and the colleges themselves.  In 2015-16, the average amount of grant aid available per low-income student (i.e., Pell Grant recipient) was approximately $5,400 at CCCs, $10,300 at CSU, and $25,200 at UC.  The differences in state and institutional aid per low-income student were particularly large, as shown in the table below. 

Importantly, not all aid goes to low-income students. Cal Grants reach middle-income students as well, and some programs, including the Middle Class Scholarship and institutional grants at UC, reach students with six-figure family incomes.  Still, sharp differences in aid availability persist when we calculate average aid across all students.  Per full-time equivalent (FTE) student, the average amount of grant aid was approximately $2,300 at CCCs, $6,400 at CSU, and $10,200 at UC.

These wide disparities in grant aid, combined with the proportionally narrower disparities in total college costs, explain why the lowest tuition colleges in California are often the most expensive.  UC students’ total costs are 59 percent more than CCC students’ total costs, but UC students get 300+ percent more grant aid. The additional grant aid more than covers the cost difference between the colleges, leaving UC students better positioned to attend college full time without excessive work or debt.  

Posted in

| Tagged

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.

Posted in

| Tagged

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.

Posted in

| Tagged

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

 

Posted in

| Tagged

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. 

Posted in

| Tagged

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

Posted in

| Tagged

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.”

----

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.”

----
Read the Washington Post article featuring Pauline Abernathy and our statement

 

Posted in

| Tagged

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.  

Posted in

| Tagged

Pages

Subscribe to Blog