Federal and State Policy

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.

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While the President’s proposed budget fully funds the scheduled increase in the maximum Pell Grant and continues to tie it to inflation after 2017, the House Budget Committee’s FY17 budget eliminates the $120 increase scheduled for 2017-18 and freezes the maximum grant at $5,815 for 10 years.

In the 1980s, the maximum Pell Grant covered more than half of the average annual cost of attending a four-year public college. Cutting the maximum grant and freezing it for the next 10 years would reduce the share of covered costs from an already record low of 29 percent in 2016-17 to just 21 percent by 2026-27, making college even less affordable. 

 

Sources: Calculations by TICAS on data from the College Board, 2015, Trends in College Pricing 2015, Table 2, http://bit.ly/1Pyv2sJ, and U.S. Department of Education data on the maximum Pell Grant. Calculations for 2017-18 through 2026-27 assume that the maximum Pell Grant is frozen at the 2016-17 level. College costs are defined here as average total in-state tuition, fees, and room and board costs at public four-year colleges. Projected college costs for future years were estimated by using the average annual increase in costs over the most recent five years.  

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Starting today, all borrowers with federal Direct student loans have access to a new repayment plan with monthly payments limited to 10% of your discretionary income. You can enroll regardless of when you borrowed. If you’re having trouble affording your monthly payments – or just want the assurance of payments based on your income – check out the Revised Pay As You Earn (REPAYE) plan and see if it’s right for you.

REPAYE and other “income-driven” plans can help keep monthly payments manageable, but may not be the best fit for everyone. Depending on how your income changes over time, you may pay more in total than you would under some other repayment plans, such as the 10-year standard plan.

Here is some key information for borrowers considering REPAYE:

  • How much will I pay each month? Your monthly payment will be 10% of your “discretionary income” (that’s your income minus 150% of the poverty level for your family size). If your income is very low, payments can be as little as $0 until your income rises. To see what your payment would be in REPAYE and other plans, you can use the U.S. Department of Education’s easy online Repayment Estimator.
     
  • How long will I be making payments? Up to 20 years if you borrowed only for undergraduate education, or up to 25 years if you took out any federal loans for graduate school. If you reach the time limit and have not yet fully repaid the loan, the remaining balance will be forgiven (but under current IRS rules, it will be treated as taxable income). If you work full-time for the government or a nonprofit organization, you may be eligible to have your loans forgiven after 10 years of payments, tax-free. Find out more about Public Service Loan Forgiveness here.
     
  • Which types of loans are eligible? REPAYE is available for all federal Direct student loans that are not in default. If you have other types of federal loans (such as FFEL* or Perkins Loans), you can consolidate them into a Direct Consolidation Loan, which would then be eligible for REPAYE. Click here and here for information about the pros and cons of consolidating. Neither Parent PLUS loans nor consolidation loans that include Parent PLUS loans are eligible for REPAYE.**
     
  • How do I sign up? Apply online at StudentLoans.gov (look for the “Income-Driven Repayment Plan Request”), where you may be able to electronically transfer your tax information into the application form. Alternatively, you can request a paper application from your loan servicer. No matter how you apply, you can check a box asking for the plan with the lowest initial payment you qualify for. These plans are always available for free – you never have to pay a fee to enroll.
     
  • What if I am already in an income-driven repayment plan? You can change federal loan repayment plans at any time. If you’re already in Income-Based Repayment (IBR) or Income-Contingent Repayment (ICR), switching into REPAYE may lower your monthly payments and shorten the total time you have to repay. However, if you switch plans, any unpaid interest will capitalize (i.e., be added to your loan principal), causing interest to accrue on a higher loan balance. Also, if you have to consolidate your FFEL loans to make them eligible for REPAYE, any IBR payments you made before consolidating will not count toward your maximum repayment period in REPAYE. 

For a high-level view of how REPAYE compares to the four other income-driven plans, we created a summary chart. To estimate your monthly payments and eligibility for REPAYE and other plans, visit the Department of Education’s online Repayment Estimator. For more detail about how REPAYE is different from other income-driven plans, see the Department’s blog post. You can find out more about all the income-driven plans at the Department’s website and our website for borrowers, IBRinfo.org

What is next for income-driven repayment? While REPAYE is good news for many borrowers, it is confusing to have five different income-driven plans for federal student loans.  There is broad and bipartisan support for Congress to streamline them into one improved income-driven plan. REPAYE is a good starting point for developing that new plan, but there are still important ways to improve it, including limiting payments to 20 years for all borrowers, as we and thousands of others have urged, and eliminating the taxation of forgiven debt.                                                          

* Most federal loans issued before July 1, 2010 were made through the Federal Family Education Loan (FFEL) program. If you’re not sure which type of federal loans you have, log in and check your record on StudentAid.gov. If you don’t want to consolidate your FFEL loans into a Direct Consolidation Loan, you may be able to enroll in a different plan called Income-Based Repayment (IBR). However, your monthly payments may be higher and you may end up paying for a longer period of time than you would under REPAYE.

** The only income-driven plan available for Parent PLUS loans is the Income-Contingent Repayment (ICR) plan, and the Parent PLUS loan must first be consolidated into a Direct Consolidation Loan to become eligible for ICR. For more information about ICR, click here

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Today, the Department of Education announced a new income-driven repayment plan called Revised Pay As You Earn (REPAYE), which is expected to become available in December of this year. Under this new plan, all borrowers with federal Direct student loans will be able to cap their monthly payments at 10% of discretionary income, regardless of when they borrowed or their debt-to-income ratio.

REPAYE will become the fifth income-driven plan available to federal loan borrowers, and it can be hard to tell which plan does what and is available to whom. To help, we put together a high-level summary of the income-driven plans, including REPAYE.

See chart below and click here for a printable version with footnotes.


To find out more about REPAYE and the other student aid changes announced today, check out our press release here.  

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Once again, the country is facing the possibility of Congress failing to raise the debt limit and the federal government defaulting on its obligations. When we faced this situation in 2013, we blogged about the impact it might have on federal student loans, so we thought we’d look again now.

No one really knows for sure what impact the government defaulting would have. However, when the government came close to defaulting in 2011, J.P. Morgan issued a report entitled “The Domino Effect of a US Treasury Technical Default.” It concluded that “any delay in making a coupon or principal payment by the Treasury — even for a very short period of time — would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the US economy.” The report estimates that a default would likely lead to a 20 percent decline in foreign demand for Treasuries over a one-year period, increasing the yields on 10-year Treasury notes by 50 basis points.

So how much would a 50 basis point increase in Treasury yields cost college students and their families in higher interest payments on their student loans? For a college freshman who starts school in fall 2016, takes out the annual maximum in subsidized and unsubsidized Stafford loans, and graduates in four years, it will increase the cost of college by about $1,000. That’s a 10% increase in interest payments over 10 years on the $27,000 she borrowed. If the government’s defaulting were to increase rates by 100 basis points, it would increase this student’s costs by $2,000 — a 20% increase in interest payments. For a graduate student who starts a two-year program next year, borrows the annual maximum in unsubsidized Stafford loans, and finishes in 2018, a 50 basis point increase would cost him about $5,000 more and a 100 basis point increase would cost him over $10,000 more in interest payments over a 25-year repayment period. (See the tables below for more details.)

In addition, J.P. Morgan and others expect that a default would slow economic growth, lowering family incomes and making it even harder for those already struggling to pay for college.

 

 

 

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Whatever you might have thought of the Administration’s plan to rate colleges, its current plan to provide a new tool to help consumers compare colleges could be a big win for students and families. There is broad bipartisan agreement on the need for better consumer information on college costs and outcomes. In fact, last year the U.S. House of Representatives passed bipartisan legislation requiring the Education Department “to create a consumer-tested College Dashboard that would display key information students need when deciding which school to attend.”

The Administration has not provided much detail about what it is developing other than that it will release this summer an easy-to-use web tool that lets students and families compare colleges based on criteria important to them. So what key information do students and families need to know and what would make the tool most helpful?

Here are some of the things that we and others have publicly recommended for an improved consumer information tool, building off of the current College Scorecard.

Let users compare colleges by degree level, selectivity, and location. Students should be able to filter schools in ways that align with common college selection criteria: which degree I want, what my odds are of getting in, and where the school is located. Additional filters could be considered, but the comparison groups should not be defined by characteristics that bear little resemblance to how a prospective student is likely to consider colleges (e.g., a school’s sector or Carnegie classification). Additionally, national context should always be provided so students will see if there’s a significant gap between the schools they’re looking at and schools overall.

Provide graduation rates for all students and for Pell Grant recipients. Everyone agrees that students and families need to know what share of students graduate. Given the wide gap at some schools between the graduation rates of Pell recipients and non-Pell recipients, it’s important to provide both. Schools are currently required to disclose the graduation rate for Pell recipients, but not all schools comply and those data can be difficult to find. It will be helpful to have both graduation rates side-by-side.

Provide cumulative debt at graduation. Likewise, it’s critical that students and families know what share of a school’s graduates have loans and how much they typically owe. As the table below shows, schools in the same state with similar costs and proportions of low-income students can have very different borrowing rates and average debt levels. 

Source: Calculations by TICAS on data for 2012-13 from the U.S. Department of Education and Peterson's. Cumulative debt data copyright 2014 Peterson's, a Nelnet company.
Note: Figures for “tuition and fees” and “cost of attendance” are for in-district/in-state students at public colleges. Figures for “% low income” reflect the share of 12-month undergraduate enrollment receiving Pell Grants (enrollment as reported by colleges on the Department’s FISAP form).

Currently, the Administration’s College Scorecard shows the median debt of all former students entering repayment, regardless of whether they graduated or dropped out. This makes colleges with high drop-out rates look like a good deal, because students who left the school after borrowing for only a semester or two bring the median debt level down. For instance, the College Scorecards for the University of Phoenix Online (Phoenix) and University of California at Berkeley (Berkeley) show similar median federal debt for borrowers entering repayment ($17,476 at Phoenix vs. $16,436 at Berkeley). However, only 7% of first-time students seeking a bachelor’s degree at Phoenix graduate in six years, compared to 91% at Berkeley. In fact, undergraduates at Phoenix are more than twice as likely to borrow federal loans as students at Berkeley, and they borrow significantly more on average each year.

Instead of providing debt when entering repayment, we recommend using currently available data for average cumulative federal debt at graduation until more comprehensive data are available. Average debt at graduation should be accompanied by the school’s borrowing rate, so students know how common it is for graduates to have any debt.

Flag schools under investigation. TICAS and 47 other organizations recently urged the Department to flag colleges in the comparison tool that are the subject of public federal or state investigations, lawsuits, or settlements. Students deserve to know when a college’s practices are under heightened scrutiny from regulators, just as investors in publicly traded for-profit colleges are required to be notified of such events. No doubt fewer students would have enrolled in schools owned by Corinthian Colleges if they had known of the many open investigations and lawsuits, fewer students would have been harmed, and fewer students would need loan discharges. 

Indicate the default risk. Students should know what share of a school’s students default on their loans. This can be determined by multiplying a school’s cohort default rate (CDR) by its borrowing rate, producing the school’s student default risk indicator (SDRI). By itself, the CDR only tells you the share of federal loan borrowers at a school who default, which may be very different from the share of students who default. For instance, the College Scorecard for Los Angeles Southwest College says it has a 66.6% default rate. However, that default rate is based on just two students defaulting at a school with nearly 11,000 students, so the typical student’s risk of defaulting at this school is actually extremely low.[1] The Department currently has the data to calculate the SDRI for each school and should provide that instead.

Pretest the tool with consumers: Ultimately, to be effective, this tool must be consumer tested, especially with low-income and first-generation students.

The Administration clearly listened to feedback on its college ratings framework. We hope it considers these recommendations as well so that the new college comparison tool gives students and families the information they need to make more informed decisions and helps encourage colleges to focus more on their affordability and student outcomes.


[1] Based on Los Angeles Southwest College’s FY2011 cohort default rate and its 12-month enrollment in 2011-2012.

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With so many Americans concerned about college costs and student loan debt, there are more and more proposals to improve college affordability and reduce or even eliminate students’ need for loans. Yet most of the proposals are not very detailed at this point, and the details matter.

One critical detail is which costs are covered. To make a real difference for low-income students, any debt-free college plan must take the full cost of going to college into account, including textbooks, transportation, and living costs like food and housing. These non-tuition costs make up the majority of the full cost of attending a public two- or four-year college (61%-79%), yet their importance is too frequently overlooked. Students may only need to pay the tuition bill to enroll in college, but to succeed in school and graduate they need to be able to cover the other costs, too. Students who can’t get to campus or can’t get the required books won’t benefit from their classes. Students who have to work long hours to pay for rent or child care don’t have enough time to study.

Students can use grants like the federal Pell Grant to help pay for either tuition or non-tuition costs. But many lower income students have to take out loans because available grants don’t cover their total costs. In fact, national data show that lower income students (those with incomes at or below the median) who attend public colleges “tuition free” are currently much more likely to borrow than higher income students who pay for some or all of their tuition bill. This underscores why plans to eliminate debt cannot just focus on tuition.

 

This is worth repeating: low-income students who are already attending college “tuition free” are more likely to need loans. To understand why, we have to look at students’ total net costs (cost of attendance after grant aid) as a share of family income.

Data show that the net costs of attending public two-year and four-year colleges account for a much larger share of income for lower income families than for higher income families. As a result, more lower income students have to borrow to get their degree. For instance, as shown below, community college students with family incomes under $30,000 are expected to dedicate 22% of their income toward paying for college. Unsurprisingly, graduates in this income range are more likely to leave school with debt than students from families who can better absorb net college costs. 


This is why ensuring a debt-free college option requires more than covering tuition costs.  It requires providing additional grant aid for lower income students who may already be going to college “tuition free,” and as we have discussed before, it requires a state “maintenance of effort” provision to ensure states hold up their end of the bargain.  

 

Calculations by TICAS on data from the U.S. Department of Education, National Postsecondary Student Aid Study, 2011-12. Median income is based on family incomes for students enrolled in college in 2011-12. Students are classified as attending tuition-free if their tuition net of grant aid is zero, and as paying tuition if their tuition net of grant aid is greater than zero.

U.S. Department of Education calculations of 2012-13 net price for first-time, full time undergraduate recipients of federal Title IV financial aid, from http://nces.ed.gov/pubs2014/2014105.pdf, based on figures reported by colleges to the Department via the Integrated Postsecondary Education Data System. To calculate the shares of income needed to pay the net price, we used the upper bound of the income range (i.e., $30,000 for the $0-30,000 group) when available, and $145,000 for the income range of $110,001 and above which is approximately the median income for students in this group. Graduates’ debt figures from U.S. Department of Education, NPSAS, and include undergraduate students who completed a degree or certificate in 2011-12. Both net price and debt calculations are the most recent available of their kind. 

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Many low-income students who get enough aid to cover their tuition still struggle to pay for other basic college costs, including textbooks, transportation, room and board. These make up most of the cost of college for students at public four-year and community colleges. That’s why free tuition alone won’t solve the college affordability problem. The America’s College Promise Act introduced yesterday recognizes this by adding something with the potential to be far more transformative: a "maintenance of effort" provision aimed at making states hold up their end of the bargain when it comes to college funding.

States are critical players in keeping college affordable, but they have also been complicit in the rise of tuition and student loan debt by letting higher education get squeezed out of state budgets. The decline in per-student state funding for higher education has been well documented, as has the resulting impact on public college costs. Without federal intervention, higher education funding is likely to keep getting squeezed out, to the detriment of students, families and our economy. The legislation introduced yesterday includes such an intervention: it requires states to keep their funding levels up, in addition to eliminating tuition at community colleges, if they want to access new federal dollars. That’s why the state maintenance of effort requirement in the legislation is so important.

States can adopt proposals labeled “free college” that do little or nothing to make college more affordable for low- and moderate-income students. That’s what happened in Tennessee: it created a “last-dollar scholarship” that only helps students who don’t get enough from other grants to cover tuition. Oregon is poised to do something similar with $10 million, although some students will receive up to $1,000 for non-tuition expenses. Significantly, Oregon also increased need-based grant aid for low-income students by $27 million, which is critical because only one in five poor students who apply receives this state grant aid due to lack of funding.

We want states to invest in college affordability and debt-free college options, not in programs that may sound good but don’t make college more affordable for low- and moderate-income students. If we’re serious about increasing affordability and reducing debt, we need to help low-income students cover more of their costs. The America’s College Promise Act would free up community college students’ federal Pell Grants to cover non-tuition expenses by requiring states to waive tuition. This helps low-income students cover non-tuition expenses; using Pell Grants to declare tuition “free” for low-income students does not. After all, Pell Grant recipients, most of whom have family incomes under $40,000, are currently more than twice as likely to have to borrow and they graduate with more debt.    

Making college affordable requires state investment in higher education.  We commend the bill’s sponsors for tackling state disinvestment in public colleges—the primary driver of rising college costs and student debt in America. 

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Yesterday, Corinthian Colleges abruptly closed its remaining 30 campuses in California, Arizona, Hawaii, New York, and Oregon, where 16,000 students were enrolled. While nothing can give these students back the time they spent at Corinthian, they deserve a fresh start.

The good news is that the Higher Education Act (HEA) provides for the discharge of students’ federal loans if a school closes before students finish their programs. In fact, the HEA says “the Secretary shall discharge” students’ loans, and the Education Department’s regulations specify that the Secretary will mail each borrower a discharge application and an explanation of the qualifications and procedures for obtaining a discharge.

The bad news is that the HEA does nothing similar to restore students’ eligibility for Pell Grants, which needy students can receive for no more than six academic years. Because the law doesn’t reset the clock on a student’s eligibility for Pell Grants when a school shuts down, low-income students may not be eligible for enough aid to complete a program anywhere else.

For example, the students enrolled in the pharmacy technician certificate program at Corinthian’s Everest College in West Los Angeles – which cost more than $11,000, and had a 25% job placement rate and a 35% student loan default rate – will be able to get their federal loans discharged, but they won’t get their Pell Grant eligibility restored to what it was before they enrolled at Everest. As a result, they may not have enough Pell Grant eligibility left to complete the much lower cost pharmacy tech program at the nearby community college. 

For the more than 12,000 Pell Grant recipients estimated to be enrolled at the Corinthian campuses that suddenly closed yesterday, this is an oversight needing swift correction.

How did Pell Grants get left out of the closed-school provisions? Prior to 2008, students could receive Pell Grants for as long as they were making satisfactory academic progress towards a degree or certificate. So if a school closed before a student could finish, the student didn’t need to worry about their Pell Grant eligibility running out. 

However, in 2008 Congress limited future Pell Grant eligibility to nine years.  Then, in 2011 Congress lowered this lifetime limit to six years and applied the new limit immediately and retroactively to all students, including those just a semester away from completing their degrees.

Unfortunately, Congress didn’t amend the HEA to restore students’ eligibility for Pell Grants when a school closes before they can finish. This was likely an oversight, not a conscious policy decision. As a result, the lowest income students at Corinthian campuses may not have enough Pell Grant eligibility left to complete a program at another school. 

It’s time to fix this harmful omission. In the last Congress, Representative Janice Hahn introduced the Protecting Students from Failing Institutions Act (HR 4860) to restore Pell Grant eligibility for students at campuses that close. We recommend going a step further: Pell Grant eligibility should be restored for any student who has their federal student loans discharged, either because their school closed or because of school fraud. Current and former Corinthian students deserve a true fresh start and the chance to get a meaningful degree or certificate at another school.  

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While the President’s proposed budget fully funds the scheduled increases in the maximum Pell Grant and continues to tie it to inflation after 2017, the FY16 House and Senate budget proposals freeze the maximum Pell Grant for 10 years. As recently as the mid 1980s, the maximum Pell Grant covered more than half of the average annual cost of attending a four-year public college. Freezing the maximum grant for the next 10 years would reduce the share of covered costs from an already record low of 29 percent in 2015-16 to just 20 percent by 2025-26, making college even less affordable.

Sources: Calculations by TICAS on data from the College Board, 2014,Trends in College Pricing 2014, Table 2, http://bit.ly/1F9qoJv; and U.S. Department of Education data on the maximum Pell Grant. The maximum Pell Grant for 2015-16 was announced in the Department of Education’s Pell Grant Payment and Disbursement Schedules,http://ifap.ed.gov/dpcletters/GEN1502.html. College costs are defined here as average total in-state tuition, fees, and room and board costs at public four-year colleges. Projected college costs for future years were estimated by using the average annual increase in costs over the most recent five years.

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