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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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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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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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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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Update: Details of the White House plan are becoming available and make clear it differs significantly from the Tennessee Promise and other “free community college” plans. In particular, the White House proposal is not a “last-dollar” scholarship. Instead, it provides additional federal funding to states that make key reforms, including not charging tuition or fees at community colleges. It is aimed squarely at stopping state disinvestment in public colleges, which is crucial to making college more affordable. Also, unlike the Tennessee Promise, low-income students could benefit. These are clear improvements on the plans discussed in our blog posted earlier today. Still, making tuition free for all students regardless of their income is a missed opportunity to focus resources on the students who need aid the most. Consider California community colleges, with the lowest tuition in the nation and waivers for low-income students. The result? Federal student aid application rates, even among low-income students, have been notoriously low, and part-time enrollment rates sky-high. "Free tuition" is not a panacea.


Many are predicting that President Obama tomorrow will endorse Tennessee’s "free community college" plan. While the Tennessee Promise is well intentioned and more students than anticipated applied for it, many higher education experts have rightly criticized it and other "free community college" plans.

One of the major problems with the Tennessee plan (and others) is that the "promise" isn't actually much of a promise at all. That’s because the "free" moniker only relates to tuition charges – charges which comprise just one-fifth of the actual costs of going to community college. The other costs of college, including textbooks, transportation, and living expenses, are far more substantial – and far more likely to prove a barrier to student success. Yet they’re left out of the deal.

Further, the Tennessee plan (and others like it) is a "last-dollar" scholarship, meaning that it only helps students who don’t get enough from other grants to cover tuition. This is a critically important point because, given the relatively low income of community college students and the relatively low tuition charges at community colleges, it means that the students with the greatest need for financial aid will rarely benefit. Conversely, those with the least need are the most certain to benefit.

Free tuition plans are giant missed opportunities because they put resources where they are less needed when the need is so great in other areas. As shown in the table below, students in the lower income categories need far more financial support to bring college within reach. The vast majority of them (92% for the lowest income group) have "unmet need" even after accounting for available grants and what they can afford out-of-pocket. That’s true of just 9% of students in the highest income category: 91% of those students can already afford not just tuition, but their entire cost of attendance. Surely higher income students would appreciate additional resources, but do they need them? Not according to federal needs analysis, and the vast majority of these higher income students already enroll in college and are the most likely to graduate.

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In addition to providing resources where they are not needed or needed less, these free-tuition plans are also ticking time-bombs. They signal that tuition is all that matters and flat-out ignore the other costs of attendance that determine whether students can get to campus, whether they’re focused on the material or how to pay for their next meal while in class, and whether they have a place to sleep at night.

Currently, many community college students get help paying for these other costs in addition to tuition. As shown above, the lowest income students’ average grant aid exceeds the amount of the tuition they’re charged by quite a bit: their total grant aid comes to about three times (328%) their tuition charge. On average, students with incomes below the median get grants that cover full tuition, with some resources left to help pay non-tuition costs, including fees, books, transportation, food and housing; students with incomes above the median get grants that cover, on average, about one-third of tuition.

If we prioritize covering tuition costs, treating the other costs of attendance as less important, how long until the grants for lower income students – grants which currently exceed tuition – are cut? This isn't a fantastical possibility. Limiting certain students’ Pell eligibility to tuition costs was an idea included in a federal appropriations bill not too long ago.

If resources were unlimited, there would be more merit to free tuition arguments. But resources are in fact so limited that the vast majority of low-income students – the students for whom financial aid will make the difference – aren't getting what they need. Free tuition proposals are politically popular, but regressive and inefficient. They are a lot like higher education tax benefits, where there is broad and bipartisan agreement that much better targeting is needed.

Free tuition proposals don’t just fail to move us forward: they’re a step in the wrong direction. We should absolutely do more to encourage students to pursue higher education and make them aware of financial aid, but this is not the way to do it.

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Today, the Education Credit Management Corporation (ECMC), a nonprofit which has several nonprofit and for-profit subsidiaries, announced that it’s buying 56 campuses from for-profit Corinthian Colleges Inc. Here’s our quick take:

ECMC has no experience running a college, let alone one of this scale, and is instead known for ruthless and abusive student loan operations. The agreement provides virtually no relief to the Corinthian students who enrolled and took on debt based on false claims. And with so many other colleges offering lower priced, higher quality career education programs, it’s unclear why this agreement is in the interests of either students or taxpayers.

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The final gainful employment rule released last week eliminated a key accountability measure for career education programs. As a result, many programs that would have failed the draft rule will now pass the final rule.  While some have argued that this change was made to benefit public institutions, it’s clear that for-profit colleges – and the University of Phoenix in particular – were the biggest winners.

The draft rule released in March measured career education program outcomes in two ways. First, the debt burdens of program graduates who received federal aid would be compared to their later earnings. Second, students’ ability to repay their loans – including both graduates and noncompleters – would be measured through a program-level cohort default rate, or pCDR. But the final rule uses only one measure: the debt to earnings ratio of program graduates, or DTE.

There are 682 programs that failed the draft rule’s pCDR test but pass the final rule (including those exempted because they have very few graduates). The vast majority of these programs - 89% - are at for-profit colleges, and for-profit college programs account for 97% of the now-passing programs’ defaulters. University of Phoenix programs alone account for 43% of the defaulters at programs that pass the final rule because the pCDR was eliminated.

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The release of the final gainful employment rule today is a step in the right direction, but the following examples of programs that meet the final standards make clear just how modest a step it is.

The draft rule released in March would have measured career education program outcomes in two ways. First, the debt burdens of program graduates who received federal aid would be compared to their later earnings. Second, students’ ability to repay their loans – including both graduates and noncompleters – would be measured through a program-level cohort default rate.

Based on the data released in conjunction with the draft rule, we identified 114 career education programs where more students default than graduate. In other words, these are programs where students receiving federal aid to attend these programs are more likely to find themselves unable to repay their debt than they are to complete the program. The particularly shocking part was that, under the draft rule, 20% of these programs passed the Department’s proposed tests, underscoring the need for the rule to be strengthened.

So, what does final rule, which eliminated the use of program-level cohort default rates, mean for those 114 programs that we called parasitic because of their consumption of resources to the detriment of students and taxpayers? It means that 15 more of them will pass the gainful employment tests (in addition to the 23 that passed the draft rule’s tests). Fully one-third (33%) of the 114 parasitic programs would now pass, giving schools no incentive to improve them.

Of the 15 newly passing programs, seven are at the University of Phoenix and include the following:

  • The associate’s degree in web page, digital/multimedia and information resources design, from which the almost 1,600 borrowers who entered repayment defaulted at a rate of 47%.
  • The associate’s degree in corrections and criminal justice, with a cohort default rate of 44% and where the number of defaulters exceeded the number of graduates by more than 3,000.
  • The associate’s degree in professional, technical, business, and scientific writing, where more than four times as many students default as graduate (316 students default vs. 70 students who complete).

For more information about the final gainful employment rule and what more should be done, see our statement here.

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