2007

By Deborah Frankle Cochrane From Massachusetts Governor Deval L. Patrick to Democratic Presidential Candidate Chris Dodd, the idea of making community college "free" has been thrown around quite a bit recently. College tuition is getting too expensive – so the affordability problem is solved, right? Wrong. We're glad that people are thinking about ways to make college affordable, but like the music club that offers you ten "free" CDs but charges an arm and a leg for shipping and handling costs, these proposals aren’t all they’re cracked up to be. Average annual college costs at a community college add up to more than $12,000 after you factor in books, transportation, room and board, and other expenses (College Board). Tuition charges, which would be eliminated by these "free college" proposals, are only 18% of costs for a typical community college student (or only 4% in California, with the largest community college system in the country). While no college student would turn down free tuition, the price of textbooks and other educational expenses could leave students scrambling to cover the costs of "free" college. The reality is that a student drawn in by the promise of free college is less likely to consider and apply for federal and state aid. After all, who needs aid to go to college if it’s supposed to be free? They may think they’re already receiving aid. A needy community college student with grant aid to cover tuition plus other expenses is likely in a much better position than the same student with free tuition, but no extra aid. The message of "free" college is attractive, and we’re glad that national leaders are getting serious about making college affordable. But false promises can be hurtful if they serve to get students in the door without a way to succeed. The best way to make college free is to address true student costs and financial need by investing in financial aid for those who can’t afford it.

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Iowa legislative staff interviewed Robert Shireman after his testimony to the Iowa legislature's Government Oversight Committee.

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In our testimony to the Iowa legislature's Government Oversight Committee yesterday, we recommended that the state seek details on the rates charged to students by the Iowa Student Loan Liquidity Corporation, the nonprofit lender created by the state. Mark Kantrowitz, publisher of FinAid.org, agrees with us and suggests additional information that should be disclosed by lenders. He also dismisses nonprofits' claims that rate information should be kept secret:

"Ideally, I'd like to see lenders disclose the mappings from credit scores to their rate tiers and not just the tiers themselves. Add a FICO Score Range column to your table. The lenders insist that they cannot or will not do this voluntarily because it reveals competitive information. But it's really all about obscuring the mapping from borrower characteristics to rates. Yes, if lenders had to publish their tiering, there'd be more competition. But isn't that the point? If lender X knows that lender Y's cutoff for LIBOR + 2.0% is FICO 750, lender X can potentially undercut with LIBOR + 1.8% at FICO 760. By making the mapping opaque, they minimize the opportunity for competition. But, frankly, it also probably has a lot to do with making it harder for borrowers to shop around by forcing them to apply to obtain rate information. Lenders don't want clear information because student loans are a commodity, and if they let it behave like one, supply and demand will drive down prices." "It's especially egregious when a state agency protests against releasing detailed pricing models for competitive reasons. What they're saying is that if they release the data, their competitors will be able to undercut them on price. Why is that a problem? Either it will force ISLLC to cut prices, or their borrowers will go elsewhere to get lower prices. Either way ISLLC's mission to enable students to pay for college is met. Of course, more likely ISLLC is not adequately aligning pricing with cost, profiting from some students to subsidize others, and so will be prone to price competition on them. But the real problem is you have agencies thinking about profits first and public benefit second."

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By strong bipartisan votes, the Senate and House of Representatives passed the College Cost Reduction and Access Act in early September. On September 27, President Bush signed the legislation. Public Law 110-84 includes a new Income Based Repayment plan modeled on our Plan for Fair Loan Payments. Along with the substantial increase in Pell Grants, this is the most significant step forward that we have seen in years. For more information, see our fact sheets: Key Provisions in H.R. 2669 and Fair Loan Payments.

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By Deborah Frankle, Research Analyst The budget stalemate in Sacramento is about to have serious repercussions for new and returning college students in California. Approximately 266,000 students are expected to receive Cal Grants to help cover fees, books, dorm costs and other expenses, but the agency that administers the Cal Grant will not have the funds for the scholarships until--unless--the state budget is approved. And with classes starting in the next couple weeks, it looks unlikely that this will happen in time to help students with initial college expenses. We contacted several financial aid offices throughout the state to see how colleges were handling this, and it appears that the approaches vary in the different segments. At the University of California and some campuses in the California State University system, the colleges are dipping into other resources to front the aid with no discernable difference to students, at least in the short term. At other CSUs, fees covered by Cal Grants are not an issue because the college can allow the student to pay later, when the Cal Grant money arrives. However, the $1,551 that helps pay for textbooks, room and board, and other educational costs will not be dispersed. And it looks like community college recipients, whose only state grant funds come from the books-and-rent portion of Cal Grant B, won’t be receiving any Cal Grant money anytime soon. These Cal Grant B recipients will then be most affected by the budget crisis, and three out of four of them attend a community college (45% of all Cal Grant Bs) or a CSU (29%) – the systems with the least resources to help tide students over until grant money arrives. We estimate that as many as 137,000 students in these two segments alone may be impacted by this situation. Recent high school graduates in this population have an average family income of $20,573 for a family of 4. Older Cal Grant B recipients are even needier, with an average family income of $14,322 for a family of 3. These are not students who can simply make ends meet without the grants designed to help make college accessible to them. At best, the inability to purchase required textbooks and supplies early in the term means that students will be unable to keep up in class; at worst, they may drop out of college without having had a fighting chance to succeed. Our students deserve better.

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By Deborah Frankle, Research Analyst Private or alternative loans comprise a growing share of student loans, despite being more costly than federal student loans. Students and parents are often unaware of the differences between private and federal loans, and many borrowers don’t know which they have until they enter repayment. Unfortunately, despite required informational sessions about federal loans, the majority of college financial aid offices are not doing much to educate students about private loans. The National Association of Financial Aid Administrators (NASFAA) recently conducted a survey of how financial aid offices discuss alternative loans with their students, results of which can be found in their magazine, Student Aid Transcript. The survey results showed that 63% of financial aid offices do not address alternative loans at all during entrance and exit counseling, the information sessions required when federal loans are taken out and again when the student leaves school. And while 58% of financial aid offices do provide more information about financial planning and debt management than they are required to, only 25% offer in-depth counseling on alternative loans specifically. Barnard College recently became part of this minority by requiring students or parents who apply for a private loan to talk with the financial aid office before Barnard will certify a students' enrollment (and access to the loan). The goal of these conversations was not to discourage people from taking out private loans, but just to be sure that they understood the differences, cost, and potential consequences involved. Still, this simple policy change reduced alternative loan volume by 73% in one year. The college found that many who initially wanted an alternative loan were not aware of the associated risks and interest rates, and had not fully considered other viable options. Such a huge drop in private loan volume suggests that the students who were initially drawn to these loans might not have really needed them. Preventing unnecessary and risky borrowing is good for students, and should be a goal of all financial aid counselors. If the drop in alternative loan volume experienced by Barnard College is anything near the potential alternative loan decreases possible at other colleges, the 73 of college financial aid offices that do not currently guide students through these decisions should consider doing so.

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It is easy for consumers to forget just how expensive a few percentage points of interest really is. I made this point on Tuesday in my presentation at the annual conference of the National Association of Student Financial Aid Administrators. Assume you have $10,000 in loans and the interest is deferred for four years of study, and then the loan is paid in equal installments over ten years:

  • For a subsidized Stafford loan (on which the government covers interest during deferment), the total interest you would pay during that 14-year period would be $3,810.
  • For an "unsubsidized" Stafford loan, the 6.8% interest yields total interest payments of $7,967.
  • If you have a private loan with an interest rate of 10%, you would pay $13,085 in interest on top of that $10,000 borrowed.
  • At 12%, the cost increases by more than $4,000, to $17,091 of interest.
  • At 14%, add another $4,000, to $21,469 of interest.
  • At 18%, you pay a whopping $31,921 of interest on top of the initial $10,000 borrowed, more than four times the interest on an "unsubsidized" Stafford loan.

These numbers, and the differences between them, would of course be even larger if you extend repayment beyond the 10 years used in this example. In an uncertain economy, these examples tell you just how valuable that fixed 6.8% maximum interest rate is on federal student loans (and a maximum of 8.5% on parent loans), whether they carry the "subsidized" moniker or not. If the numbers alone are not enough to convince, there are many other benefits to federal loans. In a NASFAA session I recently attended, Martha Johnston of Citizens Bank provided a helpful list, including:

  • Federal loans carry automatic full insurance in cases of death or disability. It's not something parents like to think about, but it happens.
  • Home equity loans (which may carry an interest rate that rivals the federal rate) put your home at risk.
  • Federal loans have unemployment and economic hardship deferments, as well as up to 60 months of forbearance.
  • No prepayment penalties on federal loans, and some ability to extend repayment without a change in the interest rate.
  • The interest rate on federal loans doesn't go up when rates in the economy increase. (Though it also doesn't go down if rates were to drop).

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By Hilda Hernández-Gravelle, Senior Research Fellow "It is like the white house on the top of the hill," a staff member I interviewed at a community college said to describe the way many Latino / Hispanic students and their families view financial aid. The idea of receiving a free scholarship or financial assistance that does not need to be repaid seems too good to be true. Consequently, sometimes students do not apply for the financial aid they are eligible for. There are other cultural factors for Latinos that can contribute to difficulties securing financial aid services and become impediments to college access. Some of these include: fear of debt; mistrust of lenders; and conflicts between family financial obligations and educational aspirations. While Latinos generally have a strong commitment to education, many believe that if you can't afford to pay for it up front, you can't attend. Such assumptions, along with a lack of awareness in the higher education sector about other cultural differences, make college seem unattainable to students who might otherwise be able to attend. The Los Angeles Times published an excellent story on this phenomenon in January 2007.

Attention to the challenges faced by Latinos in higher education is beginning to grow in the college access field. The Lumina Foundation just completed an important dynamic rich media report and web site on access and success for Latinos. Excelencia in Education also recently released survey results on enrollment and attainment for Latino students. The Chicano Studies Research Center at the University of California at Los Angeles released a report at the beginning of this month on the "mismatch" between Latino students’ aspirations and experiences titled, "An Examination of Latina/o Transfer Students in California's Postsecondary Institutions."

At the American Association of Hispanics in Higher Education, held in Orange County California in March 2007, Mari Luna De La Rosa and I presented The Strategy of Debt: How Hispanic Students Pay for College.This presentation introduced financial aid data and cultural factors that affect how Hispanic students use available aid. In an interactive presentation, we heard the perspectives of financial aid service providers and college administrators, highlighting the need to be aware of and responsive to cultural differences in financial aid service delivery.

The presentation was well-attended and received, demonstrating the need for dissemination of information that shapes understanding of financial aid among different groups. Given the debt aversion that exists among Hispanic students, and the resulting impact on college access, the Institute will explore how to better inform Hispanic students, families and administrators about college costs, debt, and the financing of higher education.

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By Deborah Frankle, Research Analyst Tuition discounting is the practice of using institutional aid to adjust tuition levels to best match what students and families are willing to pay, a widespread trend that is tracked by annual reports from the College Board. We recently used publicly-available federal data to get a sense of the phenomenon at private four-year institutions, and were surprised to find that almost half of private, four-year institutions with at least 1,000 students provide discounts to 90% or more of their students. Four out of five colleges (83%) provided discounts to at least half of their students. In many cases, the average discount was quite large. What does this mean? Actual discounting strategies vary dramatically between colleges, and the numbers above do not distinguish between need-based and merit-based aid. Some colleges use their institutional aid to help meet the financial need of low-income students, increasing access; others use it to attract students with less or no need who serve to maximize the prestige of the institution. Because we cannot distinguish between pricing and aid strategies at individual colleges, we cannot say for sure. But one recent analysis suggests that the overall picture is troubling: institutional aid, a larger source of financial aid than state and federal aid combined, goes to higher-income students at rates far exceeding those of federal and state aid. For dependent students, 46% of institutional need-based grant funding went to those with family income above the median, compared to 3% of federal aid. Why is this interesting? These issues bring up a number of questions: • When institutional aid ($10 billion) far outweighs federal and state aid combined ($7 billion), what does it mean for college access that institutional aid tilts to those with higher incomes? (NPSAS, dependent students only) • What does 'need-based' aid mean when it’s almost evenly distributed across all income levels? • What is the point of tuition increases when almost all students receive a discount? Does the "sticker shock" of high tuition scare low-income students away before they learn about available discounts? • Should detailed institution-level data on discounting practices be made public? Other resources on this topic: Tuition Discounting, Not Just a Private College Practice, College Board Tuition Discounting and Prudent Enrollment Management, Association of Governing Boards

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Robert Shireman, the founder and president of The Institute, has been guest-blogging for Higher Ed Watch, a higher education news and policy initiative from the New America Foundation. In his final post, "Building Fences," Shireman argues that state policies that use college funding as a carrot to keep students in the state after graduation are counterproductive. Here is an excerpt:

But states don’t like to see those graduates leave, so they have been getting more creative in their efforts to keep graduates from jumping the fence. Some states, for example, are considering, proposals that are modeled after the Georgia Hope Scholarship Program, which provides free tuition to top students who stay in state for college. Others are debating plans to award scholarships that would be rescinded if a graduate decided to cross the border for a job.

The current debate in Washington on immigration underscores just how backwards and wasteful these state strategies are. Corporate America is concerned that the immigration bill does not allow for enough visas for immigrants to fill jobs that Americans do not have the skills to fill. This cries out for a domestic policy response that focuses on increasing the number of young people who go on to college and complete degrees. . .

At The Institute for College Access and Success, we believe that Congress, as part of the upcoming reauthorization of the Higher Education Act, should create a College Opportunity Incentive Fund to send a strong signal to states about the national imperative to improve college access and success rather than to build fences between states. The Fund would essentially provide a bounty to the state for every student from the lower half of the country’s family income distribution. In addition, the Fund would offer a double bounty for every degree conferred on a lower income student. The states could use the money to provide much-needed financial aid and to implement other strategies to expand access and to improve retention to graduation.

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