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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 Others are debating plans to award scholarships that would be rescinded if a graduate decided to cross the border for a job.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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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. Here's an excerpt from "A Questionable Arrangement":

An internal strategy document from Sallie Mae says a whole lot about how the company makes its money from taxpayers, from students, and then again from taxpayers. On Tuesday, Higher Ed Watch described the subsidies on federal loans that remain Sallie Mae’s priority #1 to keep, while yesterday’s item explained why the company is intent on maintaining the special status that private student loans have in bankruptcy (priority #2).

Next on Sallie Mae’s list is to protect its debt management operations, "especially Guarantor Services." In two recent articles (here and here), Paul Basken of The Chronicle of Higher Education revealed how Sallie Mae employees in one division of the company effectively run a student-loan guarantee agency that is in charge of monitoring the activities of other divisions of the company, while both sides aim to maximize profits.

That questionable arrangement came into existence in 2000 when federal and state regulators turned a blind eye to Sallie Mae’s purchase of virtually all the assets of a non-profit guarantor known as USA Funds. The deal left in place a non-profit shell that contracts with Sallie Mae, whose employees now do the federal oversight work for which USA Funds is responsible. Last year, federal money passing through USA Funds accounted for 32 percent of the revenue in Sallie Mae’s debt management operations division.

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The Institute's president, Robert Shireman, was interviewed for the Washington Post. This article (subscription only) was printed on May 17, 2007.

Every spring, many thousands of students in the Washington region face the complex task of putting together a financing plan for college. This year, controversy has grown over how the $85-billion-a-year student loan industry operates, with revelations from a New York state investigation and other probes about loan companies' ties to university financial aid offices and the government. The Post's Amit R. Paley spoke with Robert Shireman, executive director of the Project on Student Debt, about the controversy and what it means for students and families. The organization, based in the District and Berkeley, Calif., aims to increase public understanding about debt and help students make informed choices. It is funded by the William and Flora Hewlett Foundation, the Pew Charitable Trusts and other sources. Shireman was an education adviser to the Clinton administration. Q What are the major revelations students and parents should know about? A The investigations revealed gifts, trips and [payments] from student loan companies to universities and to some college financial aid advisers. In at least some cases, these conflicts of interest resulted in students and parents getting steered towards unnecessarily large or expensive loans. What do the revelations mean to consumers? We used to think of financial aid officers as impartial professionals dedicated to helping students pay for college. I still believe that most are. But every day we hear about another conflict of interest, so consumers need to be cautious about the financial aid recommendations that they get. Make sure the advice is in your best interests, not designed to make money for the school or get the adviser a free trip to the Bahamas. What are the basic questions to ask financial aid officers? What are the total costs I will need to cover as a student at your school? How does the package of aid you have offered me cover those costs? How much will I need to borrow, and with what types of loans? What lenders do you recommend, and why? Do you have any financial relationships with the lenders you recommend? What are the major types of student loans? The best loans are Federal Perkins and subsidized Stafford loans. They have fixed, reasonable interest rates, and the government covers the interest while you are in school. Students from higher-income families are not eligible for those loans, but they can still get federal "unsubsidized" Stafford loans, which I put in quotes because the government actually does subsidize them by keeping the interest rate reasonable. These are the next best choice for any borrower. Federal PLUS loans are available to parents and graduate students as long as they don't have any bad marks in their credit history. Again, the interest rate is fixed, but some families may find that a home equity loan rivals the rate on PLUS loans. Private or alternative loans are the ones to avoid. Their rates are almost always variable, without any cap. The rates can be as high as a credit card. Some families may be able to find a good deal, but these loans lack the borrower protections that come with federal loans, such as assistance during unemployment and disability. How do students know which lenders they should choose? Despite the scandals, the financial aid office is not a bad place to start. Ask for their recommendations, and ask whether there are lenders that offer lower rates. For private loans, get actual rate quotes from at least three companies. The charges can vary a lot. Don't trust the "as low as" rates that lenders advertise. What are preferred-lender lists, and are they good or bad for students? Colleges usually recommend a few lenders, or even just one. These lists have been at the heart of the controversy. Students usually use lenders suggested by the financial aid office. If they are chosen based on what's best for the borrower, that's fine, and it can help simplify an already overwhelming decision-making process for students and families. But if campus officials are getting gifts, trips and [questionable payments], then the recommendations are tainted. What sort of reforms do you expect in the industry as a result of the investigations? We're already seeing campuses canceling questionable arrangements with lenders, prohibiting gifts, and revamping or even eliminating their preferred-lender lists. I expect this trend to continue, and that Congress will ban or restrict many of the disturbing practices that have been revealed in the past few months. If done right, the result will be a much more transparent, accountable and consumer-friendly student loan process.

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Public confidence in college financial aid offices has been shattered by revelations of gifts, trips, deals, and kickbacks from lenders. In the resulting confusion, I have been asked time and again: "Is there a web site you can recommend where students can get accurate, complete and unbiased comparisons of student loan rates?" Unfortunately, the answer is no. The sites we have seen take money from lenders in exchange for getting listed. Often, lenders pay a premium to get prominent placement in the user’s search results. In some cases, "comparison" sites actually lead to only one or two lenders out of the thousands in the market. Even on sites that feature multiple lenders, it is perilously easy to be led down the wrong road, ending up with higher-cost loans that do not carry the interest caps and other protections that come with federal loans. I recently logged into SimpleTuition.com to see what loan offers I could get if I decided to pursue my MBA at U.C. Berkeley. The lowest rate on the list (showing up on page 2) was 7.27% for a private loan from a company called Student Funding Group LLC. The price-conscious and time-constrained consumer, having found the best deal, might click on the "apply now" button and end the comparison shopping. Instead, I opened the expanded version of the search results, which revealed that the 7.27% is the "as low as" rate. It’s not a sure thing until I submit a complete application and allow the lender to peruse my credit reports. Still, I had reason to be optimistic. MyFICO.com said my credit is so good that "Most lenders will consider offering you their most attractive and most competitive rates" and may even offer me "special incentives and rewards targeted to their 'best' customers." I should be a slam-dunk for that as-low-as rate of 7.27%, I thought. I proceeded through the application process (no, it didn’t take only a minute, as advertised) and eventually got a rate quote: 8.75% plus 4% in fees, or the equivalent of between 9 to 10% -- much more than the 7.27% that at first appeared possible. Many (maybe most) consumers, after filling out that whole application, would go ahead and take the loan even at the higher rate, assuming there was some good reason they can’t get the as-low-as rate. But I decided to compare. A second lender, Sun Trust, had showed up on SimpleTuition with an as-low-as rate of 7.28%. After submitting, again, a whole application, I received a rate quote of 7.875%. It was much closer to the as-low-as rate, though there was no indication as to whether there would be any fees charged. I inquired via email, and it appeared that there would be no fees applied in my case. Had I found the best loan for me? No, not even close. It turns out that SimpleTuition neglected to tell me about Federal Stafford loans, with rates of no more than 6.8%. And while the list included Federal Grad-Plus loans, I ignored them because the interest rate of 7.92% was higher than the rates I saw on listed private loans. Or so I thought. The important detail that I missed—because it’s not clear on the web site—was that the Grad-Plus loan rates are fixed, not variable like the private loans. That's a critical and potentially expensive distinction. Not all lenders try to push private loans ahead of Federal loans. For example, Wachovia strongly encourages students to get Federal loans before considering private loans. Contrast that with the treatment you get when seeking a student loan through LendingTree.com. The site directs you immediately to a private loan company. And if you express an interest in Federal loans instead of their more expensive private loan, you are told with an ominous lack of enthusiasm: "Federal Loans may be a good option for some families." In fact, Federal loans are the best place to start for nearly everyone. But wait! The lender list at GreentreeGazette.com shows that National City has private loans with zero interest. I applied. The promissory note arrived and I prepared to provide my electronic signature and get my loan. But I noticed that it said that my interest rate "margin" would be 4.25. I perused the rest of the document and found that the interest rate would be LIBOR plus the margin, which totals almost 10%. Plus 4% in fees. Another bad lead. The system is confusing enough without the added problem of colleges' advice being potentially tainted by conflicts of interest. Students in the lending maze need unbiased, knowledgeable advisors. That's the important role that college financial aid administrators should be playing in the process.

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On April 1, the U.S. Department of Education released the FAFSA4caster, an online tool intended to help families plan for college by providing early estimates of their federal financial aid eligibility. To get an early aid estimate, students and their parents have to answer 96 questions from the actual FAFSA. Positives: For students and parents who are not put off by the volume and complexity of questions in the FAFSA4caster, it will be a useful tool. It can give them a good sense of what they will be expected to pay towards college costs and what federal aid they may be eligible for. In addition, the data they enter will be used to pre-populate many elements of the full FAFSA when they are ready to officially apply for aid. This is a good use of technology that will allow aid applicants to pick up where they left off, rather than starting from scratch. Negatives: The FAFSA4caster requires students and parents to answer all of the most difficult and error-prone income questions that make the actual FAFSA so intimidating. You still have to track down all the tax documents, make various calculations, and transfer the answers from one form to another by hand. Suggestion: The way to make this tool easy and inviting is to significantly reduce the number of high-stakes questions that applicants have to answer themselves. That can be accomplished -- without diminishing the accuracy of the aid estimate -- by letting users authorize the IRS to answer 31 of the questions automatically. We encourage the Department to take this opportunity to simplify the FAFSA4Caster as soon as possible. Because the estimate it produces is non-binding, the Department could use whatever year of income data is available from the IRS at the time students and parents use the new tool. For more about how this approach could make the whole aid application process easier, see Going to the Source: A Practical Way to Simplify the FAFSA. FYI: To get a sense of how hard it is to create a simple aid estimation tool given the income data that applicants are currently required to provide themselves, see these valiant attempts by FinAid! and the College Board.

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The most inefficient and intimidating part of the financial aid process is requiring students and families to transcribe, calculate, and submit piles of income information that the government already has. An article in today's Inside Higher Ed describes how researchers are conducting an experiment with H&R Block that pre-fills the FAFSA with selected clients' tax data. Over the past year, The Institute for College Access & Success has been exploring a way that all students and families could benefit from a similar approach. We've found that it's both technologically feasible and perfectly legal for financial aid applicants to give the U.S. Department of Education access to the needed income information in their tax records. People already do this whenever they apply for a mortgage and in many other situations. For more about this approach, see our testimony before the Advisory Committee for Student Financial Assistance.

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The entire Economic Diversity of Colleges web site has been updated with the best available information for the 2004-05 school year. Institutional profiles reflect the new information with fresh charts and graphs, and the new data has been added to the comparison tool as well as the institutional data pages. We welcome your questions, comments, and suggestions about this update and other aspects of EconomicDiversity.org.

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The Economic Diversity web site now includes the average student loan debt for the 2005 graduating class as reported by 1,421 four-year institutions. Also included is the proportion of graduates with any student loans. The site provides access to these data (as well as comparable figures for 2000 and 2004) through an agreement with college guide publisher Thomson Peterson's. (The data are copyright 2006 Thomson Peterson's, a part of Thomson Learning Inc. All rights reserved.) Using the new 2005 data, we constructed statewide enrollment-weighted averages for all 50 states and the District of Columbia. The state averages will be posted tomorrow on our sister site, the Project on Student Debt, along with a brief report. The five states with the highest average cumulative student debt are New Hampshire, Iowa, North Dakota, Rhode Island and Pennsylvania. The five lowest are Utah, Hawaii, Delaware, Maryland, and California. These data aren't perfect. Colleges are asked to report the total federal and private student loans taken out by graduating seniors while they attended that institution. This means that prior borrowing by students who transfer is not included. Actual debt may also be higher due to private loans taken out by the students but not handled by the campus financial aid office (and therefore not in the campus' records).

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Companies offering private student loans advertise low rates, but the rates they actually charge to individual borrowers, and how they determine those rates, are closely-held trade secrets. The rates are based on borrower credit scores and other factors; ultimately, companies maximize their returns by trying to charge the highest rate they can while still getting the business. One way to determine the actual rates being charged on private student loans is to review the prospectuses that accompany portfolios of loans that are sold to investors. We looked at four recent portfolios from Sallie Mae, and one Fitch Ratings review of a portfolio from the National Collegiate Student Loan Trust. These portfolios revealed average interest rates today of 9.77%, 9.91%, 10.0%, 10.11% and 10.35% (based on a today's Prime rate of 8.25% and a 3-month LIBOR rate of 5.47%). Many borrowers, at least 15% of them according to the investor reports, are charged interest rates of more than 12%. These rates are variable, so as interest rates in the economy increase, so do the rates paid by the borrowers.

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One well-documented obstacle to economic diversity is the financial aid application process itself: the FAFSA is incredibly long, confusing and intimidating. When low-income students don't apply for financial aid, they miss out on resources that could increase their chances of success in college by allowing them to go to school full time, work reasonable hours, and attend more supportive institutions. In a paper published this April, Harvard economists Susan Dynarski and Judith Scott-Clayton examine how the FAFSA can be a barrier to access and aid. Among their findings: "the basic step of locating financial records is an obstacle for poor students, due to higher mobility rates and family dysfunctions such as divorce and separation of children from parents." A recent ACE report found that nearly two million Pell-eligible students did not apply for financial aid in 2003-04. For the lowest income students, financial aid application rates are flat (for dependents) or declining (for independents), even as overall aid application rates rise. Calls for FAFSA simplification usually focus on changing the formula that determines aid eligibility, so that it requires less data from students and parents. These proposals rarely make headway because they require difficult and politicized choices about eligibility, equity and cost. The good news is that there's a very practical way to make the FAFSA easier for students and families to use, regardless of the underlying formula. That's because the government already has some of the most important information used to calculate eligibility. Instead of having to dig through piles of tax records and do complex calculations, applicants could simply provide access to their IRS transcripts. The data could be processed electronically, eliminating many of the most difficult FAFSA questions and worksheets. People routinely give this permission when they apply for loans, and many commercial entities use this tool to verify income information. There's even a line on the IRS transcript request form that says: "If the transcript or tax information is to be mailed to a third party (such as a mortgage company), enter the third party's name, address, and telephone number." The private contractors running the Federal Direct Loan Program already use a consent form to access Income Contingent Repayment Plan users' IRS data. And some local governments have incorporated the IRS form into applications for benefits for working poor families. So, why not build it into the FAFSA itself, and lower a barrier to access?

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