Blog

The U.S. Department of Education announced this week that it’s reaching out to about 3.5 million federal student loan borrowers who are carrying higher than average debt or showing signs of financial distress. The goal of the Department’s email campaign is to make sure these borrowers know about income-driven repayment options that might make their monthly payments more affordable and keep them from defaulting.

We’re thrilled that this piece of President Obama’s college affordability plan is being put into action. With rising student loan default rates and a job market still recovering from the financial crisis, the need is clearly urgent. Our Project on Student Debt developed the policy framework and spearheaded the coalition to create Income-Based Repayment (IBR), which became available to federal loan borrowers in 2009. We have since repeatedly called on the Department to do more to make sure borrowers are aware of IBR, including targeted outreach along the lines of this new effort.

Simply put, people can’t benefit from IBR and related plans like Pay As You Earn unless they know about them. They need timely, accurate, and usable information before extended forbearances cause their debts to balloon, delinquencies damage their credit scores, or defaults lead to even more severe consequences.

With that in mind, we think the Department could easily increase the impact of its outreach by taking the following steps. We suggest a couple of improvements that should make borrowers more likely to act on the important emails they’re getting from the Department:

Tell borrowers about the light at the end of the tunnel. The Department’s sample outreach email fails to mention that after 20 or 25 years of repayment in an income-driven plan, any remaining debt can be discharged.  This is a crucial feature of income-driven plans. But the sample email makes it sound like there is no time limit on payments, unless you qualify for Public Service Loan Forgiveness. It says, “When you make payments based on your income, your loans are paid off over a longer period of time than the standard 10-year plan. While this reduces your monthly payment amount, it also increases the total amount you pay over time. But if you work in public service, you may qualify to have your remaining loan balance forgiven after 10 years of payments.” The fix? The Department’s outreach should tell borrowers that income-driven plans not only lower your payments, they also cancel any debt remaining after 20 or 25 years in repayment.

Make it easier to for borrowers to get income-driven payment estimates. The sample email also provides a link for borrowers to view estimates of payments in income-driven plans. But when you click on “repayment estimator” you find yourself on the Department’s generic home page for federal loan borrowers: studentloans.gov.  The only way to see your estimated payments under all plans at once is to sign in to this site using your PIN, but there is no mention of a “repayment estimator.” If you don’t know what you’re supposed to do, you can easily get lost. The fix? Make the link go directly to the repayment estimator, and ultimately make the estimator available for prospective borrowers who don’t have PINs.  

Posted in

| Tagged

The U.S. Department of Education has released new final regulations that strengthen key protections for distressed borrowers with federal student loans. The regulations also make conforming revisions to reflect legislative changes related to student loans.

The new regulations will make it easier for borrowers to get out of default and repay their loans by ensuring that “reasonable and affordable” payments to rehabilitate a loan are, in fact, reasonable and affordable. Consistent with the law, the final regulations specify that the rehabilitation payment amount must not be a required minimum payment, a percentage of the borrower’s total loan balance, or an amount based on other criteria unrelated to the borrower’s total financial circumstances.

In response to public comments on the draft rules submitted this summer by TICAS and others, the final rules require that borrowers seeking to rehabilitate defaulted loans be initially offered a payment amount based on what they would pay in Income-Based Repayment (IBR), which caps monthly payments at 15 percent of a borrower’s discretionary income. The draft rules would have allowed payments based on the IBR formula only after borrowers were offered and then rejected a different amount calculated by servicers and based on a long and complex form. In a change of course, the Department ultimately required payments based on the IBR formula to be offered first, in response “to the numerous comments we received expressing concerns about the amount of personal financial information a borrower requesting loan rehabilitation would [otherwise] have to provide.”

In addition, the final regulations permit borrowers who have been delinquent on their loans for at least 270 days to be placed in forbearance based on an oral rather than a written request. Borrowers in forbearance don’t have to make payments, but their interest keeps accruing and then capitalizes when the forbearance ends, leaving them owing even more.

To try to prevent institutions from pressuring borrowers to request oral forbearances during the period when institutions are held accountable for student loan defaults, the rules limit any forbearance granted based on an oral request to 120 days and prohibit consecutive 120-day forbearances. In another improvement over the draft proposal, borrowers who are placed in forbearance based on an oral request will receive written information, as well as an oral explanation, of their repayment options and how they can exit forbearance, as TICAS had recommended. The Department is allowing loan holders, colleges, and guaranty agencies to implement this rule on November 1, even though they are not required to comply until next July.

The Department publicly acknowledges the evidence “that some institutions are aggressively pursuing their former students to compel them to request forbearance on their loans, primarily during the cohort period when the institution is accountable for student loan defaults.” As detailed in our public comments, it’s well documented that some for-profit colleges have engaged in such abuses at borrowers’ expense while receiving billions of dollars in federal student aid. TICAS has identified steps the Education Department should immediately take to prevent such abuses.

Soon to be published in the Federal Register, the new rules also improve students’ access to loan discharges when schools shut down before they can finish their studies.  

Posted in

| Tagged

As the possibility of Congress failing to raise the debt limit and the federal government defaulting on its obligations becomes more real, we looked at what impact this might have on federal student loans.

Since the U.S. government has never defaulted before, we cannot know for sure what impact it 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 concludes 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.

Enacted in August, the Bipartisan Student Loan Certainty Act of 2013 ties federal student loan interest rates to the 10-year Treasury note yield (as of the May auction) plus a fixed increment. 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 2014, 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 2016, a 50 basis point increase would cost him about $5,000 more and a 100 basis point increase would cost him about $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.

Undergraduate borrower taking out annual maximum subsidized and unsubsidized Stafford loan amounts, starting college in        2014-15 and graduating in four years

Scenario Amount entering repayment  Total payments over 10 overs Total interest paid over 10 years
Based on current CBO FY projections for 10-Yr T-Note yields  $28,100  $37,150  $10,150
       
If 10-Yr T-Note yields increase by 50 BPs  $28,200  $38,150  $11,150
 Difference from current projections ($)  $100  $1,000  $1,000
 Difference from current projections (%)  0%  3%  10%
       
If 10-Yr T-Note yields increase by 100 BPs  $28,300  $39,150  $12,150
  Difference from current projections ($)  $200  $2,000  $2,000
  Difference from current projections (%)  1%  5%  20%

 

Graduate borrower taking out annual maximum unsubsidized Stafford loan amounts, starting college in 2014-15 and graduating in two years

Scenario Amount entering repayment Total payments over 25 overs Total interest paid over 25 years
Based on current CBO FY projections for 10-Yr T-Note yields  $45,100  $91,100  $50,100
       
If 10-Yr T-Note yields increase by 50 BPs  $45,450  $96,050  $55,050
 Difference from current projections ($)  $350  $4,950  $4,950
 Difference from current projections (%)  1% 5%  10%
       
If 10-Yr T-Note yields increase by 100 BPs  $45,750  $101,150  $60,150
  Difference from current projections ($)  $650  $10,050  $10,050
  Difference from current projections (%)  1% 11%  20%

Calculations by TICAS based on February 2013 CBO fiscal year projections of 10-Year Treasury Note yields from "The Budget and Economic Outlook: Fiscal Years 2013-2023,” http://1.usa.gov/162YKgi. The dependent undergraduate student takes out a total of $27,000 in Stafford loans ($19,000 subsidized and $8,000 unsubsidized) and the graduate student takes out a total of $41,000 in unsubsidized Stafford loans. Figures in the table are rounded to the nearest $50 and 1%.Pauline Abernathy, Diane Cheng and Jessica Thompson

Posted in

| Tagged

The nonpartisan Congressional Budget Office (CBO) recently released a report that explores the growth in the Pell Grant program between 2006-07 and 2010-11, citing factors such as the economic downturn and legislated policy changes. We are planning to dig deeper into the CBO’s analysis over the coming weeks, but wanted to highlight one important point in the report.

Although the cost of the Pell Grant program increased substantially between 2006-07 and 2010-11, that pace of growth is not expected to continue. In fact, CBO projects almost no annual growth in Pell Grant program costs between 2012-13 and 2023-24, after adjusting for inflation. Over that entire 11-year period, the program’s costs are only projected to increase by 1% in real terms.

It’s clearly time for policymakers to stop asking whether Pell Grants are sustainable and focus instead on whether they’re sufficient. Even after recent increases, the maximum grant covers the smallest share of the cost of attending a four-year public college since the start of the program. Pell Grant recipients are more than twice as likely as other students to have to borrow to pay for college. The CBO data drive home the need for a comprehensive approach to financial aid and higher education policy, so that all students who are willing to study hard can afford to go to college and graduate.

For more information about Pell Grants, please visit TICAS’ Pell Grant Resource Page: http://www.ticas.org/pellgrant_resources.vp.html. For TICAS’ recommendations for increasing the effectiveness of Pell Grants, see our white paper at http://www.ticas.org/pub_view.php?idx=873.  

Posted in

| Tagged

On August 12, the Congressional Budget Office (CBO) released its estimates of the subsidy rates on federal student loans before and after enactment of the Bipartisan Student Loan Certainty Act of 2013 signed by President Obama earlier this month. These CBO estimates show:
  • That the government will profit from Stafford graduate, graduate PLUS, and parent PLUS loans in every year over the next decade, and beginning in 2016 will make even more profit from them than had been projected under prior law.  Note that CBO does not separate estimates for unsubsidized loans to undergraduate students versus graduate students, so the unsubsidized line understates the profits CBO is projecting from Stafford graduate loans.
  • That the government will still profit off of subsidized Stafford undergraduate loans for the next two years (but less so than if the rates had doubled to 6.8%), after which subsidized loans will require a subsidy that is equal to or greater than the subsidy under prior law.
Ultimately, these estimates underscore the increased profits projected from federal student loans under the new law as well as the shift in costs to students starting a few years from now, especially graduate students and parents of undergraduates.

Posted in

| Tagged

This week, the Senate passed legislation to change the way interest rates are set on federal student loans. It’s expected to pass the House next week and soon become law. While it would lower rates for borrowers this year, it is more of a missed opportunity than a cause for celebration, as we said in our statement last week. That’s because it is expected to cost students and families more over time than if Congress had done nothing at all after interest rates doubled on subsidized Stafford loans.

Over the next 10 years, the legislation is expected to cost borrowers $715 million more than if current rates were simply left in place, and current rates are already projected to generate $184 billion in profits for the government. It lowers rates for today’s students only by requiring future students to pay far more. Within a few years, new loans for undergraduates, graduate students, and parents are all projected to carry higher fixed rates than they do right now.

Still, the Senate-passed bill is better than the earlier bill passed by the House, which would have set truly variable rates – meaning the rates on existing loans would change every year while in repayment – and charged borrowers even more to pay for deficit reduction.

Several other proposals removed any cap on how high rates could rise, but Senate Democrats successfully fought to include caps in the final compromise. An amendment offered by Senators Reed and Warren would have lowered those caps to where interest rates are today: 6.8% for all Stafford loans and 7.9% for PLUS loans for parents and graduate students. Notably, that amendment got 46 votes, but not enough to prevail and prevent the final bill from passing with the higher caps.

As many in Congress have pointed out, the upcoming reauthorization of the Higher Education Act is a crucial opportunity to revisit student loan policy, including but not limited to interest rates, in the context of higher education reform as a whole. We urge Congress and the Administration to make college more affordable – not less – for both today’s students and tomorrow’s.

Posted in

| Tagged

For college students who need to borrow, at any type of school, federal student loans are the safest and most affordable choice. Unfortunately, some community colleges across the country continue to deny their students access to federal loans. This leaves students with options that range from bad to worse: they could stay enrolled and on track by using riskier and more expensive forms of debt, or they could work excessive hours, cut back on school, or drop out.

In just the past two weeks, media outlets have confirmed that three more colleges in two states have decided to stop offering federal loans. In North Carolina, Southeastern Community College became the latest of many in the state to do so in recent years. In California, a decision by the Yuba Community College District means that neither Yuba College nor Woodland Community College will offer loans for 2013-14. The rationale provided for decisions in both states is that the colleges’ default rates – the share of their federal loan borrowers who are unable to repay – may rise so high that the schools could be sanctioned by the U.S. Department of Education (the Department) as a result.

In all cases, high default rates mean that the college should do more to help their borrowers avoid default. But schools where only small shares of students borrow, including many community colleges, are afforded special protection against sanctions. This protection is based on colleges’ ‘participation rate index’ or PRI, a measure that combines colleges’ default rates with their borrowing rates. Unfortunately, too few community college administrators are aware of the protection or the relevant regulations – even those at the schools most likely to benefit.

Take the recent example of the Yuba District. With fewer than 5% of Yuba’s students taking out loans, the college would almost certainly qualify for this protection – called a “PRI appeal” -- should its default rate rise to levels that would otherwise trigger sanctions. Still, the Yuba Community College District Chancellor could either not find the PRI rules or understand how they applied to his district (excerpted from Sacramento Bee):

“Chancellor Douglas B. Houston said the district unsuccessfully combed U.S. Department of Education regulations in search of assurances that the district could successfully appeal. He said the risk was too great not to act.”

This is a shame. The Department – which encourages federal loan access – must do more to make sure that the right people see and understand these rules. We at TICAS have done what we can, responding to frequent questions from colleges and even creating a PRI worksheet (updated for FY 2010 three-year rates) so they can see how it would work for them. But colleges need to be reminded by the Department that providing access to federal loans is important, and that certain protections from default-rate sanctions are available. Colleges need to understand that while helping students avoid default should always be a priority, concerns about sanctions must be kept in perspective. And colleges need to know that the Department is committed to developing a PRI appeals process that works for schools – providing the assurances colleges need, when they need them – to alleviate the fears that lead colleges to stop offering loans unnecessarily. We hope the Department has taken note of the rash of schools abandoning the federal loan program and takes action before the next release of college default rates in September.

Posted in

| Tagged

With just three days until interest rates on subsidized Stafford loans are scheduled to double from 3.4% to 6.8%, Congress should not make college more expensive, either by letting rates permanently double or by making permanent changes that leave students worse off than doing nothing at all. Instead, Congress should freeze interest rates to avoid increasing the cost of college for millions of students and families already struggling to cover rising costs. The Reed/Hagan bill (S.1238) introduced today with more than 30 other senators would freeze rates for one year and pay for itself by closing a tax loophole. It’s scheduled for a Senate vote on July 10.

By contrast, the bill Senators Manchin, Burr, Coburn, Alexander, and King announced they will introduce today would be worse for students than doing nothing at all. It would let rates for subsidized Stafford loans more than double by 2018 and set no limit on how high rates on all new loans could rise.

There has always been a cap on federal student loan interest rates. As we, alongside other organizations that advocate for students and young people, recently wrote to Congress, a rate cap is essential to ensure that student loans remain affordable and that high interest rates don’t deter students from starting or completing college during periods of high and rising rates.

Nevertheless, some have objected to maintaining an interest rate cap, suggesting that the availability of income-driven repayment plans eliminates the need for any cap. But that’s simply not the case.

Still others have claimed that an interest rate cap isn’t necessary because federal consolidation loans would still have a maximum rate of 8.25%. However, the potential to consolidate is not a legitimate substitute for capping how high rates can rise. Consolidation comes with risks, which vary depending on the borrower’s specific circumstances. For example, consolidation can increase the total cost of the loan by lengthening the repayment period, and it can make it harder to qualify for Public Service Loan Forgiveness. We described these and other consolidation risks in our last post.

A recent alternative Democratic proposal would cap rates and keep subsidized loan rates below 6.8%, but rates on unsubsidized loans would be expected to exceed 7% by 2016. Because 82% of undergraduates with subsidized loans also have unsubsidized loans, keeping rates low on one while increasing rates on the other may not reduce costs for low- and moderate-income students, and could even increase them.

The table below compares how four recent long-term proposals compare to the current rates and scheduled rates for undergraduate subsidized Stafford loans over the next decade. Under three of the proposals, rates on subsidized loans would rise sharply—exceeding 7%, more than double the current rate, by 2018. The difference can be substantial. For a student borrowing the maximum allowable in subsidized and unsubsidized loans over four years, the difference in the rates can cost them over $5,000 more if they repay in 10 years, and over $7,000 more if they repay under an income-driven plan (for details, see our recent analysis here).

Projected Rates for Undergraduate Subsidized Stafford Loans

(based on CBO fiscal year projections for 10-year Treasury notes)

 

Years Rates Projected to  Exceed 7% (2013-2023)

Years Rates Projected to  Exceed 8% (2013-2023)

Cap on How High Rates Can Rise (Yes/No)

Scheduled Rate (6.8%)

NONE

NONE

Yes

Current Rate (3.4%)

NONE

NONE

Yes

Coburn/Burr/Alexander

2016-2023

2018-2023

No

Kline/Foxx

2013-2023*

NONE

Yes

Manchin/Burr

2018-2023

NONE

No

Alternative Dem

NONE

NONE

Yes

*Rate is projected to exceed 7% beginning in 2017 and would apply to all loans taken out after July 1, 2013, because under the Kline/Foxx bill, the rates for all loans vary each year throughout the life of the loans.
 

Both today’s students and tomorrow’s deserve affordable student loans, not so-called solutions that let rates double and rise even higher without any upper limit. Instead, current rates should be temporarily frozen so that Congress and the Administration have time to come up with a plan that makes real sense for both students and taxpayers and helps make college affordable for all. Both the Reed/Harkin bill, supported by a majority of the U.S. Senate and the Administration, and the new Reed/Hagan bill, do just that by extending current rates and fully covering the cost by closing unnecessary tax loopholes.

Posted in

| Tagged

With just nine days until interest rates on subsidized Stafford loans are scheduled to double from 3.4% to 6.8%, policymakers keep scrambling to come up with a long-term fix. But so far, their long-term proposals – actual and rumored – fall short on the most important measure of all: keeping loans affordable for students, both now and in the future.

The table below uses CBO projections for 10-Yr T-Note yields (fiscal year) to compare how three recent long-term proposals compare to the current rates and scheduled rates for undergraduate subsidized Stafford loans over the next decade. As you can see, rates would rise sharply under all three proposals, increasing the cost of college for millions of students and families already struggling to pay for college.

 

Projected Rates for Undergraduate Subsidized Stafford Loans (2013-2023)

 

Years Rates Projected to  Exceed 7% (2013-2023)

Years Rates Projected to  Exceed 8% (2013-2023)

Cap on How High Rates Can Rise (Yes/No)

Scheduled Rate (6.8%)

NEVER

NEVER

Yes

Current Rate (3.4%)

NEVER

NEVER

Yes

Coburn/Burr/Alexander

2016-2023

2018-2023

No

Kline/Foxx

2013-2023*

NEVER

Yes

Manchin/King/Coburn

2018-2023

NEVER

Uncertain**

*Rate is projected to exceed 7% beginning in 2017 and would apply to all loans taken out after July 1, 2013,  because under the Kline/Foxx bill, the rates for all loans vary each year throughout the life of the loans.
**Media reports on this proposal vary, and the proposal itself has not been made public.

The table shows that in five years or less, projected rates under these long-term proposals would exceed 7%, more than double the current rate. Some conservatives have objected to including any cap on how high rates can rise. Others have suggested that the availability of income-driven repayment plans eliminates the need for an interest rate cap. But that’s simply not the case.

Still others have claimed that an interest rate cap isn’t necessary because federal consolidation loans would still have a maximum rate of 8.25%. They argue that students who borrow when rates are even higher could consolidate into a new loan at 8.25%.

However, the potential to consolidate is not a legitimate substitute for capping how high rates can rise. Consolidation comes with risks, which vary depending on the borrower’s specific circumstances. Among the risks of consolidation:

  • Consolidation costs you more by extending your repayment period: the longer you stretch out your payments, the more interest you pay. Standard consolidation repayment periods range from 10-30 years depending on your debt level.
  • Any accrued but unpaid interest is capitalized (added to the loan principal) when you consolidate.
  • Rates on consolidation loans are rounded up to the nearest 1/8th of one percent of the weighted average of the loans or 8.25%, whichever is lower. This can also add to the cost of your loan.
  • Consolidating prevents you from paying down your highest interest loan first to reduce the average rate and total cost of your remaining debt.
  • The way repayment periods are automatically set in consolidation makes it harder to qualify for Public Service Loan Forgiveness (PSLF). The only payments that count towards the 120 required for PSLF are income-driven or “standard” 10-year payments. But “standard” consolidation repayment periods are longer than 10 years if you have at least $7,500 in debt.
  • If you consolidate a Parent PLUS loan with your own student loans, the resulting consolidation loan will not be eligible for Income Based Repayment or Pay As You Earn.
  • Benefits and rights associated with individual loans are lost in consolidation.

Both today’s students and tomorrow’s deserve affordable student loans, not so-called solutions that let rates double and rise even higher without any upper limit. Congress must not rush to make permanent changes that leave students worse off than doing nothing at all. Instead, current rates should be temporarily frozen so that Congress and the Administration have time to come up with a plan that makes real sense for both students and taxpayers. The Reed/Harkin bill, supported by a majority of the U.S. Senate and the Administration, does just that: extending current rates for two years while fully paying for itself by closing unnecessary tax loopholes.

Posted in

| Tagged

Tomorrow or Saturday, the Legislature will vote on the 2013-14 Budget Act. Included in the budget at the behest of the Assembly Speaker, and agreed to by the Senate pro Tempore and the Governor, is a new Middle Class Scholarship Program. Once fully phased in, the program is projected to cost $305 million annually and offer tuition discounts to students with family incomes likely between $80,000 and $150,000.

But California already has a middle class scholarship. The Cal Grant program, the state’s need-based financial aid program, serves students with family incomes up to $83,100 (for a family of four) – well above California’s median income.  Still, many of our most financially needy college students – those with family incomes below the federal poverty line – are either completely un-served or dramatically under-served by the Cal Grant program, despite the common belief that the state is meeting their needs. Less than one-quarter of California’s very low-income students who apply for aid receive a Cal Grant. A major cause is there just isn’t enough money appropriated to the Cal Grant Program to serve all eligible students.

With hundreds of thousands of low- and truly middle-income students facing severe cost barriers, why throw hundreds of millions of dollars at a new program to help students from families with incomes as high as $150,000?  Investing that money in Cal Grants would get a far bigger bang for the buck. Higher income students are already on track to attend and graduate from college, while lower income students face such large financial obstacles that they drop out, graduate in lower numbers, or fail to attend altogether.

The fiscal priorities contained in the budget agreement are disheartening. However, legislation pending in both the Senate and the Assembly would restore recent cuts to already inadequate grants for the lowest income recipients and increase the availability of awards for both low- and middle-income students. Putting more money into the Cal Grant program would go a long way towards better serving middle-income students. And low-income students would be better served, too.

Posted in

| Tagged

Pages

Subscribe to Blog