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With interest rates on subsidized Stafford loans scheduled to double to 6.8% on July 1, today the House passed H.R. 1911 (sponsored by Representatives Kline and Foxx). It would permanently change the way interest rates are set and cost student borrowers more than letting rates double as planned. Meanwhile, the Senate is expected to vote soon on S. 953 (sponsored by Senators Reed and Harkin), which freezes current rates for two years. In addition, there are various other proposals, including one from the President.

To help track and compare these proposals, TICAS has developed a handy summary chart.

We’ve also analyzed how several proposals would affect students’ cost of borrowing, based on a traditional-age student who graduates in four years and borrows the maximum amount of subsidized and unsubsidized Stafford loans ($27,000). For each proposal, we compare the costs in a standard 10-year repayment plan and the income-based Pay As You Earn plan.

Here are some highlights from the full analysis:

Costs in the Standard 10-Year Repayment Plan

  • For a student who starts college this fall, the long-term change in the Kline-Foxx bill (H.R. 1911) would actually cost over $1,000 more than if Congress did nothing at all.

• Letting the subsidized loan rate double to 6.8% as scheduled would cost the student almost $4,000 more than leaving the current 3.4% rate in place.

• H.R. 1911 would cost the student over $5,000 more than leaving the current 3.4% rate in place.

  • For a student who starts college five years from now (in 2018), H.R. 1911 would cost the student over $1,800 more than if Congress did nothing and let rates double to 6.8%.

Costs in the Pay As You Earn Plan (income-based payments, 20-year repayment period)

Our findings underscore that interest rates do make a difference in what many students will have to pay even if they are in Pay As You Earn.

  • For a sample student in Pay As You Earn, extending the current 3.4% rate for subsidized loans saves the student a significant amount of money: ranging from almost $3,000 to almost $10,000 depending on the proposal.
  • Under H.R. 1911, this student would pay over $7,000 more in interest compared to an extension of the current rate, and over $2,000 more than if the rates were allowed to double.

Comprehensive reform is needed to keep federal loans affordable, support sensible borrowing, and provide well-targeted debt relief (note that our recent white paper includes such reform). However, with less than six weeks until student loan rates double to 6.8%, none of the current long-term proposals meet these goals. We must protect students now while giving Congress and the Administration time to consider and enact permanent changes that make sense for both students and taxpayers.

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California Governor Jerry Brown today updated his proposed spending plan for 2013-14.  As in his January plan, he proposes no policy changes to the Cal Grant program, a welcome reprieve from recent years’ cuts.  We are also pleased that he is taking more time to consider how best to craft incentives that support cost-effective student success.

However, we remain concerned about the Governor’s proposal to require California community college (CCC) students who need help with college costs to fill out a federal aid application, or FAFSA.

As we’ve said previously, there are real merits to requiring FAFSA completion to receive a Board of Governor (BOG) fee waiver.  The FAFSA is students’ ticket to federal aid, including Pell Grants and federal loans, as well as state Cal Grants, so why not make it the ticket to institutional BOG fee waivers, too?  This would help more CCC students tap into the federal and state aid that many are currently leaving on the table.

Without a doubt, better access to all the aid they’re eligible for would enable students to take more courses per term, speeding up their time to degree and increasing their chance of ultimately earning a degree or transferring – all of which are in line with the Governor’s priorities for higher education.  Improving access to aid means more students need to complete FAFSAs.

However, the reasons why CCC students leave available aid on the table generally boil down to the fact that CCC financial aid offices aren’t sufficiently equipped to help all of their students understand financial aid and file FAFSAs, which can be complicated and time-consuming to complete.  Per-student funding for financial aid administration at the CCCs is just a fraction of what it is at UC or CSU, despite CCC students being just as likely as others to need aid. And systemwide financial aid staffing at the CCCs has already decreased in recent years.

Under the Governor’s proposal, resources for CCC financial aid offices would decrease even further – by millions of dollars statewide in 2014-15, when the FAFSA requirement would be implemented.  That’s because financial aid administrative funding is based on how many BOG fee waivers colleges award, and the Governor presumes that the number of fee waivers awarded will drop once a FAFSA is required. Fewer fee waivers means less administrative funding, which in turn means fewer students will have support to complete the FAFSA and get fee waivers.

In summary, mandating FAFSA completion for BOG fee waivers could help meet the Governor’s goal of increasing timely completion, but without a substantial increase in the level of support for campus financial aid offices, his actual proposal may have the opposite effect.

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We applaud the Department of Education’s recent improvements to the guidance for college net price calculators, which address several of the issues raised in our report last year. If colleges follow the new guidance, net price calculators will be much easier to find, use, and compare.

The new guidance directs schools to make these tools easier to find in several ways:

  • We found some net price calculators buried deep within school websites. The new guidance strongly urges colleges to post their calculators prominently where students and families are likely to look for information on costs and aid, such as on the Financial Aid, Prospective Students, or Tuition and Fees webpages.
  • Other calculators are hard to find because they are not consistently labeled. The guidance makes clear that these tools must be called “net price calculators” and not other names.
  • The Department also instructs colleges to provide direct links to their net price calculators for use in consumer tools such as College Navigator and the new College Scorecard. Previously, some schools provided links to their home page instead.

The new guidance also aims to make the calculators easier to use and their results easier to compare:

  • We found calculators that made it look like the user’s contact information was required to get a net price estimate. The Department’s guidance clarifies that the calculators cannot require contact information and says those questions should be clearly marked as optional.
  • Some calculators misleadingly used outdated cost information or emphasized the cost after subtracting loans as well as grants and scholarships, which is not the “net price.” The new guidance makes clear that the calculators must use the most recent data available and reinforces the importance of the legally required net price figure, which is the cost after grants and scholarships alone. Only by comparing net price to net price can consumers see meaningful differences in what they might have to save, earn, and/or borrow to pay for college.

Our report identifies several other improvements that would make net price calculators much more user-friendly, such as making the user’s “net price” estimate the most prominent figure on the page, limiting the number of detailed questions (especially those that are required), and making it clear which questions are really required.  But the new guidance – if followed – is an important step toward helping prospective college students and their families look beyond intimidating “sticker prices” and start figuring out which schools they might be able to afford.

To view the Department’s updated guidance on net price calculators, visit the Net Price Calculator Information Center and view the recent Dear Colleague Letter. For more information about net price calculators, visit our resource page.

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Both the President’s FY14 Budget and the Comprehensive Student Loan Protection Act, reintroduced in the Senate this week, propose significant changes to federal student loan interest rates. Rather than being set by Congress, interest rates on new student loans would be tied to the U.S. Treasury’s 10-year borrowing rate that year and remain fixed for the life of the loan, even if interest rates dropped substantially. Though not identical in their details, both proposals would lower the interest rates for students and families who borrow this fall, but allow interest rates to rise steeply for those who borrow in the coming years. Based on CBO projections, interest rates for unsubsidized Stafford loans would exceed 6.8% by 2016 and rise above 8% by 2018.

Moreover, both proposals would eliminate the cap on student loan interest rates, which means that actual rates for all types of federal student loans could rise even higher than currently projected. For the first time ever, there would be no limit to how high rates could go. In addition to increasing the costs of loans and college, uncapped interest rates could deter students from enrolling in or completing college, particularly during periods of high and/or rising interest rates.

Some have suggested that an interest rate cap is not necessary if borrowers have access to an income-driven repayment plan, such as Income-Based Repayment (IBR) or Pay As You Earn (PAYE). In IBR, which is widely available, monthly payments are capped at 15% of discretionary income, and after 25 years of qualifying payments any remaining debt is discharged. In PAYE, currently only available to some current students and recent graduates, monthly payments are capped at 10% of discretionary income, and any remaining debt is discharged after 20 years. New borrowers in 2014 will have access to a similar repayment plan. The President’s budget goes a step further by providing access to existing as well as new borrowers starting in 2014. It also prevents the taxation of debt discharged through income-driven plans.

Although these programs can help keep monthly payments manageable, income-driven repayment plans are no substitute for a cap on interest rates.  First, under current law, not all federal loans or loan borrowers are eligible for an income-driven repayment plan. 

For example, to qualify for IBR or PAYE, borrowers must have a relatively high debt-to-income ratio. Second, even borrowers who qualify for IBR or PAYE can have to pay much more in total with higher-interest-rate loans. In income-driven repayment plans, the interest rate can affect both the monthly payment amount as well as the length of time in repayment. For example, a single borrower who enters repayment with $20,000 in debt and starts out making $30,000 a year (AGI increasing 4% a year) ends up paying much more in PAYE with a higher interest rate than a lower interest rate.

  • An interest rate of 6.8% rather than 3.4% would increase the borrower’s total cost by about $12,000.
  • An interest rate of 8.0% rather than 3.4% would increase the borrower’s total cost by about $19,000.

Comprehensive reform is needed to keep federal loans affordable over time, streamline the program, and better target benefits, but these recent proposals miss those marks. There is a better way forward. TICAS’ recent white paper proposes changes that keep loans affordable, simplify loans, and target benefits to those with more financial need. Our proposal includes both a universal interest rate cap and a guarantee that rates for borrowers in repayment will never be too much higher than the rates being offered to current students. As also detailed in our white paper, the benefits of the improved IBR plan should be targeted so that borrowers with very high incomes do not receive substantial forgiveness when they could well afford to pay more. Read our statement about the President’s FY14 Budget and our white paper on improving federal student aid to increase college access and success. 

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As promised in last night’s State of the Union Address, today the Administration unveiled its new College Scorecard. By providing information about colleges’ costs and outcomes in a clear and comparable format, it has the potential to be a game-changer for higher education. We have long touted the importance of the Scorecard and other tools designed to help students and families pick a college, and we applaud the Administration for supporting and promoting a higher education agenda that puts students first.

Overall, the data provided on the Scorecard are what students and families need to better understand their college options. Today’s version of the Scorecard includes some marked improvement over earlier drafts: it is more interactive and now links directly to colleges’ own net price calculators. However, two types of data on the Scorecard are less helpful and even downright misleading:

  • Loan default rates are provided without any context about how many students at the college borrow and are therefore at risk of ever defaulting.  For instance, American River College’s default rate of 27.5% is much higher than the national average of 13.4%. But what consumers can’t tell from the Scorecard is that only 8% of American River College students actually borrow federal loans. The default rate only represents the share of borrowers – not students – who default. Certainly American River should work on improving its default rate. But when 92% of its students never borrowed in the first place, implying that the default rate alone is indicative of student outcomes more generally does a disservice to would-be students.
  • The median borrowing figures provided are for all federal loan borrowers who entered repayment, regardless of whether the student entered repayment after graduating or dropping out after a semester or two. This makes colleges with high drop-out rates look like a good deal, compares apples to oranges, and undermines the value of other outcome information. Here’s an example. The Scorecard shows that the median federal debt of borrowers entering repayment at Grand Canyon University and Duke University (which both primarily grant bachelor’s degrees) is very similar: $9,500 at Grand Canyon and $8,840 at Duke.

Meanwhile, other federal data not reflected on the Scorecard show that these figures represent very different student outcomes. Because 41% of entering first-time, full-time students at Grand Canyon didn’t return for a second year, the low median debt for borrowers entering repayment reflects just one year of loans in many cases.  Indeed, the average federal loan amount for undergraduate borrowers at Grand Canyon in 2010-11 – what they borrowed in just that one year -- is a remarkably similar figure: $9,444. In contrast, all but 3% of entering first-time, full-time students at Duke return for a second year. And the average annual federal loan amount for undergraduate borrowers is $3,751, less than half their median debt at repayment. That makes sense considering 94% of their entering students leave with degrees.

In these cases, bad comparisons are worse than no comparisons.  Fortunately, both of these data problems have simple fixes.  It would be easy for the Department of Education to add the share of students borrowing to the loan default rate box and provide the necessary context for interpreting default rates. For the median borrowing figures, the Department is already taking steps to collect cumulative federal debt at graduation -- which would be an apples-to-apples comparison of students at the same point in their academic trajectory. Until those figures are available, the Scorecard should take the same approach to median borrowing as it already does to earnings information: make clear that federal data aren’t yet available and encourage prospective students to ask the school for more information.

For more about how to improve information for students and families and other ways to increase college affordability and completion, see TICAS’ new white paper (released yesterday): Aligning the Means and the Ends: How to Improve Federal Student Aid and Increase College Access and Success.  

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Today Governor Jerry Brown introduced his proposal for the 2013-14 state budget. His proposal outlines laudable and critical goals for higher education: making the state’s public colleges more affordable; increasing the number of Californians who complete a degree or certificate; decreasing the time it takes to get through school; and improving transfer rates. Importantly, he proposes no policy changes to the Cal Grant program, which serves hundreds of thousands of California students. However, as described in the budget summary, some of the policies he proposes may be at odds with his stated goals.

For instance, the Governor proposes limiting the number of units for which students can receive a state General Fund subsidy (either through appropriations to colleges or financial aid), beginning in 2013-14. Students should be able to take appropriate courses and earn degrees in a timely fashion, and there needs to be a shared responsibility for doing so. But in the Governor’s proposed budget, the responsibility appears to fall primarily on students, and the details on what will be expected of colleges are much less clear. And if the proposal were to be applied retroactively, to students continuing in 2013-14 rather than those newly enrolling for 2013-14, it would only serve to further penalize the many students who have been stalled by widespread college capacity problems.

Similarly, there are merits to requiring a federal aid application for California community college (CCC) students seeking Board of Governor (BOG) fee waivers, particularly with the availability of the state Dream Act application (which we presume would count under this proposal). Unfortunately, the CCC financial aid offices that administer this program are woefully underfunded, so much so that federal and state aid is being left on the table. Without providing additional resources for colleges to support students’ FAFSA completion, fewer students will likely receive BOG waivers – simply because the FAFSA presents a significant hurdle, and one that CCC financial aid offices are not adequately funded to address.

We urge the Legislature to address these potential pitfalls in the coming months by focusing on the goals outlined by the Governor, and ensuring that policies enacted do not have such unintended consequences for students.  

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Starting tomorrow (Friday, December 21), recent college graduates with federal student loans can apply to lower their monthly payments using the Pay As You Earn plan. This new repayment plan has a lower monthly payment cap than the more widely available Income-Based Repayment (IBR) plan. Pay As You Earn also provides forgiveness after 20 years of payments, rather than 25 years in IBR.

As with any repayment plan that allows you to pay less per month, it is possible to pay more in the long run under Pay As Your Earn or IBR due to accumulated interest. But for millions of Americans currently struggling to repay their loans, these plans ensure that payments will be manageable, help prevent delinquency and default, and provide a much-needed light at the end of the tunnel.

Countering the effects of recession

Pay As You Earn is designed to help recent students entering the job market for the first time in today’s tough economy. Only those who took out their first federal loan after September 30, 2007 and had at least one disbursement after September 30, 2011 will qualify.

The negative effects of starting your career in a down economy can last more than a decade. According to a recent study from the Economic Policy Institute:

Research shows that entering the labor market in a severe downturn can lead to reduced earnings, greater earnings instability, and more spells of unemployment over the next 10 to 15 years. […] In short, the labor market consequences of graduating in a bad economy are not just large and negative, but also long-lasting.

Earlier this year we found that two-thirds of the Class of 2011 had loans, and their average debt was $26,600 for a four-year degree. Yet half of recent college graduates are either unemployed or underemployed. Compared to students who enter the job market in better economic times, recent and soon-to-be graduates are likely to face lower earnings and higher unemployment for many years to come.

Helping lower income borrowers

Borrowers with modest incomes, who need help the most, will get significant relief from Pay As You Earn. As we noted in a recent post, a student who graduated in 2012 or later with $26,600 in federal loans and earns $25,000 a year (adjusted gross income) would pay one-third less each month in Pay As You Earn than in the current IBR plan. The same is true for a married borrower with the same debt who just completed a bachelor’s degree, has two children, and earns $45,000.

The Department of Education reports that more than 1.3 million borrowers are already enrolled in IBR, and nearly 90% of them have incomes under $50,000.

Applying made easy

A new electronic form at Studentloans.gov makes it easy to apply online for Pay As You Earn, IBR, and related repayment plans. Borrowers can even ask to be enrolled in whichever income-based plan they qualify for that has the lowest monthly payment.

Together, these plans can help millions of borrowers keep their student loan payments affordable even in tough times.

NOTE:  TICAS and its Project on Student Debt developed the policy proposal that formed the basis of IBR, which recommended forgiveness after 20 years of payments. Dozens of organizations representing students, consumers, colleges, and lenders supported the goals of that proposal. Learn more about IBR and Pay As You Earn at IBRinfo.org.

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The passage of California’s Proposition 30 last month protected both K-12 and higher education from another round of severe cuts. This good news also creates an opportunity to reflect on how state resources can best ensure access and support success for the state’s current and future college students. To that end, we've been analyzing how the Cal Grant program is serving California’s college students. See our full Cal Grant Snapshot here.

We found that for 2012-13, there was only one Competitive Cal Grant available for every seventeen eligible applicants – up from one in seven in 2006-07. (While all eligible recent high school graduates receive a Cal Grant, otherwise eligible older students and students who did not apply by the March 2nd deadline must compete for a very limited number of grants.) We also learned that only about one-quarter (23%) of very low-income students who applied for federal aid received a state grant. And for those few very low-income students who do receive a Cal Grant, the stipend to cover educational costs beyond tuition has failed to keep pace with inflation and is now at a quarter of its original value.

TICAS research director Debbie Cochrane highlighted these and other findings at the California Student Aid Commission’s strategic planning session last month. Her comments on the state of Cal Grants and where the Commission can play a unique role can be read in its entirety here.

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Recent and soon-to-be college graduates will soon have a new option to help keep their federal student loan payments manageable and avoid default—the Pay-As-You-Earn repayment plan recently finalized by the U.S. Department of Education.

Students graduating from college this year are entering the job market with record student debt and facing near record unemployment rates. Half of recent college graduates are either unemployed or underemployed—the highest share in more than a decade.  This makes the new student loan changes particularly timely.

Pay-As-You-Earn is designed to help these recent and soon-to-be college graduates, allowing them to make lower income-based monthly payments on their loans than the current Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR) plans allow.  Pay-As-You-Earn will also provide loan forgiveness after 20 years rather than 25 years of payments, allowing borrowers to more easily save for retirement and help their children pay for college.  To be eligible, borrowers must have taken out their first federal student loan after September 30, 2007 and received a loan disbursement after September 30, 2011—meaning primarily recent undergraduates.

Some have questioned how much borrowers with modest incomes will benefit from the plan.  In fact, such borrowers will receive significant relief. Here are just a couple of examples:

  • For students leaving school in 2012 or later with $26,600 in federal loan debt (the average total debt for borrowers in the Class of 2011) and earning $25,000 a year (adjusted gross income), Pay-As-You-Earn will lower their monthly payments by about one-third (from $103 to $69) compared to the current IBR plan.
  • Pay-As-You-Earn will also provide significant repayment relief to the many working adults who went back to college during the economic downturn.  A married recent graduate with two children, an adjusted gross income of $45,000, and $26,600 in federal loans will also see his or her monthly payments reduced by one-third (from $130 to $87) compared to the current IBR plan.

No one repayment plan will be the best or most affordable option for everyone, but particularly in today’s economy, many borrowers are struggling to avoid delinquency and default.  With the Class of 2012’s first student loan payments coming due starting this month, for many, Pay-As-You-Earn cannot come soon enough.

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