Federal and State Policy

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.

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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.

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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.

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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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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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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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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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On Saturday, June 30, a judge on the U.S. District Court for the District of Columbia issued a decision in APSCU v. Arne Duncan et al which challenged the Department of Education’s gainful employment regulations. Those regulations apply to career education programs at public, nonprofit and for-profits colleges and were set to go into effect on July 1.

TICAS Vice President Pauline Abernathy issued the following statement in reaction to the ruling:

The Federal District Court decision issued this weekend leaves students and taxpayers exposed to unscrupulous schools that seek to swindle them and routinely saddle students with debts they cannot repay.

However, the court decision did affirm both the Education Department’s authority to enforce the gainful employment provisions in the law and the need to do so.  The court concluded that “The Department has set out to address a serious policy problem, regulating pursuant to a reasonable interpretation of its statutory authority….Concerned about inadequate programs and unscrupulous institutions, the Department has gone looking for rats in ratholes—as the statute empowers it to do.”

The court ruled that the Department did not provide adequate rationale for picking the 35% threshold for program repayment rates, leading it to vacate the entire rule as a result.  The decision faults the rationale for the 35% threshold, not the importance of the repayment rate measure, which effectively assesses the extent to which a program’s former students are able to pay down their loan principal.  Indeed, nearly two years ago, dozens of organizations advocating for students, consumers, higher education, civil rights and college access urged the Department to raise the repayment rate threshold, writing, “This standard is simply too low to demonstrate that programs are adequately preparing students for gainful employment.”

With student debt levels rising and 30 state attorneys general from both parties jointly investigating for-profit college industry practices, the need for action has never been more urgent.  To protect students and taxpayers, we call on the Administration to swiftly respond to this court decision and on Congress to promptly adopt bipartisan legislation that prohibits any school from using taxpayer dollars to advertise and recruit students and closes the “90-10 Rule” loophole that allows schools to count GI Bill funds and Department of Defense Tuition Assistance as private rather than federal dollars.

 

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To help students better understand how much each college would actually cost them, the Consumer Financial Protection Bureau (CPFB) and the U.S. Department of Education (Department) have developed a Know Before You Owe financial aid shopping sheet. This draft form takes an important step toward helping students and their families make more informed decisions about how to pay for college and which college to attend. As President Obama remarked in Ohio earlier this week, “You don’t want to owe and then know.”

We recently submitted comments on the draft financial aid shopping sheet, pointing out the most critical elements to include (such as the full cost of attendance and net price) and providing recommendations to make the form even more helpful to students. For example, we emphasize the need to avoid appearing to endorse risky borrowing through private student loans.

We encourage you to submit your own comments on the CFPB’s “Know Before You Owe” webpage. Tell the Department and CFPB what information you wish you had known before deciding where to go to college and how to pay for it. Your feedback is valuable!

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As TICAS has long advocated, for students and families to make sound decisions about paying for college, financial aid letters must be clear, comparable, and consumer-friendly. On each of these fronts, there is significant room for improvement. As a step in that direction, the U.S. Department of Education held a public meeting earlier this month to gather input on how to improve financial aid award letters. We submitted written comments and participated in both the panels and small group discussions at the meeting.

What emerged from this month’s meeting was a broad and growing consensus about the need for consistent core elements and common definitions across award letters. There was also continued discussion, but less agreement, about whether or not there should be a single award letter format, and whether standards for award letters should be made mandatory at some point in the future. All of the panelists and all of the small groups of participants reporting out listed most or all of the following as critical core components for all award letters:

  • Realistic estimates of the full cost of attending college for one year, whether paid directly to the college or not; federal law defines cost of attendance as including at least  tuition & fees, room & board, books & supplies, transportation & miscellaneous personal expenses.
  • Grants, scholarships, and other aid that does not have to be earned or repaid, often known as gift aid.
  • Any remaining costs after gift aid is subtracted, commonly referred to as net price.
  • The types and amounts of loans, work-study, and parent/student contributions recommended by the college to cover the remaining costs, often called self-help.
  • Contact information for the financial aid office.

These are consistent with our recommendations  emphasizing the importance of key principles and elements. While there is broad consensus on the elements, there was vigorous discussion about what to call them. Some participants were particularly concerned that terms like “cost of attendance” and “net price,” may not be accessible to students and families. There was general agreement that the next steps need to include several ways of gathering consumer input directly from those who actually receive award letters—students and their families—and those who help them interpret them—counselors and advisors from schools and community groups. In his remarks, David Hawkins of the National Association for College Admission Counseling (NACAC) noted that students and families expect high school counselors to be able to help them with financial aid questions, including interpreting award letters, but this is an area where the counselors themselves feel they need additional assistance. Among the ideas for how to engage consumers, U.S. PIRG pointed out the Consumer Financial Protection Bureau’s “Know Before You Owe” page, which brought in over 18,000 comments on how to simplify and improve mortgage disclosures, as an example of an innovative and successful effort of this sort.

We encourage the Department to build on the clear consensus that emerged from this month’s meeting about key elements and the importance of consistent and consumer-friendly terminology. In particular, the Department should engage with consumers both before and after drafting model award letter formats and recommendations, gathering input about how best to help them understand college costs and options for covering them.

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