Federal and State Policy

The Obama transition Web site is sponsoring an online discussion on college costs — noting both the interest of many in the issue and the recent death of Claiborne Pell, who as a Democratic U.S. senator from Rhode Island led the fight to create the grant program named for him. Numerous comments deal both with policy alternatives and the personal situations of individuals trying to pay for college.

[via Inside Higher Ed]

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We joined 12 other national organizations to send a letter to Congressional leaders urging that their economic stimulus bill include major new investments in college affordability. Our proposal includes a dramatic Pell Grant increase, a boost in funding for Federal Work-Study, more access to PLUS loans, and emergency federal loan funds for some students. Read the letter

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U.S. Treasury Secretary Henry Paulson's plan to prop up private student loan providers as part of the $700 billion dollar economic bailout package is misguided and will be harmful to students and borrowers if it doesn't require new consumer protections for private loans. We need you to keep the pressure on and demand that any government bailout for lenders who make these risky, high-cost loans address the needs of borrowers as well.

Dear Secretary Paulson,

As representatives of students, consumers, colleges, administrators, and counselors, we write to urge you to reconsider the plan you announced last week to allocate funds from the $700 billion economic rescue package to private student loan providers.

Most students and families do not use private student loans to pay for college, nor should they. Private loans are risky and expensive, and lack the protections, oversight, and regulations of safer federal loans. Furthermore, providers of private student loans already receive special treatment in bankruptcy at borrowers’ expense. Billions of taxpayer dollars should not be spent enabling lenders to continue making these high-risk loans. Most students do not use private loans to pay for college.

  • The Project on Student Debt estimates that only about eight percent of undergraduates who graduated last year took out private loans.
  • Financial aid experts and lenders agree that private loans should only be used after all federal financial aid options have been exhausted. These include Parent PLUS loans that are available up to the full cost of attendance.
  • Federal student loans are as available as ever, despite the credit crunch. In fact, Congress increased the maximum federal student loan limits and has taken other steps to ensure the continued availability of federal student loans. If a parent doesn’t qualify for a PLUS loan due to an adverse credit history, his or her child is eligible for additional federal loans. Private loans are risky and expensive.
  • Private loans have high variable interest rates that are dependent on the credit scores of borrowers and co-signers. There is no limit to how high interest rates can rise – they are often two or three times as high as the fixed rate on federal Stafford loans. As with subprime mortgages, the lowest income borrowers are typically saddled with the highest interest rates and the worst terms.
  • Unlike federal loans, private loans have no real protections for borrowers who fall on hard times. In cases of unemployment, disability, periods of very low income, and even death, private loan borrowers and their families have few or no options for relief. This is not true of federal loans, which can be deferred or repayed in amounts based on the borrower’s income.
  • The only relief for struggling private loan borrowers actually plunges them deeper into debt. Lenders often charge fees to grant a forbearance – a temporary postponement of payments – on a private loan. Forbearances are only available for a limited amount of time, during which interest accrues and is added to the principle when payments resume. Private loan providers already enjoy powerful government protection.
  • Private loans are nearly impossible to discharge in bankruptcy, unlike other similar forms of consumer debt. Someone who racks up thousands of dollars buying jet skis on a credit card can get relief through bankruptcy, but a teacher with private loans who can't work because of a disability has no way out.
  • The special treatment of private loans in bankruptcy protects lenders’ investments at the expense of students and consumers. Lenders that are protected against losses in this way will continue to make risky loans to borrowers without strong prospects for repayment – that is bad for students and the economy. There is a real, but limited, demand for private student loans. Undocumented students, international students, and those who attend schools that don’t participate in the federal loan programs are not eligible for federal loans. Those students, and the small percentage of others who really do need to borrow more than is available federally – and for whom doing so is a sound investment – need safe and reliable options, not more of the same risky private loans. We would welcome an opportunity to work with you on solutions that use tax dollars appropriately and serve the best interests of students and consumers. If you continue with some form of the current plan, we strongly urge you to make receipt of taxpayer dollars contingent on lenders’ acceptance of provisions that increase protections for private student loan borrowers. Private lenders that receive federal rescue funds should be required to offer more affordable fixed interest rates, income-contingent repayment options, and discharges in cases of a borrower’s death or disability. There should be ways for current private loan borrowers – not only future borrowers – to renegotiate more reasonable terms for their loan repayment. Congress must also reconsider the treatment of these loans in bankruptcy. A bailout for the providers of usurious private student loans will not solve the college affordability crisis caused by the failing economy, and would actually be detrimental to many students and consumers. However, if you continue to pursue any form of rescue for private student loans, it would be unconscionable to do so without also providing better consumer protections. Ultimately, the best way to make college affordable and strengthen our nation’s economy is to increase federal, state, and institutional grant aid and reduce the need for students to borrow in the first place. Sincerely, American Association of Collegiate Registrars and Admissions Officers American Association of State Colleges and Universities Campus Progress Consumers Union National Consumer Law Center The Project on Student Debt National Association for College Admission Counseling U.S. Public Interest Research Groups United States Students Association

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Barack Obama and his administration will soon be making important decisions about the types of financial resources available to students and their families, as well as how easy those resources are to find out about, apply for, and use. We sent a letter to President-Elect Obama congratulating him on his election and urging him to focus on reforms that will make a real difference to college access and success. Read the letter.

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

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

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

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

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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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