Higher Education

Senator Marco Rubio (R-FL) just announced that he paid off his student loans early with the proceeds from a book deal. Paying down debt ahead of schedule is generally a prudent financial move. But if the Obama administration’s new Income-Based Repayment (IBR) plan had been in place when Senator Rubio graduated from law school, his decision to pay down debt early would have been a sucker bet. Why pay early when your unpaid loans will be forgiven?

Read the full post on Ed Money Watch.

Senator Marco Rubio (R-FL) just announced that he paid off his student loans early with the proceeds from a book deal. Paying down debt ahead of schedule is generally a prudent financial move. But if the Obama administration’s new Income-Based Repayment (IBR) plan had been in place when Senator Rubio graduated from law school, his decision to pay down debt early would have been a sucker bet. Why pay early when your unpaid loans will be forgiven? That’s the financial choice countless graduate students will face in the coming years thanks to a now more-generous IBR plan that took effect on November 1, 2012, which is detailed in the New America Foundation report Safety Net or Windfall? Examining Changes to Income-Based Repayment for Federal Student Loans.

We estimate that if the New IBR plan were available back in 1996 when Senator Rubio started repaying his student loans, he would have $83,482 forgiven in the year 2015. We developed that figure using Senator Rubio’s actual income information, which has been released publicly since the year 2000. We estimate the Senator’s loan balance at graduation to be $170,000 based on a press article that indicates Senator Rubio had $165,000 in student loans in the year 2001, five years after he left school. We also approximated income information for the years 1996 through 1999 and after 2010 because actual information is not available. The calculation also factors in a family size of two in his first year of repayment (himself plus his wife) and increases in the years each of his four children are born.

The table above details what Rubio would pay under the Old IBR plan – the one that pre-dates the Obama administration’s changes last month. Under that plan, borrowers pay 15 percent of their incomes (subject to a cap) toward their loans annually after a “cost-of-living” exemption equal to 150 percent of the federal poverty guidelines. Any debt remaining after 25 years of payments is forgiven.

Under the plan that took effect on November 1, 2012, which we call “New IBR,” borrowers pay 10 percent of their incomes after the exemption, and have any debt forgiven after only 20 years of payments. Recent student loan borrowers are eligible for New IBR. (We adjusted the cost-of-living exemption in the calculator to reflect the initial 1996 poverty guidelines and annual increases thereafter. We also set the interest rate on the Senator’s loans to reflect those under current law, as that rate reflects the repayment terms under today’s program and illustrates what a borrower today would pay.)

Our paper exploring the New IBR system found that the plan will provide significant windfall benefits to high-income, high-debt borrowers—benefits that the Old IBR did not provide. Marco Rubio’s loan and income data offer a prime example. In spite of his salary, which at its high point nearly hits $400,000 a year, he would be eligible to receive more than $80,000 in loan forgiveness, and to pay substantially less than he would under the consolidation loan repayment plan that he actually used, if he graduated today.

This is yet more proof that policymakers must amend the program to rein in its benefits and the incentives it provides to graduate and professional schools to raise tuition. Our paper outlines exactly how policymakers could accomplish that while preserving the safety-net function of IBR – and under that plan, Senator Rubio would receive no loan forgiveness, but would still pay far less than under consolidation. That’s a good deal for students.

So far, the Obama administration hasn’t said a word about the serious flaws of New IBR, and hasn’t stated whether it has any intention of addressing them. Maybe Senator Rubio can help the White House understand the issue. He could start by explaining to the President why a government check for $83,482 to forgive his student loans (or someone like him) isn’t the best use of taxpayer money.

46 states and Washington, D.C. have adopted and pledged to implement the Common Core standards and assessments, but authentic implementation of the standards remains elusive. And it’s not because states lack aligned curriculum materials or technical capacity. Rather, states have not yet enacted policies to legitimize the standards within higher education. The college and career readiness goal embedded throughout the Common Core is hollow unless universities and employers accept the premise and buy in to the notion that students mastering these standards are prepared for success.

Recognizing this need, PARCC, one of the consortia readying Common Core-aligned tests, has adopted Policy-Level Performance Level Descriptors and a College- and Career-Ready Determination policy (PLDs and CCRD, for short). For the record, yes, that is a lot of jargon. And yes, it does sound mundane. But in the effort to measure college and career readiness, these kinds of policies are ground zero. So it’s worth translating the alphabet soup into English.

PLDs are the number of scoring levels on the PARCC assessments. Just like the AP exams, there will be five: distinguished, strong, moderate, partial, and minimal command of the knowledge, skills, and practices in the Common Core. Each PLD is described both in terms of its content and its policy implications – in other words, how the score relates to the standards and how it relates to students’ postsecondary readiness. For example, students at level 3 in English have a moderate command of the standards and “will likely need academic support to be prepared to engage successfully in entry-level, credit-bearing courses.” You can read all of the PLDs here.

The policy for identifying college- and career-ready students is the CCRD, and it is linked to the PLDs. Here are the Cliffs Notes: students will need to score at level 4 or 5 to be considered academically college- and career-ready.

More specifically, students with the CCRD distinction in English Language Arts that enroll in entry-level courses requiring college-level reading and writing skills have a 75 percent chance of earning a C grade in those courses. To their credit, PARCC fully admits that their assessments do not measure critical skills that also contribute to postsecondary preparation, like time management, motivation, and study habits – a big reason PARCC couched the likelihood of students’ success even with a CCRD from the consortium.

But PARCC also claims that students earning a CCRD “will be able to enter directly into certain entry-level, credit-bearing courses in those subject areas without having to take placement tests.” Isn’t this premature? The consortium has no evidence to back up its policies and convince higher education to trust their determinations. It all sound good, and postsecondary officials involved in drafting the CCRD signed off, but none of it is real yet.

Until cut scores for the PLDs and CCRD are set (in the spring and summer of 2015) and validated with evidence of students’ postsecondary outcomes (in 2017, as the first PARCC cohort graduates high school in 2016), it is difficult to imagine higher education changing placement policies and allowing students with a 4 on the PARCC tests to enter directly into certain courses. If the AP model is any indication of PARCC’s future, uniform policies may be unlikely even within institutions. At many colleges and universities, decisions to grant credit or exempt students from courses are set by individual academic departments, rather than at a system- or state-level. State policymakers may need to legislate or regulate the CCRD, rather than rely on public institutions to voluntarily comply. But this kind of direct involvement could undermine acceptance of the new assessments, as institutions are used to having autonomy to do what they like with students’ results from the SAT, ACT, or AP exams.

These comparisons between the new assessments and traditional college readiness exams were made stark in Whiteboard Advisors' latest Education Insider poll. 96 percent did not think the Common Core tests would replace AP as a measure of high school achievement. Why? Many Insiders cited AP’s “long track record,” “brand value,” and “credibility” with postsecondary institutions, teachers, parents, and students. Building a stellar reputation takes time, and in the near-term, nearly half of the Insiders believe states will instead create their own tests, with several calling out ACT as a likely vendor. This makes sense given that ACT is no longer working with PARCC, but rather developing its own bevy of college- and career-ready assessments.

Again, the pieces are in place for a college readiness turf battle between the College Board, ACT, and the consortia-developed Common Core tests. The two new policies from PARCC provided much-needed details to educators and policymakers (after you translate them to English, that is), but they did little to change the overall dynamic. PARCC added more acronyms to the alphabet soup, but little clarity when it comes to how higher education will determine college and career readiness.

Board of Minnesota higher ed institutions requests additional funding from state legislators

State university presidents in Indiana request increase after years of flat funding

Idaho teachers will receive bonus pay based on performance

Republicans criticize outgoing North Carolina governor for pre-K expansion

Board of Minnesota higher ed institutions requests additional funding from state legislators
The Minnesota State Colleges and Universities Board of Trustees this week offered to cap tuition increases at three percent, decrease administrative expenses by $44 million, and increase enrollment in return for an extra $97 million from legislators over the course of two years. The additional money will raise the system’s total budget to $1.2 billion, an 8.9 increase over the last budget, for the state’s 24 two-year colleges and seven state universities. The three-percent tuition cap would limit increases to $145 for a college student and $205 for a university student. In addition to promising tuition caps, the board has also proposed an aggressive matching campaign; for instance, the Board would match $21 million in state funding for “state-of-the art equipment” with donations from the private sector. State College Student Association President Steve Sabin expressed his concern that tuition hikes will be exceed the stated levels if the state does not fully fund the Board’s request. More here…

State university presidents in Indiana request increase after years of flat funding
The presidents of three state universities in Indiana have asked the State Budget Committee to increase funding for higher education in the next budget biennium, which covers fiscal years 2013-2015, following years of spending cuts that helped keep the state’s budget in the black. Higher education funding this year totaled $1.7 billion in Indiana, a four percent decrease from its high of nearly $1.8 billion in fiscal year 2009. The funding problems are especially burdensome for the state universities that focus more on teaching than research because they have fewer opportunities to receive outside funding for research grants. The presidents argue that they have cut costs significantly and kept tuition and fees at manageable levels for the past several years. Now, they contend, the state should increase funding. More here…

Idaho teachers will receive bonus pay based on performance
Idaho teachers can expect the Pay-for-Performance bonuses implemented last year as part of the state’s “Students Come First” laws, despite the fact that those laws were repealed through a referendum in last week’s elections. Seventy-six percent of Idaho’s schools (499 schools) will receive a portion of the $38 million payout. Although voters were originally told that if the laws were struck down on November 6, the teachers would not legally be allowed to receive bonuses, but the Idaho deputy attorney general issued a legal opinion after the election stating there was no legal impediment to issuing the bonuses this year. Even though the laws were struck down, many legislators and government officials seem to suspect that merit pay for teachers, in some form, will eventually become part of the Idaho K-12 education system. More here…

Republicans criticize outgoing North Carolina governor for pre-K expansion
GOP legislators are criticizing outgoing Democratic Governor Beverly Perdue for reallocating $20 million for an expansion of the state’s pre-kindergarten program for low-income children through next summer. Perdue redirected the $20 million from other funding sources, arguing that programs AIDS medicine and foster care services were overfunded. GOP lawmakers expressed concern because in recent years the state has experienced budget shortfalls late in the fiscal year (usually associated with Medicaid). Further complicating the issue, Perdue will not be governor by the time any potential shortfall would occur – Republican Governor-elect Pat McCrory will take office in early 2013. Before the expansion to the program that will add 6,300 slots, the state was spending about $128 million annually to provide pre-K for approximately 25,000 children. Estimates suggest that closer to 67,000 children may be eligible for the program. The expansion is the result of a 20 percent cut to the program by GOP lawmakers, which included requiring parents to incur a co-pay for pre-K services. Both a county judge and the state Court of Appeals struck down those provisions. More here…

Back in 2010, the National Commission on Fiscal Responsibility and Reform (aka the Simpson-Bowles commission) recommended as part of its deficit and debt reduction proposal that policymakers end the interest-free benefit on Subsidized Stafford student loans. These loans are a subset of student loans awarded to borrowers who meet an income and cost-of-attendance formula test. The proposal was met with howls from student and borrower advocates who rushed to point out that students would leave school with more debt if policymakers eliminated the interest benefit, which stops the interest clock while borrowers are enrolled in school and, in some cases, for up to three years after.

Nevertheless, upon the request of the Obama Administration, Congress ended the benefit for graduate students in 2011, and moved the money to Pell Grants. That left the benefit intact for undergraduates, but probably not for much longer. It costs a whopping $4 billion a year, while the Pell Grant needs an extra $5.8 billion next year and $8.9 billion the following year to stave off a cut in benefits.

If lawmakers end the Subsidized Stafford interest benefit for undergraduates to provide more funding for Pell Grants—and they should—expect student and borrower advocates to again argue that the changes will increase student debt burdens. Except this time, the critics will have to include a big caveat that will undermine their case.

Subsidized Stafford loans now provide regressive benefits. That is, they target benefits to borrowers earning higher incomes in repayment. That is due to the new Income-Based Repayment (IBR) plan for federal student loans that took effect this month.  

The new plan (“New IBR”) sets a borrower’s payments at 10 percent of discretionary income and forgives any debt after 20 years. Those benefits effectively make Subsidized Stafford loan benefits redundant for borrowers who earn a lower or middle income in repayment.[1] Borrowers earning higher incomes, on the other hand, will still earn benefits from Subsidized Stafford loans in the form of reduced total payments.

Here is another way to understand this point. Borrowers will leave school with higher loan balances if policymakers eliminate the interest-free benefit on Subsidized Stafford loans. However, borrowers’ monthly and total payments under IBR are based on their incomes, not loan balances, and because the repayment term is set at 20 years (loan forgiveness) regardless of loan balance, New IBR ensures that the only borrowers who make higher payments as a result of having a higher loan balance are those with higher incomes.  

At what income level does this matter? There isn’t a magic number, but undergraduates are limited in how much federal loans they can take out. That allows us to run scenarios through the New America Foundation IBR calculator and see what borrowers will pay on their loans based on set income profiles, with and without the interest-free benefit on Subsidized Stafford loans.[2] The results are displayed in the table below.

In this analysis, we first assume the borrower’s debt is the maximum amount that a dependent undergraduate can borrow if he is 1) eligible for the full amount of Subsidized Stafford loans, plus the remaining amount of Unsubsidized Stafford loans, plus accrued interest while in school or 2) if he is eligible only for Unsubsidized Stafford loans plus accrued interest. The resulting loan balance at graduation after five years of borrowing under the first option is therefore $33,448, of which $23,000 is in Subsidized Stafford loans; and under the second, is $39,296, all in Unsubsidized Stafford loans.

Next we developed five borrower profiles, each with a different starting income and income growth rate. Borrower 1 has a starting income of $22,000 that increases by three percent every year, up to $38,577 in year 20. Borrower 2 has a starting income of $40,000 that increases by three percent every year, ending at $71,400 twenty years later. Borrower 3 has a starting income of $25,000 that increases by nine percent annually, reaching $128,542 in year 20. Borrower 4 has a starting income of $50,000 that increases by three percent every year, ending at $87,675 in year 20. Borrower 5 has a starting income of $40,000 and increases six percent each year, reaching $121,024 after twenty years.

As the table shows, under New IBR, the only borrowers who benefit from the additional benefits of Subsidized Stafford loans are those who earn a middle income right out of school, or those who eventually make a high income. Even then, the borrowers reap the benefit of a Subsidized Stafford in their last payments, not in their first years out of school. Their payments under IBR are based only on their incomes, not their loan balance, loan type or interest rate.

This brings up another key point. Not only are the added benefits of a Subsidized Stafford loan regressive, but borrowers earn the benefits in the form of a shorter repayment term—their final year(s) of repayment. Therefore, they collect a benefit when they theoretically are most able to repay.[3]

In short, with the availability of New IBR, Subsidized Stafford loans provide no additional aid to borrowers who need it most, while reducing payments for borrowers who are not struggling to repay. That should help persuade lawmakers and the student aid advocacy community that it would be prudent policy to end the Subsidized Stafford benefit and use the money instead to aid lower income college students through the Pell Grant program. The New IBR plan is now by far the most beneficial repayment plan available to low-income borrowers, so much so that it renders other, more poorly targeted benefits obsolete.

President Obama should include that policy proposal in his forthcoming budget request to Congress, citing the benefits of his administration’s New IBR as the justification for ending Subsidized Stafford loans.

There’s another lesson in here, too. Federal student aid is an incoherent mix of complex benefits and rules that overlap and cancel each other out in ways that virtually no one understands. For that we may thank the lawmakers (and the advocates who encourage them) who have added to, tweaked, and changed eligibility rules for these programs time and time again without even a hint of a broad plan. It’s time for a wholesale redesign of federal student aid.  

Last week, the Obama administration finalized regulations for Pay-As-You-Earn (PAYE). The program is an update to the existing Income-Based Repayment (IBR) plan, and it allows federal student loan borrowers to pay ten percent of their income every month and receive loan forgiveness after 20 years, changed from 15 percent of borrowers’ monthly incomes and 25-year loan forgiveness under the old version of IBR. The Federal Education Budget Project released a report last month demonstrating that PAYE will provide windfall benefits to graduate and professional students, even if they end up earning a high-income.

Jason Delisle, director of the FEBP and co-author of the report, spoke with Businessweek about the problems with the new program – and how it is a boon to graduate students, even those earning six-figure salaries by the time they receive loan forgiveness. 

An excerpt of the interview is below. Click here to read the full interview.

Businessweek: Based on your findings, what would you tell students thinking about graduate school or getting an MBA? What is the best way for them to take advantage of this program?

Delisle: My advice to people who are about to enter graduate school or get an MBA would be to borrow as much money as they possibly can through the federal student loan program. They shouldn’t use their own money, savings, or income to pay for it because the risks or the downside of this having real financial consequences for you, provided this program is in place, are almost zero. And to the extent that there are risks, they are well worth taking because the potential upside is pretty big on this.

Businessweek: … Do you fear this will encourage graduate schools to raise their tuition, especially lower-tier schools?

Delisle: You can imagine schools that are having problems enrolling students or getting them to pay tuition hiring financial planners to come on campus and do seminars. They’ll be able to tell them, Here is why you don’t have to worry about how much you are borrowing to pay for school, or here’s why you don’t have to worry if you don’t land a great job. This is money coming in the door for the schools and none of it is far-fetched. Some of this stuff looks like shady infomercial stuff, but it is a real program that is about to take effect.

Read the full report here.

AT the end of “Fundamentals of Atomic Force Microscopy,” a short online course offered by Purdue University, students who score at least 60 percent on the final exam will receive an e-mail with a file attached. It will contain a picture of a blue-and-white circle, roughly one inch in diameter, embossed with the stylized image of an atomic force microscope bouncing a laser beam off a cantilever into a photodiode, which is how scientists take photographs and measure the size of very small (nanoscale) things.

The Asset Building News Week is a weekly Friday feature on The Ladder, the Asset Building Program blog, designed to help readers keep up with news and developments in the asset building field. This week's topics include wealth and income inequality, housing, and financial education.

With the last of the three debates completed and the presidential election just around the corner, the New America Foundation has pulled together this video with people from our various policy teams to ask the candidates a few final questions about how they plan to govern. Check us out, tell us what you think, and if you seeeither candidate answering any of the questions, let us know--tweet to us at @NewHealthDialog and @NewAmerica!