When it comes to remaking the federal financial-aid system, grantees in the Bill & Melinda Gates Reimagining Aid Design and Delivery program tend to agree on a few key fixes. They want to change the way student-loan interest rates are set; make income-based repayment more common, if not universal; end, or at least consolidate, higher-education tax credits; and provide students with more data about specific programs’ outcomes. Many of their ideas would save taxpayers and students money—but are they politically viable? Following is background on four of the proposals, along with odds of passage.
Interest Rate on Loans
Last year, in the midst of campaign season, Congress extended for a year a 3.4-percent interest rate on subsidized student loans. The reprieve, which prevented interest rates from doubling last July 1st, cost taxpayers $6-billion, but it saved borrowers less than $10 a month on average.
Now, with the reprieve about to expire, student groups are again calling on Congress to avert the increase. They argue that borrowers can’t afford a rate hike while unemployment is high and default rates are rising.
Meanwhile, some members of Congress, and several of the Gates grantees, say it’s time to move to a market-based rate. In mid-March, the U.S. House of Representatives education committee held a hearing that examined proposals offered by two of the Gates RADD recipients: the New America Foundation and the National Association of Student Financial Aid Administrators. At the hearing, Chairman John Kline, Republican of Minnesota, said that letting Congress set interest rates creates “uncertainty and confusion” for borrowers and “allows Washington politicians to use student-loan interest rates as bargaining chips.”
Switching to a market-based rate could save taxpayers billions over the next decade, provided that rates rise, as expected. But it would probably cost taxpayers in the short term, while interest rates are low.
To protect borrowers when market rates are high, one of the grantees, the Institute for College Access and Success, would cap the maximum rate, and reset it when rates fall. Others, including the New America Foundation and HCM Strategists, a health and education advocacy group, argue that income-based repayment, with loan forgiveness, would provide an effective cap, ensuring that low-income borrowers wouldn’t pay significantly more over time when interest rates rise.
Our verdict: Pretty much everyone agrees that the current rate is arbitrary and out of sync with the government’s cost of borrowing. With the one-year extension due to expire in July, there’s growing interest among lawmakers in re-examining how student-loan interest rates are set. But switching to a market-based rate could require members of Congress to accept short-term costs for the sake of longer-term savings, something budget hawks may be reluctant to do.
More important, switching to a market-based rate would most likely require student groups to swallow a hike in the rate on subsidized loans. (Under the New America/HCM proposal, the interest rate on all loans issued this year would be 4.9 percent—higher than the 3.4-percent rate on subsidized loans but significantly lower than the 6.8-percent rate on unsubsidized loans.) Student groups are insisting that any fix include an interest rate cap.
Given those obstacles it seems likely that Congress will put off a rewrite until the next reauthorization of the Higher Education Act, expected to begin next year.
Loan Repayment
Under current law, borrowers with federal student loans can choose from among seven different repayment plans, including three income-based options. Yet many borrowers struggle to make sense of them, and defaults are growing.
In an effort to simplify loan repayment, several groups and lawmakers have proposed automatically enrolling borrowers in an income-based plan. Many of the Gates grantees echo this idea, calling for making income-based repayment the default, rather than the standard 10-year plan, and ending subsidized loans.
Yet universal income-based repayment, or IBR, as currently configured, has some drawbacks. For one thing, it could result in some students paying more over time, because of accumulating interest. It could also encourage colleges to raise their prices by making students less price-sensitive. If students knew they could repay their loans as a percentage of their future incomes and have the remainder of their debt forgiven after 20 or 25 years, they might be more willing to take on large debts.
To deal with the first possibility, most of the grantees would allow students to opt out of income-based repayment.
To discourage excessive borrowing, they would force wealthier borrowers to pay a larger percentage of their income and require borrowers with more debt to wait longer to receive loan forgiveness.
Our verdict: Automatic IBR has bipartisan appeal. It would save taxpayers money by reducing defaults, and it would reduce the burden on low-income borrowers and unemployed graduates.
Logically, the plan is a winner. Borrowers with higher incomes can afford to pay more than those with lower incomes. And it makes more sense to provide loan subsidies based on borrower income at repayment, rather than family income at enrollment.
But loan forgiveness is not cheap, and conservatives might argue that universal IBR penalizes successful college graduates, forcing them to subsidize their less-wealthy peers.
If borrowers could opt out, and loan forgiveness was limited, or eliminated (as under legislation offered by Rep. Tom Petri, Republican of Wisconsin), the plan might pass.
Tax Credits
For years, policy makers and research groups have salivated over the idea of ending the nation’s education-tax benefits and investing the money in Pell Grants or other aid programs. Nearly everyone agrees that the current system of tax credits and deductions is too complex, too regressive, and terribly timed, with the money arriving months after tuition is due.
The Gates grantees are no exception. Eleven of the 16 proposals call for consolidating, shrinking, or eliminating the tax credits, arguing that there is little evidence that they increase access to college. Several would focus them on lower-income families, lowering eligibility caps or expanding the refundable portion of tax credits. A couple would use the benefits as leverage, awarding the money on the basis of academic progress.
Yet several of the grantees acknowledge the political realities of tax reform. As the Institute for Higher Education Policy puts it, “tax credits receive overwhelming support from across the political spectrum and are unlikely to be eliminated.” The Association of Public and Land-Grant Universities notes that Congress just extended several of the benefits as part of a deal to avert the fiscal cliff, and concludes that “there is probably little political appetite at this moment to re-examine tax credits and deductions comprehensively.”
Our verdict: Given the strong bipartisan support for tuition tax benefits, their popularity among middle-class voters, and the fact that several were recently made permanent, they’re not going away anytime soon.
Reporting Requirements
Colleges today complain that they’re overwhelmed by federal data-reporting requirements, yet it’s not clear that students and parents are getting the information they need. In part, that’s because there’s little high-quality, comparable data about student outcomes. Efforts to improve federal data collection have been stymied by a 2008 ban on the creation of a federal “unit record” system to track students from college to career and a recent lawsuit that struck down the department’s effort to collect information on the debt burdens and loan-repayment rates of students attending career-oriented programs.
Despite these limitations, the department has forged ahead with its College Scorecard, a standardized financial-aid award letter (known as a “shopping sheet”), and a model net-price calculator. Meanwhile, policy makers of all stripes have jumped on the “transparency” bandwagon, with House Majority Leader Eric Cantor and President Obama alike calling for better data on student outcomes.
To this chorus, the Gates grantees add their voices, with reports calling for mandatory use of the shopping sheet and the lifting of the ban on a unit-record system. Two would extend the gainful-employment-reporting requirements to all colleges, while others want more information on expected wages, cumulative debt, and graduation rates for student-aid recipients.
The New America Foundation makes the most compelling case for a unit-record system, arguing that “the data landscape has changed significantly” since the ban was put in place, and that “we now live in a world of big databases.”
Still, many colleges remain opposed to a federal database on privacy grounds. Meanwhile, financial-aid officers have opposed award-letter standardization, arguing that colleges should be free to decide how best to present information to their own students. And many college groups would fight new reporting requirements, arguing that they would drive up costs.
Our verdict: Momentum is building for a unit-record system, but it’s not clear that its time has come. The shopping sheet stands a somewhat better chance, given that colleges are already required to provide it to veterans and members of the military. Best odds, though, are on the new reporting requirements, with potential passage of a “Student Right to Know Before You Go Act,” by Democrat Ron Wyden of Oregon and Republican Marco Rubio of Florida. Congress loves transparency, and reporting requirements go down easier than accountability metrics and cost controls.
