Repayment study left out blacks

A U.S. Education Department analysis on the relationship between race and repayment of student loans left out black students, skewing results used to justify the gainful employment rule, reports Inside Higher Ed.

For-profit colleges, which enroll many minority, low-income and older students, argue the high-risk demographics explain their students’ higher default rates on student loans. Not so, said the department in June, concluding that only 1 percent of the variance in repayment rates could be explained by the racial composition of enrollment. Sorry, never mind.

But by failing to count black students, the study understated the impact of race: the actual variance at for-profits is 20 percent over all, and 31 percent for four-year institutions, the department said in the December filing.

Eduardo Ochoa, the department’s assistant secretary for postsecondary education, said “accurate figures would have had no impact on the final regulations.”

Interesting.

The Association of Private Sector Colleges and Universities, the for-profit trade group challenging the gainful employment rules, charges the new figures show that “schools that enroll a higher percentage of minority students are more likely to fail the department’s repayment test.”

President Obama talked about defunding colleges that raise tuition in his State of the Union speech, writes Andrew Kelly on the Enterprise Blog.  That means shifting “some Federal aid away from colleges that don’t keep net tuition down and provide good value,”  according to a White House blueprint (pdf). Deciding whether a college is providing value for the money will require collecting gainful employment data on all higher education sectors, writes Kelly.

Federal policy pushes up college prices

College tuition is soaring in response to federal policies on student aid and university research funding, argues Arthur M. Hauptman, a higher education financing analyst, in an essay in Inside Higher Ed. Jawboning won’t help, he writes. Neither will top-down regulation.

Pell Grants aren’t a major push factor for college prices, Hauptman believes. But rising spending for Pell may be the reason colleges are shifting their own aid away from the poor and toward middle-class students.

The rise in student loans correlates strongly with the rise in tuition.

Currently, colleges can just maintain or raise their prices and shift the cost-sharing to loans for a broad range of their students. This needs to change. One way to accomplish this would be to require that needy students not receive all their aid in the form of loans.  In effect, this would mean that institutions must offer discounts to their needy students who borrow, thereby reducing their debts.

In addition, students shouldn’t be allowed to borrow excessively for living expenses.

Now, community college students who face $2,000 or $3,000 in tuition and fees are eligible to borrow $10,000 or more to cover their total expenses. This applies at all institutions for students who live at home or off campus. This provision should be changed so that reasonable limits are placed on how much these students can borrow. Ditto for students living in dorms or on meal plans – they should not be allowed to borrow excessively large sums for this form of consumption. Such a change would likely have the beneficial effect of reducing how much institutions charge for these non-education services.

Students can’t use federal grants to pay for remedial courses, pushing them to borrow, Hauptman writes. He suggests students be able to take tuition-free remedial courses offered by providers who’d be paid by the government based on their success at raising student competencies. Colleges would have to compete with private companies for the remedial ed business.

Federal student loan subsidies should be eliminated or limited to Pell Grant recipients, he recommends. “This may seem harsh medicine, but the benefit is very expensive, not well-targeted to those most in need, and serves as an incentive for students to borrow more than they otherwise would.”

Linking loan repayments to post-college income makes sense, Hauptman writes, but it will serve “as a further encouragement to institutions to keep their prices high and let the loan system deal with the consequences.”

Obama’s loan plan will boost tuition, debt

President Obama’s student loan repayment plan encourages students to take on more debt and lets colleges keep raising tuition, writes Peter Schiff on Business Insider. The taxpayers will get the bill.

The move will come as a great relief to an education establishment increasingly concerned that students might no longer be able to afford skyrocketing tuition rates.

The AP reported today that state support for higher education has fallen 23% after accounting for inflation over the last ten years, even as tuitions have risen 5.6% faster than CPI. This gap has been bridged by a whopping 57% increase in federal student loans over the same time period due to the increased cost of tuition and number of student enrollment.

Under the new version of Pay As You Earn, borrowers would pay 10 percent of  “discretionary income,” defined as total income above 150% of the federal poverty level (about $16,000 for an individual). After 20 years, the loan is forgiven.

Assuming that a successful college graduate would earn, on average, $80,000 per year over the course of the 20-year obligation period, the repayment burden under the new plan will total somewhere around $4,500 per year, or $90,000 for the life of the loan. A less successful graduate who earns say $50,000 per year, on average over the 20-year obligation period, would have a repayment burden of just $1,500 per year, or just $30,000 over the life of the loan.

For students anticipating an average income, Pay As You Earn provides an incentive to borrow heavily:  If you’re only going to repay $30,000 to $90,000, why not borrow $200,000?

Colleges and universities will have no incentive to control costs, Schiff adds. Why not build that new rock-climbing wall or performing arts center? Students will enjoy it and taxpayers will pay for it.

Students have racked up $1 trillion in debt in an era when they thought they’d have to pay it back, Schiff writes. Imagine how much they’ll borrow now that they won’t have to pay the full amount.

In a way, Obama would be turning higher education in to a third-party payer system (not too dissimilar from our current health care system – which is also characterized by outsized cost increases).

Fewer students will live at home and go to community college to save money, he predicts. Frugality is for suckers.

Income-based repayment (IBR) is a “disaster” that could cost billions of dollars in the future, writes Andrew Gillen. The Congressional Budget Office (CBO) estimates costs and revenues for a 10-year window: Since IBR’s costs kick in 10 to 20 years in the future, it’s being treated as free.

Obama eases student loan burden

President Obama will offer some relief to borrowers trying to pay back student loans.  A measure passed by Congress to limit repayments to 10 percent of discretionary income — down from 15 percent — will go into effect in 2012 instead of 2014. The remainder of the loan will be forgiven after 20 years instead of 25.  In addition, the new plan offers a small cut in interest rates for students who consolidate their federal loans.

Some 1.6 million borrowers could save hundreds of dollars a month, predicted Education Secretary Arne Duncan. “These are real savings that will help these graduates get started in their careers and help them make ends meet,” Duncan said.

The Education Department offered two examples of the new form of income-based repayment, known as Pay As You Earn.

A nurse who is earning $45,000 and has $60,000 in federal student loans. Under the standard repayment plan, this borrower’s monthly repayment amount is $690. The currently available IBR plan would reduce this borrower’s payment by $332 to $358.  President Obama’s improved ‘Pay As You Earn’ plan will reduce her payment by an additional $119 to a more manageable $239 — a total reduction of $451 a month.

A teacher who is earning $30,000 a year and has $25,000 in Federal student loans.  Under the standard repayment plan, this borrower’s monthly repayment amount is $287 .  The currently available IBR plan would reduce this borrower’s payment by $116, to $171.  Under the improved ‘Pay As You Earn’ plan, his monthly payment amount would be even more manageable at only $114.   And, if this borrower remained a teacher or was employed in another public service occupation, he would be eligible for forgiveness under the Public Service Loan Forgiveness Program after 10 years of payments .

Few borrowers are enrolled in the income-based repayment plan now, possibly because they’re not aware it’s available.

The White House said the changes won’t cost taxpayers more. I have a hard time understanding why collecting less money over a longer period of time and forgiving loans after 20 years of minimum payments can be cost free.

Trying to grow the economy by encouraging Americans to borrow is a risky strategy, writes David Magee on International Business Times. “Student loans are needed, as they are an important tool for many who could not otherwise afford an education. But they shouldn’t be a tool for growing or fixing the economy.”

Update: U.S. House Committee on Education and the Workforce Chairman John Kline, a Minnesota Republican, said Obama’s changes will encourage more borrowing. “That means more debt for students, more debt for taxpayers, and more red ink on the government’s books.”

No student loans without a repayment plan

Before they receive federal loans, Tidewater Community College students will be required to draw up a personal budget showing how they’ll pay their bills before and after graduation, including student loan repayments, reports Inside Higher Ed.

The average one-year loan debt at the Virginia college was $3,990 last year; the college’s cohort default rate for 2008 was 7.6 percent.

However, Tidewater President Deborah DiCroce wanted to do more to help students “borrow responsibly” and make “sound investments” in their education.

“It’s not a handout,” DiCroce said of student loans. “It’s not something that goes away when the college experience is completed or not completed. There’s a commitment to repay a loan that has as much weight to it as any other kind of borrowing one might do. My concern, as we are ramping up our financial aid program, is keeping a close eye on our default rates, as one of our measures of accountability. It just became clear that we needed to take a step beyond what the feds require. Where is our responsibility to educate a borrower on this type of investment?”

It’s very easy for students to borrow thousands of dollars, said Daniel DeMarte, Tidewater’s vice president for academic and student affairs. “We needed to get them to slow down and require them to do some more thinking before we disburse anything. To do that we need to get them to think ahead, ‘What’s the return on investment?’ The second step is to keep in front of them and not forget that they borrowed money.”

Starting in the fall, each loan application will come with a repayment plan including the expected monthly payments and a summary of the student’s borrowing history at Tidewater and other colleges. Students will fill out two budget worksheets.

One asks the student to estimate his or her current monthly expenses — from rent and transportation to insurance and childcare — and income. The worksheet ends showing the student his or her remaining discretionary funds. Tidewater officials hope students will consider how their estimated student loan payments might fit into their current budgets if they left college, either by dropping out or by graduating.

The second worksheet asks students to fill out a similar budget to anticipate their financial situation after graduation. It includes resources to help them estimate their future job titles and average starting salaries in specific fields. Student loan payment is part of their new projected monthly expenses on this worksheet, which notes that loan repayments should never exceed 15 percent of one’s monthly income.

College officials will check to see if students’ plans are realistic. That may require hiring more financial aid advisers, but DiCroce thinks it’s worth it.