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Federally Subsidized Student Loan Interest Rates Set to Double on July 1

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Thursday night, time ran out for Congress to reach a deal to keep federally subsidized student loan interest rates from doubling. The Senate adjourned for its Fourth of July recess without voting on a plan; thus, the interest rates on new federally subsidized loans will double to 6.8 percent on Monday July 1st (the same rate as unsubsidized federal student loans).

It is possible, however, that students won’t end up paying the increased rates.  There has been a push from some legislators to enact a one-year fix that would temporarily adjust/lower the interest rates after the fact.  As the lender of the student loans, it is within the federal government’s power to apply such a solution retroactively.

The increase was originally scheduled to occur a year ago.  But, thanks to an election-year alliance of student advocates and the Obama administration, the rate increase was delayed by a year.

For more information, see the Inside Higher Ed article and please stay tuned to the Federal Relations website for updates.

Supreme Court Decision on Fisher v. University of Texas

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On Monday, the Supreme Court ruled that Fisher v. University of Texas (UT), the case on UT Austin’s race-conscious admissions policy, be sent back to an appeals court for further scrutiny. The case stemmed from a lawsuit by Abigail Fisher, a white applicant to the university who claimed she was unfairly rejected due to UT Austin’s affirmative action admissions program. For more background on this case, please see our previous two posts, found here and here.

The court’s 7-to-1 decision did not provide a direct answer about the constitutionality of UT Austin’s admissions practices. Instead, it ordered the U.S. Court of Appeals for the Fifth Circuit to reconsider the case on the grounds that the appeals court had failed to apply “strict scrutiny” (a rigorous standard requiring that both an important goal and a close fit between means and ends be identified) in its review of the case and subsequent ruling in favor of UT. Justice Ruth Bader Ginsburg was the only dissenting voice; she argued that the appeals court was right to support UT’s policies.

According to the NY Times, Justice Kennedy wrote for the majority that courts reviewing affirmative action programs must, “verify that it is necessary for a university to use race to achieve the educational benefits of diversity.” This necessitates, he said, “a careful judicial inquiry into whether a university could achieve sufficient diversity without using racial classifications.”

The Supreme Court’s ruling did not displace its 2003 decision in Grutter v. Bollinger, which found educational diversity to be of sufficient importance to overcome the government’s standard ban on racial consideration. However, as Inside Higher Ed reports, legal experts believe the court’s demanding “strict scrutiny” requirements will make it difficult for UT and many other institutions to successfully defend their use of race in admissions.

The debates surrounding Fisher v. UT and affirmative action in higher education as a whole are far from over. Many expect the Texas case to return to the Supreme Court after a new review by the appeals court.  We will keep you posted with any updates.

Supreme Court Takes Up Second Affirmative Action Case

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The U.S. Supreme Court has agreed to consider whether a 2006 Michigan referendum to ban public colleges from using race or ethnicity in admissions is constitutional. This is the second affirmative-action case on the court’s docket —the first being Fisher v. University of Texas at Austin (discussed in a previous blog). If the Supreme Court declares the ban, known as Proposition 2, unconstitutional, similar bans in Washington and five other states could also be invalidated.

Inside Higher Ed nicely summed up the difference between the two affirmative action cases: “The Texas case is about the extent to which public colleges and universities may consider race and ethnicity in admissions, while the Michigan case is about the extent to which voters can bar such consideration.”

The Supreme Court accepted the Michigan case, Schuette v. Coalition to Defend Affirmative Action, after the state’s attorney general, Bill Schuette, appealed a November ruling by the U.S. Court of Appeals for the Sixth Circuit. The appeals court struck down Proposition 2 in an 8-7 vote, on the grounds that it “undermines the Equal Protection Clause’s guarantee that all citizens ought to have equal access to the tools of political change.” Under Proposition 2, minority citizens who want public university admissions to consider race must launch a burdensome ballot campaign, whereas groups seeking other university policy changes are free to simply lobby.

Schuette argues that Michigan’s measure and the Equal Protection Clause both protect a fair political process, whereas “preferential treatment based on race (which necessarily means discrimination against other races)… focuses entirely on achieving a particular outcome (here, an admissions outcome), even at the expense of making the process discriminatory.” Michigan’s measure, he says, “does not endorse race-based policies; just the opposite, it stops discrimination based on race.”

The Supreme Court will hear the Michigan case in its term starting in October.  Its ruling in the Texas case is expected this spring or summer, but could occur at any time.

Is All Merit Aid Meritorious?

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Although there are many types of financial aid, it is typically awarded on the basis of either need or merit. Need-based aid is largely a result of a federal calculation and is somewhat predictable:  to ensure access, students with more financial need receive more financial aid of various forms. And, although there is no universal definition of the merit aid, it traditionally describes scholarship money used to attract top academic achievers. However, Kevin Carey, director of education policy at the New America Foundation, asserts in a recent commentary for The Chronicle that a significant portion of merit aid is actually used to attract “academically marginal students with wealthy parents.”

Carey cites evidence of this trend. A 2011 U.S. Department of Education study found that of the full-time students at four-year institutions who received “merit” aid in 2007-08, almost 20 percent had entered college with a combined SAT score of less than 700 and 45 percent had scored below 1000 (out of a possible 1600). The study also shows that although the percentage of private college students receiving need-based aid showed a slight decline from 1995 to 2007 (going from 43 to 42 percent), the proportion receiving “merit” aid nearly doubled during that time span (from 24 to 44 percent).   At public universities, the percentage of students getting need-based aid increased from 13 to 16 percent, but the growth in merit aid outpaced it, going from 8 to 18 percent.  Thankfully, as discussed in a previous post, a group of private-college presidents has been calling on its peers to limit the amount of financial aid awarded on criteria other than need.

The National Association of State Student Grant and Aid Programs’ (NASSGAP) Annual Survey Report on State-Sponsored Student Financial Aid and Brookings’ Beyond Need and Merit: Strengthening State Grant Programs provide corroborating evidence that merit-aid is becoming more prevalent, while need-based aid is diminishing.  However, neither discusses the academic strength of the students receiving merit aid.

So why is this happening?  If a college offers good scholarships and financial aid packages to an affluent family, it may incentivize them to choose that school.  Even though that family’s son or daughter may be a low academic achiever who has a decent chance of dropping out, it is still lucrative for the school to attract those students.  Noel-Levitz, a higher ed consulting firm, revealed that one of its client colleges was able to generate over $10,000 more per low-achieving student than they could per top-achieving student.

Carey hopes that as taxpayers, the news media, and affiliates of universities become aware of this trend, their vigilance will keep institutions in check.

White Paper Focuses on Reforming Tax-based Aid

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Many of the white papers sponsored by the Bill & Melinda Gates Foundation’s Reimagining Aid Design and Delivery project have focused on modifications to the Pell program and/or student loans and repayment (including the two I summarized previously, found here and here). However, the white paper released on Wednesday by the Center on Postsecondary and Economic Success takes a different approach.  It argues that by making tax-based student aid more beneficial to low and middle-income students, the federal government could save billions of dollars, direct those savings to the Pell program and improve the financial aid system as a whole.

Current tax-based financial aid provides high-income families with much larger tax deductions, since the value of the deductions is linked to a family’s marginal tax rate. As The Chronicle notes, “a $100 tax deduction, for example, is worth early $40 to a high-income household but only $10 to a lower-earning family.”  To remedy this issue and refocus the benefits of aid onto low-income families, the Center proposes increasing the refundable portion of the American Opportunity Tax Credit (AOTC). The Center also recommends eliminating nonrefundable tax credits, such as the Lifetime Learning Credit (LLC), since they do not benefit households that pay no income tax (i.e. low-income families).

The table below shows the percent distribution of student aid by type and income category in 2013. As you can see, Pell Grants (in blue) primarily benefit low-income families, whereas tax-based student aid (in purple) does the opposite.  Another interesting table from the Tax Policy Center can be found here.

The paper includes three alternative proposals for making tax-based aid more helpful to low-income students and simultaneously boosting college access and completion.  It also discusses three options for improving performance measures used in student-aid policies.

TICAS Paper Proposes New Approach to Federal Financial Aid

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“Aligning the Means and the Ends: How to Improve Federal Student Aid and Increase College Access and Success” is the Institute for College Access & Success’s (TICAS) white paper for the Reimagining Aid Design and Delivery project, sponsored by the Bill & Melinda Gates Foundation (see our recent post for more information). Some of the report’s suggestions have been echoed in other white papers and publications, such as simplifying the federal financial aid application process, making the Pell program a mandatory federal budget item, and fostering more understandable and comparable reporting of college costs. The paper’s others recommendations include:

  • Holding colleges accountable not only to the percentage of student borrowers who default on loans (represented by the currently-used cohort default rates), but also to the percentage of students who take out loans in the first place. TICAS proposes denying federal aid to colleges that score below a certain threshold on a combined index of the two measures. The group also recommends increasing federal aid to colleges scoring above a certain threshold. The amount of additional aid would be determined by how much Pell funding their students receive.
  • Shoring up the Pell Grant. TICAS proposes doubling the maximum Pell grant award, to about $11,000 a year, and extending the eligibility timeframe from 6 years to 7.5.
  • Creating a single federal student loan with no fees and a fixed interest rate. The rate would be low while students are in school and would rise, by a fixed amount with a cap, when they leave.
  • Streamlining repayment plans, replacing multiple options for income-based plans with only one. Delinquent borrowers would automatically be placed in the income-based plan; but, a non-income-based option would be available to other borrowers. TICAS wants to leave borrowers with a choice, but argues they need real counseling—not just disclosure—to help them decide.
  • Eliminating higher education tax benefits and sending the savings to Pell Grants and monetary incentives for states and colleges.  If tax benefits are preserved, the group recommends restructuring them into an upgraded American Opportunity Tax Credit aimed at helping low- and moderate-income students.

TICAS’ paper outlines a few ways the government could fund these proposals in addition to potentially eliminating higher ed tax benefits.  As The Chronicle nicely summarized, those options include, “limiting the benefit of itemized tax deductions, taxing private equity and hedge-fund income like other income, and removing or reforming tax-exempt bonds for private nonprofit colleges.”

ACE Decides 5 MOOCs Deserve College Credit

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Back in November, the American Council on Education (ACE) revealed a “wide-ranging” project to evaluate MOOCs’ academic potential and determine whether some MOOCs should be eligible for college credit. Our previous blog post provides additional background information. In the 11 weeks since that announcement, ACE reviewed five MOOCs offered by Coursera (one of the largest MOOC providers) and, today, announced it has recommended all five MOOCs for credit.

The endorsed MOOCs are:

  • “Pre-Calculus” and “Algebra” from the University of California at Irvine;
  • “Introduction to Genetics and Evolution” and Bioelectricity: A Quantitative Approach” from Duke University; ” and
  • “Calculus: Single Variable” from the University of Pennsylvania.

Courses were reviewed on their substance, quality of educational experience, and the value and security of their tests and assessments tools. To meet standards for the latter, Coursera established a series of identity verification measures and partnered with a remote monitoring service called ProctorU. Some MOOCs use peer assessments to score student work, a method which has been criticized for uncertain reliability. But given the STEM focus of these five courses, they all rely on objective scoring systems rather than peer assessments.

Although ACE’s validation of the MOOCs is noteworthy, it’s up to the Council’s 1,800 member colleges to individually decide whether they’ll actually offer credits for the courses.  For now, students at Duke, Irvine and Penn will not receive credit for taking their institutions’ ACE-approved courses. Inside Higher Ed reports that UC-Irvine does not consider its MOOCs to currently be worthy of its credit because neither the learning environment nor the academic commitment of a course’s thousands of students can be controlled. “Those anybodies can influence negatively the learning environment of students who are serious about taking it,” said Gary Matkin, UC-Irvine’s dean of continuing education. Similarly, Duke believes its traditional courses offer “an entirely different kind of educational experience” than MOOCS, including “substantial interactions between students and the faculty member.”

While other colleges decide whether to accept Coursera’s MOOC certificates for credit, ACE is reviewing courses from Udacity (another MOOC provider) for possible credit recommendations.

New America Paper Recommends Major Overhaul of Financial Aid System

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The Gates Foundation has joined the nation’s financial aid conversation and is attempting to rethink how policies and practices can not only help maintain access (in the face of flagging state support and rising tuition prices), but also help students succeed. In September of last year, the Gates Foundation launched its Reimagining Aid Design and Delivery project, which provided 16 organizations with funding to develop and publish innovative financial aid strategies aimed at encouraging college completion. One of the 16 organizations, the New America Foundation, recently released its white paper, which recommends bolstering Pell Grants, limiting student loan options, and removing higher ed tax benefits.

To improve “both the effectiveness and sustainability of Pell Grants,” the New America Foundation recommends:

  • Making the Pell program a mandatory federal budget item;
  • Increasing the maximum grant faster than is currently scheduled while restoring summer grant support;
  • Limiting Pell eligibility to 125 percent of a program’s length;
  • Providing additional federal funding to public and private-nonprofit colleges that have a large proportion of low-income students and high graduation rates; and
  • Requiring four-year colleges that enroll a small percentage of low-income students and charge more than $10,000 per year (after financial aid) to match some of the Pell dollars they receive with need-based aid from institutional funds.

The plan, which is intended to be “budget neutral,” recommends that the Pell Grant changes be funded by:

  • Eliminating the American Opportunity and Lifetime Learning tuition tax credits, tax-advantaged savings plans for education, and the student loan interest deduction;
  • Ending the Supplemental Educational Opportunity Grant program; and
  • Encouraging borrowers to refinance old student loans into direct lending.

The authors also recommend consolidating federal student loan programs into a single, “enhanced” Stafford Loan sys­tem as a means of simplifying the student loan system and reducing the potential for default. This would involve:

  • Automatically enrolling all federal student loan borrowers in income-based repayment plans;
  • Eliminating subsidized undergraduate loans;
  • Setting student loan interest rates via a fixed formula that adjusts to market conditions;
  • Ending the Grad PLUS and Parent PLUS loan programs;
  • Increasing borrowing limits slightly to $40,000 total for undergrads and $25,500 per year for grads; and
  • Limiting federal student loan eligibility to 150 percent of a program’s length.

Although some (if not many) of these ideas are politically unpopular, the authors argue that their recommendations must be implemented together in order to be effective. However, it seems more likely that Congress will cherry-pick specific suggestions to pursue or perhaps ignore the report’s policy proposals altogether. The Gates Foundation hopes their project will, at the very least, stimulate discussion about reforming financial aid.

Private-College Presidents Champion Need-Based Aid

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Two years ago at the annual Council of Independent Colleges, a group of private-college presidents advocated for limiting the amount of financial aid awarded on criteria other than need—usually referred to as “merit-based” financial aid. Although the presidents received an enthusiastic response from the Council, little action followed. However, last Saturday at this year’s Council meeting, the conversation was revisited and two encouraging developments suggest progress may be more conceivable this time.

First, the presidents unveiled a draft “statement of principle,” which they hope will unite colleagues who believe that meeting financial need should be the highest priority of aid policies. Titled “High Tuition/High Discount Has No Future,” the statement articulates that the merit-aid/tuition discounting model is unsustainable and those signing their support acknowledge they’ve contributed to the problem. The statement cites a 2009 study that found “the increased use of merit aid is associated with a decrease in enrollment of low-income and minority students, particularly at more selective institutions.”

Second, David L. Warren, president of the National Association of Independent Colleges and Universities, revealed information from preliminary conversations with U.S. Justice Department officials regarding ways in which groups of presidents could discuss their tuition and/or financial aid policies without penalty and, hopefully, reach collective agreements to make college more affordable. This is significant as the Overlap Group, a set of elite universities that joined forces on admissions and financial-aid decisions for several years, faced antitrust charges by the federal government in 1991. The federal case effectively ended any meaningful collaboration on such topics, keeping schools in the dark about each other’s financial aid and admissions strategies.

“The fear, obviously, is that unilateral disarmament” in the merit-aid race won’t work, said one of the efforts’ leaders according to The Chronicle. Presidents worry that increasing need-based aid and decreasing merit aid, which is used to attract top students, will result in less robust enrollment and less prestige. But hopefully between the statement of principle, which could align presidents behind common goals, and discussions with the federal government, which could result in permissible collaboration, some progress will be made and the game of financial-aid chicken can end.

American Council on Education Will Review Whether Some MOOCs Deserve College Credit

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Controversy has surrounded massive open online courses (MOOCs) since their inception.  Some believe MOOCs will broaden access to higher education and bring down costs, while others fear the rush to embrace MOOCs may come at the expense of academic quality. To help settle this debate, the American Council on Education (ACE) revealed yesterday a “wide-ranging research and evaluation effort” of MOOCs’ academic potential, including a pilot project to determine whether some MOOCs should be eligible for college credit.  The Bill & Melinda Gates Foundation recently awarded ACE nearly $900,000 to pursue these activities—one of the foundation’s 13 new MOOC-related research grants.

ACE’s pilot project will examine 5 to 10 MOOCs offered by Coursera (one of the largest MOOC providers.) beginning next year. Teams of faculty will compare these MOOCs to traditional college courses, evaluating their contents, teaching methods, and student engagement. To pass the review and be recommended for credit, Coursera must find a way to authenticate its students’ identities—a difficult task considering thousands of students can register for each course. Coursera hopes to address this challenge by partnering with online proctoring companies that monitor tests remotely and verify students’ IDs via special software and webcams.

According to the NY Times, if ACE believes a course deserves academic credit, students who want to earn that credit would pay a fee for the proctored exam.  If those students want a transcript that they can submit to other schools, they’ll need to pay another fee (Coursera’s offerings are otherwise free).

It should be noted that even if ACE recommends a course for credit, individual colleges must still decide whether to accept those credits. While higher education institutions (as represented by ACE) and the Gates Foundation may believe in the potential of MOOCs’, it is unclear whether colleges will actually welcome MOOC transfer credits.