The 2013 Higher Education Not Top Ten List

Yesterday, I put out my top-ten list of higher education policy and finance issues from 2013. And today, I’m back with a list of not-top-ten events from the year (big thanks to Justin Chase Brown for inspiring me to write this post). These are events that left me shaking my head in disbelief or wondering how someone could fail so dramatically.

(Did I miss anything? Start the discussion below!)

10. Monsters University isn’t real. The higher education community was abuzz this summer with the premiere of Pixar’s newest movie about one of the few universities outside Fear Tech specializing in scaring studies. The Monsters University website is quite good, and as Jens Larson at U of Admissions Marketing notes, it’s hard to distinguish from many Title IV-participating institutions. I’ll use this blog post to announce my willingness to give a lecture or two at Monsters University. (As an aside, since the two main characters didn’t graduate, their post-college success may not help MU’s scores in a college rating system.)

9. Brent Musburger set men back at least five decades in the course of 30 seconds. His public ogling of the girlfriend of Alabama quarterback A.J. McCarron during January’s BCS championship game instantly became a YouTube sensation. Musburger shouldn’t have listened to his partner in The Waterboy, Dan Fouts, who urged him to not hold anything back in the last game of the season. McCarron, on the other hand, is preparing to play Oklahoma in the Sugar Bowl on January 2.

8. Rankings and ratings are not the same thing. While college leaders tend not to like the Obama Administration’s proposed Postsecondary Institution Rating System, it is important to emphasize the difference between rankings and ratings. Rankings assign unique values to each institution (like the college football or basketball polls), while ratings lump colleges into broad categories (think A-F grades). Maybe since I work on college rankings, I’m particularly annoyed by the confusion. In any case, it’s enough to make my list.

7. Mooooove over: The College Board has another rough year. This follows a rough 2012 for the publishers of the SAT, as more students took the ACT than the SAT for the first time last year. But in 2013, the redesign of the SAT got pushed back from 2015 to 2016, giving the ACT more time to gain market share. The College Board followed that up with a head-scratching example of “brand-ing,” passing out millions of cow stickers to students taking the PSAT. If these weren’t enough, the College Board also runs the CSS Profile, a supplemental (and not free) application for financial aid required by many expensive institutions. Rachel Fishman at New America has written extensively about the concerns of the Profile.

6. Gordon Gee is the most interesting man in higher education. The well-traveled university president began 2013 leading Ohio State University, but left the post this summer after his 2012 comments disparaging Notre Dame, Catholic priests, and the ability of the Southeastern Conference to read came to light. Yet, he and his large bowtie collection will be heading to West Virginia University this spring as he assumes the role of interim president. There is still no word if the Little Sisters of the Poor will show up on WVU’s 2014 football schedule.

5. Rate My Professor is a lousy measure of institutional teaching quality. I’m not going to fully dismiss Rate My Professor, as I do believe it can be correlated with an individual professor’s teaching quality. But a Yahoo! Finance piece claiming to have knowledge of the 25 colleges with the worst professors cross the boundaries of absurd. I quickly wrote a response to that piece, noting that controlling for a student’s grade and the difficulty of the course are essential in order to try to isolate teaching quality. This was by far my most-viewed blog of 2013.

4. Elizabeth Warren’s interest rate follies. The Democratic Senator from Massachusetts became even more of a progressive darling this spring when she announced a plan to tie student loan interest rates to the Federal Reserve’s overnight borrowing rate—0.75%. Unfortunately, this plan made no sense on several dimensions. While overnight borrowing has nearly no risk, student loans (over a ten-year period) have considerable risk. Additionally, if interest rates were set this low, money would have to come from somewhere else. I would much rather see the subsidy go upfront to students through larger Pell Grants than through lower interest payments after leaving college. Fortunately, Congress listened to smart people like Jason Delisle at New America and her plan went nowhere.

3. The Common Application fails early applicants. The Common Application, used by a substantial number of elite colleges, did not work for some students applying in October and November. The reason was that the Common App’s new software didn’t work and they failed to leave the previous version available in case of problems. Although this didn’t affect the vast majority of students who aspire to attend less-selective institutions, it certainly got the chattering classes talking.

2. The federal government shut down and budget games ensued all year long. The constant partisan battle culminated with a sixteen-day shutdown in October, bringing much of the Department of Education to a screeching halt. While the research community used Twitter to trade downloaded copies of IPEDS data and government reports, other disruptions were more substantial. 2013 also featured sequestration of some education spending, although it looks like the budget process might return to regular order for the next two years.

1. Georgetown Law finds a way to stick taxpayers with the entire cost of law school. It is no secret that law school is an expensive proposition, with six-figure debt burdens becoming the norm at many institutions. But some of the loans can be forgiven if students pursue public service careers for a decade, a program that was designed to help underpaid and overworked folks like public defenders or prosecuting attorneys.

Georgetown’s Loan Repayment Assistance Program advertises that “public interest borrowers might now pay a single penny on their loans—ever!” To do this, the law school increased tuition to cover the cost of 10 years’ worth of loan payments under income-based repayment for students making under $75,000 per year. Students take out Grad PLUS loans to fund this upfront, but never have to pay a dime of those loans back as Georgetown makes the payments. Jason Delisle and Alex Holt, who busted this scheme wide open this summer, estimate that students will have over $150,000 in loans forgiven—and put on the backs of taxpayers.  Although Georgetown tries to defend the practice as being good for society, it is extremely hard to make that argument.

Honorable mentions: #Karma, lousy attacks on performance-based funding research, financial stability of athletics at Rutgers and Maryland, and parking at 98% of campuses.

The Year of Higher Education Policy in Review

As 2013 draws to a close, it’s time to take a look back at some of the biggest happenings (or non-happenings) of the year. Some of these items would have been on the list for several years, but others (including the top happening of the year) are brand-new for 2013. Enjoy the list!

10. There is still some hope in the academic job market. In spite of continued concerns about the working conditions of adjuncts (as exemplified in the case of former Duquesne adjunct Margaret Mary Vojtko—read both the original op-ed and a thoughtful retelling of her life story), the tenure-track job market may just be springing back to life after a few lean years. I’m thankful to be one of those success stories, as I got a great job offer from Seton Hall University before defending my dissertation at the University of Wisconsin-Madison. (Look at my faculty webpage…I’m bona fide and I love my job!) But, in other disciplines, the rough market continues.

9. We heard more noise about reauthorizing the Higher Education Act, but no action. The HEA, which dates back to 1965, is supposed to be renewed in 2014. And Congress is saying all the right things about renewing the HEA, including holding a series of hearings on reforming the Pell Grant. However, it is hard to find anyone in academia or the policy community who thinks that is likely. After all, No Child Left Behind (the Elementary and Secondary Education Act) expired in 2007. If I had to put money on a reauthorization date, I would go for 2017.

8. The higher ed policy world gets RADDical. During late 2012 and early 2013, 17 organizations and teams released white papers as a part of the Gates Foundation-funded Redesigning Aid Design and Delivery (RADD) project. The recommendations of the groups ranged widely (see this nice summary from the National Association of Student Financial Aid Administrators, one of the participating organizations), but all groups suggested substantial changes from the status quo. It’s worth noting that the recommendation shared across the largest number of reports is stabilizing or increasing Pell funding, which could be a tough political lift in the current fiscal environment. This effort was not without its skeptics, as this well-commented Chronicle piece on the influence of Gates funds details.

7. The FAFSA changes to recognize same-sex parents, but is still complicated. Despite the push among many of the RADD grantees and at least some interest in Congress, the FAFSA ends 2013 as perhaps being more complicated than it was at the beginning of the year. This is because the venerable form changed to recognize the existence of same-sex marriages after this year’s Supreme Court ruling and political pressure before the ruling took place. The net result is that some students will see less aid. I would also be remiss if I didn’t mention my work with NASFAA on the feasibility of using prior prior year financial data to determine aid eligibility. That might get tied into the next HEA authorization.

6. Congress reached a reasonable solution on student loan interest rates. Put your shocked face on, folks—Congress did accomplish something without causing too much pain to students or financial aid offices. Interest rates on undergraduate subsidized Stafford loans were set to increase from 3.4% to 6.8% on July 1 (and actually did for a few weeks), leading to the hashtag #DontDoubleMyRate. The rates ended up being tied to 10-year Treasury notes, yielding a rate of under 4% this year; however, advocates note that the rate is likely to rise over time. Thankfully, Senator Warren’s plan to set interest rates based on the Federal Reserve discount window (which is nearly riskless) never received serious discussion.

5. MOOCs expand, but their outcomes are questioned. Massive open online courses (MOOCs) are seen by some as having the potential to change how higher education is delivered, but it is safe to say that not all faculty support them—as evidenced at San Jose State. MOOCs have also been hammered for low completion rates, which are often below 10%. The always-astute Kevin Carey notes, however, that the low completion rates are partially due to people who sign up for the course but never really attempt to complete them. Additionally, large numbers of students may still be completing the course, even if completion rates are low. This issue will only get hotter during 2014.

4. Student loan debt grows amid possible reforms. The Institute for College Access and Success (TICAS) recently put out its annual report on student debt loads—and the results aren’t pretty. The average debt load of graduates was $29,400 in 2012, and 71% of students took out debt. (Even more concerning is the fact that TICAS can’t even get data on a lot of colleges’ graduates.) Increasing debt loads have led to innovative plans to make college more affordable. The most-discussed plan is Oregon’s Pay it Forward proposal, which would be a type of income-based repayment covering tuition and fees in that state. While I have serious concerns about whether the program could work (but think it’s worth a demonstration program), my dear friend and dissertation mentor Sara Goldrick-Rab makes her opposition clear.

3. One of the nation’s more prominent community colleges might actually lose its accreditation. The City College of San Francisco is currently slated to lose its accreditation next summer if they do not meet 357 goals set by the Accrediting Commission for Junior and Community Colleges. Since students cannot qualify for federal Title IV financial aid if they attend an unaccredited college, this would effectively shut down an institution that had nearly 100,000 students. Students and faculty went after the accreditor and nearly shut it down, although it was recently announced that the accreditor could operate for another year. I still think that CCSF will keep its accreditation, but the damage (in terms of enrollment) may already be done.

2. Gainful employment continues to be a hot political topic. The Obama Administration proposed gainful employment regulations several years ago, in which vocationally-oriented colleges would lose Title IV eligibility if they had poor employment and loan repayment outcomes. These rules have been in and out of court for several years, and a new set is now being developed. The Department of Education tried to reach consensus with stakeholders last week, but failed; this means that ED will write its own rules. For all the developments that will happen in 2014, I’ll defer you to Ben Miller’s great work covering the topic.

1. PIRS roars to the public’s attention, and colleges are not happy. As regular readers of this blog know, I’m the methodologist for Washington Monthly’s annual college rankings. Yet I was completely floored when President Obama announced the impending development of a college ratings system for the 2014-15 academic year. (The official title—Postsecondary Institution Rating System or PIRS—just got released yesterday.) Thankfully, I was able to recover quickly enough to go on MSNBC the next night to talk about the proposal.

The Department of Education has done a lot of listening on the college ratings proposal, and the vast majority of the feedback in the higher education community appears to be negative. A recently released poll of college presidents highlights the opposition amid concerns of the ratings favoring highly selective institutions. (Yet the only measure that a majority of college presidents supported using was graduation rates—a measure strongly tied to selectivity.) This recent conference panel also shows some of the issues facing the ratings.

While the long-term goal is to tie ratings to financial aid by 2018 or so, I don’t see this as being likely to happen given its requirement of Congressional approval. However, the ratings could potentially help students even if institutions don’t like the bright lights of accountability. Let’s just say that the discussion around the release of the first ratings this summer should be spicy.

I’ll post a not-top-ten list of higher education policy issues later this week. Send me your suggestions for that piece, and let me know what you think of this list!

Policy Options for Pell Reform: The CBO’s Analysis

The federal Pell Grant program has grown dramatically over the past decade, due to both the effects of the Great Recession and changes to the program that made it more generous to students from low- to middle-income families. As spending has more than doubled since 2006 (although it slightly fell in the most recent year for which data is available), some in Congress have grown concerned about the sustainability of the program. This led Senator Jeff Sessions (R-AL), ranking member of the Senate Budget Committee, to request a review of Pell spending and information about the likely costs of various reform options going forward.

The Congressional Budget Office, the nonpartisan agency charged with “scoring” fiscal proposals, released a report yesterday summarizing the estimated fiscal effects of a host of changes to the Pell program. (Inside Higher Ed has a nice summary of the report.) While the goal of the requesting Senator may have been to find ways to lower spending on the program by better targeting awards, the CBO also looked at proposals to make the Pell program more generous and to simplify Pell eligibility.

While I’m glad that the CBO looked at the fiscal effects of various changes to restrict or expand eligibility, I think that Congress will make those decisions on a year-to-year basis (pending the availability of funds) instead of thinking forward over a ten-year window. However, it is notable that the proposal to restrict Pell Grants to students with an expected family contribution of zero—by far the students with the greatest need—would only cut expenditures by $10 billion per year, or just over one-fourth of the program cost. I am more interested in the CBO’s cost estimates for simplifying eligibility criteria. They propose two possible reforms, which are discussed in more detail on pages 24 and 25 of the report.

Proposal 1: Simplify the FAFSA by only requiring students and their families to provide income data from tax returns instead of pulling in asset and income data from other sources. This would slightly affect targeting, as some resources would be unknown to the government, but research has shown that basic income data predicts Pell awards well for most students. The CBO estimates that about two percent more students would receive the Pell Grant and that about one in five students would see an increase of approximately $350. This is estimated to increase program costs by $1 billion per year, or less than 3% of the annual program cost.

Proposal 2: Tie Pell eligibility to federal poverty guidelines instead of EFCs. I am quite interested in this idea, as it would greatly streamline the financial aid eligibility process—but I’m not sure whether I think it is the best idea out there. Basically, the federal poverty guidelines are calculated based on income, household size, and state of residency, and could be used to calculate Pell eligibility. This is indirectly done right now through means-tested benefit programs; for example, eligibility for the free/reduced price lunch program is based on the poverty line (130% for free, 185% for reduced). Since students who have a family member receiving FRL can qualify for a simpler FAFSA already, this may not be such a leap. The CBO estimates that about one in ten students would have their Pell status affected by their model option and that costs would fall by $1.4 billion per year, but the percent of poverty used (up to 250%) would likely be changed in the legislative process.

In the alternatives section of the report (page 26), the CBO discusses committing Pell funds to students in middle and high school—noting that such a program could increase academic and financial preparation for postsecondary. This sounds very similar to a paper that Sara Goldrick-Rab and I wrote on a possible early commitment Pell program (a citation would have been nice!), but they don’t provide any estimates of the costs of that program. We estimate in our paper that the program will cost about $1.5 billion per year, with the federal government likely to at least break even in the long run via increased tax payments (something not discussed in any of the policy options in the brief).

I’m glad to see this report on possible options to Pell reform and I hope that they will continue to get requests to score and examine innovative ideas to improve and reform the delivery of financial aid.

“Bang for the Buck” and College Ratings

President Obama made headlines in the higher education world last week with a series of speeches about possible federal plans designed to bring down the cost of college. While the President made several interesting points (such as cutting law school from three to two years), the most interesting proposal to me was has plan to create a series of federal ratings based on whether colleges provide “good value” to students—tying funding to those ratings.

How could those ratings be constructed? As noted by Libby Nelson in Politico, the federal government plans to publish currently collected data on the net price of attendance (what students pay after taking grant aid into account), average borrowing amounts, and enrollment of Pell Grant recipients. Other measures could potentially be included, some of which are already collected but not readily available (graduation rates for Pell recipients) and others which would be brand new (let your imagination run wild).

Regular readers of this blog are probably aware of my work with Washington Monthly magazine’s annual set of college rankings. Last year was my first year as the consulting methodologist, meaning that I collected the data underlying the rankings, compiled it, and created the rankings—including a new measure of cost-adjusted graduation rate performance. This measure seeks to reward colleges which do a good job serving and graduating students from modest economic means, a far cry from many prestige-based rankings.

The metrics in the Washington Monthly rankings are at least somewhat similar to those proposed by President Obama in his speeches. As a result, we bumped up the release of the new 2013 “bang for the buck” rankings to Thursday afternoon. These rankings reward colleges which performed well on four different metrics:

  • Have a graduation rate of at least 50%.
  • Match or exceed their predicted graduation rate given student and institutional characteristics.
  • Have at least 20% of students receive Pell Grants (a measure of effort in enrolling low-income students).
  • Have a three-year student loan default rate of less than 10%.

Only one in five four-year colleges in America met all four of those criteria, which highlighted a different group of colleges than is normally highlighted. Colleges such as CUNY Baruch College and Cal State University-Fullerton ranked well, while most Ivy League institutions failed to make the list due to Pell Grant enrollment rates in the teens.

This work caught the eye of the media, as I was asked to be on MSNBC’s “All in with Chris Hayes” on Friday night to discuss the rankings and their policy implications. Here is a link to the full segment, where I’m on with Matt Taibbi of Rolling Stone and well-known author Anna Kamenetz:

http://video.msnbc.msn.com/all-in-/52832257/

This was a fun experience, and now I can put the “As Seen on TV” label on my CV. (Right?) Seriously, though, stay tuned for the full Washington Monthly rankings coming out in the morning!

Financial Aid as a Paycheck?

President Obama is set to make a series of speeches this week addressing college affordability—a hot topic on college campuses as new students move into their dorm rooms. An article in this morning’s New York Times provides some highlights of the plan. While there are other interesting proposals, most notably tying funding to some measure of college success, I’m focusing this brief post on the idea to disburse Pell Grants throughout the semester—“aid like a paycheck.”

The goal of “aid like a paycheck” is to spread grant aid disbursals out through the semester so students take ownership of their education. Sounds great, right? The problem is that it’s only been tested at a small number of community colleges in low-tuition states, such as California. If a student has more financial aid than the cost of attendance, then there is “extra” aid to disburse. But this doesn’t apply to the vast majority of students, particularly those at four-year schools. Spreading out aid awards for students with unmet need creates an even bigger financial gap at the beginning of the semester.

In order for “aid like a paycheck” to work for the vast majority of students, we have to make other costs look like a monthly bill. If students still have to pay for tuition, books, and housing upfront (or face a hefty interest rate), this program will create a yawning financial gap. If colleges want to be accountable to students, perhaps they should bill students per month for their courses—that way, dropped courses hurt the institution’s bottom line more than the student’s. This would delay funds coming in to a college, which can result in a loss of interest given the large amounts of tuition revenue.

Before we try “aid like a paycheck” on a large scale, Mr. President, let’s try making colleges get their funds from students in that same way. And let’s also get some research on how it works for students whose financial need isn’t fully met by the Pell Grant. The feds have the power to try demonstration programs, and this would be worth a shot.

Does This Explain Opposition to Market-Based Interest Rates?

As of this writing, it appears that the U.S. Senate has finally reached an agreement on student loan interest rates after subsidized Stafford rates doubled from 3.4% to 6.8% on July 1. The general terms of the agreement are similar to what President Obama proposed in his FY 2014 budget and what the House of Representatives agreed to back in June, with some compromises on each side.

The big difference between current law and the Senate agreement is that interest rates for nearly all student loans will be tied to the 10-year Treasury rate, which currently sits at about 2.5%.  (Undergraduates would pay a 2.05% premium above the Treasury rate on Stafford loans to account for program costs and the risk of offering the loans.) However, the Treasury rate is expected to increase to 5.6% by 2016, pushing the interest rate for undergraduates to 7.65% from less than 5%. The plan includes a cap at 8.25%, which may be reached according to the CBO report.

The Senate agreement is not without its critics, particularly on the political Left. Senator Bernie Sanders, a Vermont independent and a self-described “socialist,” criticized the plan as “dangerous” in an article in The Hill. His criticism lies in the fact that interest rates can rise well above the current 6.8% over time, a very real concern given the interest rate projections. While the plan is expected to pass the Senate (and the House), some other Senate Democrats will likely vote no as well.

At this point in the great interest rate debate, I have to wonder if there is another reason some politicians oppose market-based interest rates. Tying student loan interest rates to the 10-year Treasury note directly connects students’ future payments to the cost of federal borrowing. And that cost of federal borrowing is influenced by the federal government’s fiscal policy.

This connection between federal borrowing and student loan rates could potentially have the following repercussions. If loans are tied to Treasury notes—and there is no way to fix the rate as has been done for the past seven years—students should have an incentive to push for federal policies which lower the federal government’s cost of borrowing. (With the decline in home ownership rates among younger adults, fewer 20- and 30-somethings have mortgages, which are affected by federal borrowing costs.)

The policy that best reduces the cost of borrowing is a balanced budget, which reduces the need for additional borrowing. The passage of the Omnibus Budget Reconciliation Act of 1993, which reduced the budget deficit through a combination of tax hikes and spending cuts, had the effect of driving down long-term interest rates. (For more on this, I highly recommend reading Bob Woodward’s Maestro about Alan Greenspan’s role in the policy discussions.)

My question to readers is whether you think that some politicians may oppose market-based interest rates because more young adults may place pressure on Congress to find some legislative solution to balance the budget—although the solutions certainly vary by political persuasion. Say it’s 2016 and undergraduate Stafford rates are 7.5%, with hitting the 8.25% cap becoming more likely. Could we see student advocacy organizations pushing for a balanced budget to bring down interest rates? I don’t know how many people will think this way, but it’s something to consider.

The Great Student Loan Interest Rate Debate

As I write this post, the House of Representatives is currently debating the future of student loan interest rates. Under current law, the rates on subsidized Stafford loans for undergraduates (the rates which get the most attention) will double on July 1 from 3.4% to 6.8% without Congressional action. The same debate was held last year under the same parameters, but Congress and the President agreed to extend interest rates for an additional year.

There have been a wide range of proposals put forth regarding plans to address the interest rate cliff, an outstanding summary of which was written by Libby Nelson in Inside Higher Ed. (In addition to the plans listed in that article, some Senate Democrats have supported a two-year extension to current law in order to allow for the Higher Education Act to be reauthorized.) Most proposals move to tie interest rates to the market—represented here by borrowing costs for the federal government—but the plans vary widely in their ideas of what the relevant market should be.

Proposals put forth by the Obama Administration and House and Senate Republicans all tie interest rates to long-term Treasury bills, but vary in their other features. (I’ve previously written on the Obama Administration’s proposal.) While the President has threatened to veto the common House GOP proposal over certain aspects, there is enough common ground here to reach an agreement.

However, proposals put forth by certain Democratic senators, particular Sen. Elizabeth Warren from Massachusetts, confuse long-term lending risks with short-term credit markets. She has proposed tying student loan interest rates (which are repaid for at least ten years once a student leaves college) to the interest rate the Federal Reserve charges banks for very short-term borrowing. Jason Delisle of the New America Foundation, hardly a bastion of conservatism, crushes her argument in a great piece of writing. He notes the confusion between short-term and long-term rates, as well as accounting for the probability of default. I would also note that if Congress wishes to help make college more affordable, it’s a better idea to give the funds upfront to students than to lower interest rates later on–long after the enrollment decisions have been made.

The federal government should move toward some sort of a market-based strategy for interest rates with certain student protections. This would allow for the costs of student loans to be more adequately reflected in the federal budget. (And if interest rates get too high, maybe it’s a reminder for Congress and the President to produce a balanced budget!) With that being said, I would still expect to see a short-term extension of the current interest rates as Congress may end up deadlocked on this issue until the Higher Education Act is reauthorized.

Why Expanding Student Loan Interest Deductions is Unwise

The United States Congress has rarely met a change to the tax code that it doesn’t like. Since 2011, Congress has made nearly 5,000 changes to the tax code, making the tax code even more Byzantine and causing many Americans headaches each spring. While the exact levels and types of taxes preferred by the public tend to differ by political and economic ideologies, a general consensus exists among economists that a stable, predictable, relatively simple tax code achieves revenue goals at a reasonable cost.

Yet Congress is constantly faced with pressure to change the tax code to allow more credits and deductions to incentivize certain activities. We have certainly seen incentives in the tax code to increase educational attainment through the use of credits and deductions. These incentives have a difficult time being effective in inducing students to obtain more education because students and their families do not receive a financial benefit until well after the enrollment decision has been made, and awareness of these programs is uneven at best.

The deduction for student loan interest payments is designed to help student be able to repay their educational debt; currently, students can receive a $2,500 deduction on their taxes (if they itemize) in a given year and their income is less than $75,000 per year if single or $150,000 per year if married filing jointly. It is hard to imagine that such a program, which does not provide a financial benefit to students until after they have left college, will help increase educational attainment.

Yet Congressman Charles Rangel (D-NY), who is well-known for his 2012 censure over failing to pay taxes, has introduced the Student Loan Interest Deduction Act, which would double the tax deduction for student loan interest and get rid of the income cap for receiving the deduction. This bill has picked up the support of many higher education associations, including the American Council on Education and the National Association of Student Financial Aid Administrators, but it is an example of inefficient and misguided public policy.

Here are a few reasons why the proposed bill is poor public policy:

(1)    Students get the tax deduction years after beginning college. Yes, students with perfect information about the deduction (and who believe the policy will remain in place) will adjust their total cost of college down. But that requires a large amount of information and a low discount rate, neither of which can be assumed.

(2)    Increasing the deduction cap allows students to benefit more if they took out more debt. This can provide an additional incentive for colleges to raise their price and capture additional revenue if they think students will pay.

(3)    Getting rid of the income cap shifts the benefits more toward higher-income families, who are more likely to itemize deductions and be able to use the deduction. Advocates on the left should be particularly steamed by this point.

(4)    This acts as an additional tax on saving for college relative to borrowing, and can place families who chose not to borrow at a disadvantage.

I would prefer to see all interest deductions removed from the tax code and replaced with more efficient upfront payments. Instead of forgoing billions of dollars in revenue through tax credits and deductions, I would rather see the money used in grant programs, lowering the interest rates for federal loans, or used toward other educational improvements. Rangel’s bill just complicates the status quo and does little to actually help students afford college.

The Benefits of Biennial Budgets

The federal government had a substantial problem with its budgeting process over the past several years, with funding being provided by a series of continuing resolutions outside the annual process for more than three years. With bipartisan frustration over this process growing, a group of centrist Senators, led by Jeanne Shaheen (D-NH) and Johnny Isakson (R-GA), have proposed a switch from annual to biennial budgets. This proposal was introduced in the past Congress and was not seriously discussed, but is likely to be considered this time around with the interest of Senate Majority Leader Harry Reid (D-NV).

Biennial budgets are not uncommon at the state level. A 2011 report from the National Conference of State Legislatures shows that 19 states have biennial budgets, including Ohio, Texas, and Wisconsin. Only four of these states have legislatures that only meet every two years, meaning that 15 states have actively chosen the biennial path.

Biennial budgeting allows for more time for debate and discussion of tricky matters, but the budgets often have to be adjusted because of the balanced budget requirements. (Budget repair bills are well-known here in Wisconsin.) The lack of such a requirement at the federal level makes biennial budgeting even more feasible. While I am a staunch supporter of a balanced budget, I recognize that a small error in economic growth or demographic assumptions can result in a slightly unbalanced budget over a two-year period. As long as the assumptions are reasonable, I’m fine with a small error which can be addressed in the future.

Requiring a budget every two years instead of one can help provide more stability to federal education funding, particularly regarding policies and levels of student financial aid and education research. This stability has the potential to have positive impacts which are independent of the actual funding levels. For example, if the exact dollar amount for the maximum Pell Grant is known, a push should be made to communicate that level to students who are likely to qualify upon entering college. Providing earlier information of financial aid could induce the marginal student to enroll in college and perhaps even take an additional high school course which would lower the likelihood of remediation. This push toward earlier notification of financial aid is consistent with other parts of my research agenda, and would have the added benefit (in my view) of allowing Pell Grant funding to be flexible as needed in the future.

A biennial budget process could also have the benefit of making student loan interest rates more predictable. Under current law, undergraduate subsidized Stafford interest rates are currently set to double (from 3.4% to 6.8%) on July 1. (This is a budgetary matter because the interest rate does determine the level of profit or loss for the federal government.) While I am a strong supporter of plans to tie student loan interest rates to market conditionssuch as the rate paid on Treasury bills plus 3%—biennial budgeting would at least allow interest rates to not face a cliff every single year.

Biennial budgeting has the potential to result in more stability in education funding, as well as result in budgets which are well-discussed and passed under regular order. For those reasons, I am supportive of moving from annual to biennial budgets. I would love to hear your thoughts on this proposal in the comments!