The Fiscal Cliff and Higher Education

We’re now well into December, and there is a pretty good chance that Congress and the Obama Administration will fail to agree on a set of policies designed to keep America from going over the “fiscal cliff,” or a series of tax increases and reductions in planned increases in domestic and military spending. Much of the attention during the fiscal cliff discussions has been about how to raise additional tax revenues from higher-income individuals. Democrats and the Obama Administration tend to favor raising the marginal tax rates while leaving deductions alone, while Republicans tend to favor keeping marginal tax rates at current levels while capping deductions at a specified amount.

These two proposals would affect higher education in different ways. The Democratic proposal has been better received than the Republican proposal in the higher education community because of the reliance of many colleges on charitable giving, which would be adversely affected by the cap on deductions. (President Obama has proposed similar limits in the past.) Capping deductions would substantially increase the real cost of a donation to higher education, as high-income taxpayers would be unable to receive a deduction equal to as much as 35% of the total gift.

The Democratic proposal would affect charitable donations in a different manner. Their proposal to raise capital gains tax rates (on the sale of stock and other securities) would reduce the payout that colleges would receive if gifts of stock are received. The strong likelihood of increased capital gains rates has led many companies, including those in the for-profit education sector, to issue special dividends before tax rates increase.

The net result of the uncertainty regarding tax rates is likely to be a positive for colleges in the short run. If previous tax increases are any indication, increasing income and capital gains taxes is likely to result in a short-term increase in charitable donations as individuals race to make decisions under more favorable circumstances. Regardless of whose revenue proposal is accepted, gifts to higher education (and government revenues) are going to be higher than they otherwise would in fiscal year 2013. This will also result in lower levels of donations for the following years since planned donations have been shifted forward.

Let’s also not forget the spending side of the fiscal cliff negotiations. Going over the fiscal cliff would result in sequestration of a substantial portion of the Department of Education’s expected budget. Most functions in the Department of Education would see an 8.2 percent cut in expected program funding, including the Institute for Education Sciences, although Pell Grant funds would not be affected. If the mandatory cuts are avoided (or more likely, pushed into the future where they will be ignored), expect a wave of federal spending as agencies spend the money that could have been sequestered.

I’m not optimistic that Congress and the Obama Administration can reach an agreement on the fiscal cliff, especially since the debt ceiling must also be addressed in the next few weeks. But since I hate to end a post on a sour note, I’ll leave you with former Senator (and co-chair of the Bowles-Simpson committee to reach a deficit solution) Alan Simpson (R-WY)’s dance moves. Enjoy!

A November Surprise in Student Loans

A few weeks ago, I co-authored a piece in The Chronicle of Higher Education on the federal government’s authority to relax income-based repayment requirements for student loans. To summarize the proposal, the federal government was granted the authority (starting in 2014) to allow students to repay student loans using only ten percent of their discretionary income for 20 years, down from 15 percent for 25 years. Our argument in the Chronicle piece is that the program represents an enormous subsidy for students attending expensive colleges and particularly professional schools. We were not the only people with those concerns; the left-leaning New America Foundation put out a similar set of concerns.

I was very surprised to learn yesterday that the Obama Administration published the final regulations for the new income-based repayment program (called “Pay as You Earn” or PAYE) in the Federal Register, which will suddenly take effect much sooner than 2014 and apparently no later than July 1, 2013. There appears to be no regulatory authority for speeding up the changes, other than the federal requirement that regulations be published by November 1 in order to take effect on July 1 of the following year. These regulations continue a disturbing trend of this administration ignoring Congressionally mandated timelines. It is my sincere hope that someone will ask the Department of Education for clarification as to how speeding up implementation is legal, especially when Congress did not agree to that timeline and there is a cost impact (more on that later).

Substantial legal issues aside, it appears that the Department of Education did not seriously consider the moral hazard concerns of people taking out more debt simply because they will not have to repay it. Buried on page 28 of the 61-page regulation document is the following nugget:

“Income-based repayment options may encourage higher borrowing and potentially introduce an unintended moral hazard, especially for borrowers enrolled at schools with high tuitions and with low expected income streams. Some commenters disagreed with the inclusion of this moral hazard statement, noting that the aspect of more generous income-based repayment plans causing increased borrowing has not been established. The Department has not found any definitive studies on the matter but since some analysts, academics, and others have suggested the possibility of this inducement effect, we wanted to address it to ensure comprehensive coverage of this issue.”

The Department of Education then never addresses the topic in the rest of the regulation document, instead focusing on the benefits for borrowers with more modest amounts of debt and household incomes of less than $60,000 per year. I side with Jason Delisle and the New America policy folks, who still note that moral hazard is a substantial concern.

The cost estimates seem way too good to be true, which is often the case in implementing new federal programs. The Department of Education (on p. 35 of the regulations) estimates that the cost will be only $2.1 billion over the next ten years, which seems to be an incredibly low number. Assuming roughly $250 million per year in additional costs over the peak years of the budget window (the last few years should not be included because they don’t include the full cohort costs) only covers $50,000 in loan forgiveness for 5,000 students. There are a lot more than 5,000 law and medical school graduates who could benefit under this program, yet it is unclear whether the Department of Education actually modeled professional school students (they mention on page 34 that graduate students were modeled, but they have much less debt on average).

Despite this change being a substantial shift in student loan policy, the education community and the media don’t seem to be too interested in the substantial cost shifting. The Chronicle had a nice article (subscription required) on the moral hazard regarding the program and Inside Higher Ed mentioned the release of the final rules, but completely missed the point. The conservative Daily Caller also mentioned the changes, but doesn’t get into the questionable legal foundation of advancing the policy before 2014 or the issue of who benefits.

It is easy to link the release of these regulations to electoral politics as usual, and I am certainly skeptical of what happens this time of year. However, given the lack of media coverage and the fact that it all hasn’t been positive, it appears that the Department of Education wanted to release the rules to have them take effect before receiving more public scrutiny. Hopefully, there will be a successful lawsuit delaying the rules on the grounds of the Obama Administration overstepping its legal authority to have the rules take effect in 2013 instead of 2014—and this will give researchers and policymakers a chance to rewrite the rules to target aid to those who truly need it instead of subsidizing expensive professional education programs.

Knowing Before You Go

Knowing Before You Go

The American Enterprise Institute today hosted a discussion of the Student Right to Know Before You Go Act, introduced by Senator Ron Wyden (D-OR) and co-sponsored by Senator Marco Rubio (R-FL). The two senators, both of whom are known for working across party lines, briefly discussed the legislation and were then followed by a panel of higher education experts. Video of the discussion will be available on AEI’s website shortly.

The goal of the legislation, as the senators discuss in a column in USA Today, is to provide more information about labor market and other important outcomes to students and their families. While labor market outcomes are rarely available in any systemic manner, this legislation would support states which release the data both at the school level and by academic programs. This sort of information cannot be collected at the federal level due to a restriction placed in Section 134 of the Higher Education Act reauthorization in 2008, which bans the Department of Education from having a student-level data system of the sort used in some states.

While nearly everyone across the political spectrum agrees that making additional data available is good for students and their families, there are certainly concerns about the proposed legislation. One concern is that the availability of employment data will make more rigorous accountability systems feasible, even though state-level data systems can only track students who stay within that state. This concern is shared by colleges, which tend to loathe regulation, and some conservatives, who don’t feel that the federal government should regulate higher education.

Additionally, measuring employment outcomes does place more of a focus on generating employment over some of the other goals of college (such as learning for learning’s sake). The security of these large unit-record datasets is also a concern of some people; I am less concerned about this given the difficulty of accessing deidentified data. (I’ve worked with the data from Florida, which has possibly the most advanced state-level data system. Getting access is extremely difficult.)

Although I certainly recognize those concerns, I strongly support this piece of legislation. It would reduce reporting requirements for colleges, since they would work primarily with states instead of the federal government. (In that respect, the legislation is quite conservative.) It makes more data available to all stakeholders in education and provides researchers with more opportunities to examine promising educational practices and intervention. Finally, it allows for states to make more informed decisions about how to allocate their scarce resources.

I don’t expect this legislation to go anywhere during this session of Congress, even with bipartisan support. Let’s see what happens next session, by which time I hope we are away from the “fiscal cliff.”