financial aid – Robert Kelchen

Rising Inflation and the Impending Tuition Squeeze

For the first time in the lifetimes of many Americans, inflation has become a legitimate concern. In the last year, the Consumer Price Index increased at a 6.2 percent clip—a rate not seen this century.

Trends in inflation over the last two decades (BLS graphic)

The higher education industry is far from immune from the effects of an inflationary cycle that was largely unexpected even a few months ago. Colleges have been struggling to address supply chain issues and a shortage of staff members willing to work in person at pre-pandemic wage rates. Colleges have responded by reducing services, increasing wages in some cases, and even trying to get faculty members to work in dining halls. In my position as a faculty member and department head, I am still waiting for my permanent laptop computer setup to arrive and have seen the challenges in trying to hire employees within existing salary bands.

But what really caught my attention was Virginia Tech’s move to increase meal plan charges by about $200 between the fall and spring semesters. Midyear adjustments in student charges are highly unusual and typically only happen if a state withholds previously promised funding during a recession. But the university is required by state law to have auxiliary enterprises operate with balanced budgets, so the sudden increase in costs had to be passed on to students.

At this point, it seems like inflationary pressures are here to stay for at least the next several months. This will put continued pressure on colleges to increase their salaries to keep up with a hot economy and rising consumer prices. While faculty tend to have less power in the labor market due to lots of qualified people looking to teach in many disciplines, many staff members are in a great position to command raises of between five and ten percent as colleges look to retain talent.

This is also the time of year during which many colleges start to develop their proposed rates for tuition, fees, and room and board for the next (2022-23) academic year. With the costs of running a college likely to rise by at least five percent this year, the logical step for colleges would be to raise student charges by the same amount. This would be a rate largely unseen since the Great Recession—when student debt was less of a public policy concern and there was less vocal skepticism of higher education. But if colleges try to keep tuition increases more modest, they are losing money. And that is a challenge after the pandemic severely affected the finances of many institutions.

So expect a fair amount of sticker shock this spring when tuition, housing, and dining charges for next year get posted. There are likely to be three types of exceptions to this trend:

Public colleges in states that limit tuition increases by state law or governing board policy. They’re stuck with what they can get.
Extremely wealthy colleges that can afford to limit increases if that will help them increase diversity and/or move up in the rankings.
Cash-strapped colleges that are desperately seeking to recruit and retain students. They will decide that holding the line on student charges is the best of a lousy set of options.

A First Look at Program-Level Earnings Data by Credential Level

The U.S. Department of Education has been promising program-level earnings data in the College Scorecard for several months now following the release of program-level debt data back in May. Debt data are interesting, but I think everyone was waiting for earnings data to come out. And it came out today, sending me scrambling to get into the data in between meetings, teaching, and other responsibilities of a tenured faculty member. The data can be found here, and please do read the documentation before digging into the data.

Before I get back to meetings, here are a few takeaways:

(1) Debt and earnings data are based on different samples of students. Debt data only include people with federal loans, while earnings data include people with any type of financial aid. At community colleges, these samples are quite different because more students typically get Pell Grants than loans. But for graduate programs, the numbers really only differ by a few work-study students.

(2) Most programs aren’t covered in the data, but most students are. For the most recent data file, there are 216,638 programs listed. Of these programs, 45,371 have earnings data and 51,423 have debt data.

(3) Earnings data are soon after graduation. Earnings were measured in 2016-17 for students graduating in 2014-15 and 2015-16. More years of data will be included in the future.

(4) Want to make money? Be a dentist. The program with highest earnings was (The) Ohio State University’s dental program, with earnings of $231,200 and debt of $173,309. Dental and other health sciences programs dominated the top of the earnings distributions, with a few law and business programs thrown in. Most of these programs have high debt burdens. On the other hand, Parker University’s chiropractic program brought up the rear with debt of $193,328 and earnings of $2,700. Something strange is probably going on with the data there.

(5) Earnings and debt vary considerably by credential level. In general, both debt and earnings increase across credential levels, but debt increases at a higher rate. As shown below, the median debt-to-earnings ratio across first professional (law, medicine, etc.) programs was 191%. Earnings often increase quickly in future years, but the first few years won’t be fun.

I look forward to seeing a whole host of (responsible) analyses using the new data, so keep me posted of any good takes. This has the potential to influence families and colleges alike, and I’m particularly interested to see if the data release affects whether colleges close low-performing programs (as I discussed in my last blog post).

Income-Based Repayment Becoming a Costly Solution to Student Loan Debt

This post was originally published at The Conversation.

When Congress established the income-driven repayment for federal student loans back in 2007, it was touted as a way to help student loan borrowers save money by capping monthly payments at a certain percentage of a borrower’s income.

Since then, student loan debt has risen from US$500 billion to where it is now approaching the $1.5 trillion threshold. The federal government expects to forgive over $100 billion of the $350 billion in loans under income-driven repayment as of 2015. That means taxpayers are picking up the bill.

This has put the entire income-driven repayment system in jeopardy as there have been proposals by congressional Republicans and the Trump administration to reduce the amount of loans forgiven and end the Public Service Loan Forgiveness program, which is a special repayment option for people in public service fields. So far, these proposals have failed to become law, but expect to see them put forth again in the future as concerns about program costs continue to grow.

As a researcher who specializes in higher education policy and financial aid, here are some of my insights on how income-driven repayment works, why its future is now in jeopardy and some potential options that can protect the most vulnerable borrowers while also helping taxpayers.

How it works

Six months after they leave college, students who took out a federal student loan are automatically put into a repayment plan with fixed monthly payments over 10 years. This is similar to how mortgages and car loans work. However, repayment can often be a major burden for student loan borrowers who take low-paying jobs or struggle to find employment after college.

To address this issue, Congress and the Department of Education created a number of options during the George W. Bush and Barack Obama presidencies that tied student loan borrowers’ payments to their discretionary income, that is, how much money they have left after meeting their basic needs.

Most students who take out federal loans today qualify for a plan called Pay As You Earn. This plan – known as PAYE – limits monthly payments to 10% of a student loan borrower’s discretionary income for up to 20 years.

There are two requirements. First, student loan borrowers must fill out paperwork each year with their income to be eligible for income-driven repayment. In recent years, more than half of federal student loan borrowers have failed to complete the paperwork on time, putting them back into the standard plan. Second, if any part of the loan is not repaid within 20 years, the remaining balance is forgiven. But this forgiveness counts as income and taxes must be paid on it in that year.

Borrowers who work for government agencies and certain nonprofit organizations can qualify for Public Service Loan Forgiveness, which limits payments to 10% of discretionary income for as little as ten years with no income tax penalty. So far, just 1% of borrowers who applied for forgiveness have had their loans forgiven, but this rate will likely increase over time as the Department of Education gets better at managing the forgiveness process.

Problems abound

In some respects, the biggest problem with income-driven repayment is that too many people are taking advantage of it.

The share of students who reduced their loan balances by even one dollar within five years of leaving college has fallen from 67% to 51% over the last five years as low monthly payments under income-driven repayment mean that many borrowers’ balances are growing instead of shrinking. This has increased the projected price tag of these programs to the federal government well beyond expectations.

These programs tend to be used more frequently by borrowers with large debt burdens – especially those who have more than $100,000 in debt. Data from the Department of Education show that students who owe $100,000 or more make up just over one-third of all outstanding student debt but nearly half of all borrowers in income-driven repayment.

Trying to pay back $100,000 in student loans is certainly not easy, and I can speak from experience thanks to my wife’s law school debt. But most of the borrowers with large student debt burdens tend to be professionals with graduate degrees and reasonably high incomes. Many of the borrowers who have the greatest difficulty repaying their loans never earned a college degree and thus did not see substantial financial benefits from their investment.

What can be done?

As a researcher of student financial aid, my concern is that policymakers might throw the proverbial baby out with the bathwater and get rid of the entire income-driven repayment system.

In my view, a better way to stop borrowers with $100,000 in debt from getting most of the benefits is to limit the amount forgiven. This can be done by capping the amount of loans that can be repaid through income-based repayment or extending the repayment term.

President Obama proposed limiting Public Service Loan Forgiveness to the first $57,500 in loans, although this did not pass Congress. His administration also implemented a program that required graduate students to pay for five more years than undergraduate students.

The savings from requiring higher-income borrowers with large loans to repay more of their loans can then be used to help the most vulnerable borrowers. Students who dropped out of college after a semester or two could see their debt forgiven more quickly and without having to pay additional income taxes. This may be a tough political sell, but this could also encourage students – especially those who are the first in their families to attend college – to give college a shot.

Some of the money could also be used to support larger Pell Grants to reduce the need for borrowing in the first place. Cutting the total amount of loans forgiven in half would allow for an increase of about 20%, or $1,200 per year, in the maximum Pell Grant, which is $6,195 for the 2019-2020 academic year. This would help cover much of the tuition increases over the last decade and reduce student loan debt.

How Much Money Should Students Borrow for College?

Well-known personal finance personality Dave Ramsey apparently tweeted out something about paying for college yesterday. When I went to click on the link, I got the following notice from Twitter.

As far as I am aware, this is the first time that someone has blocked me on Twitter (I only use the blocking function for likely Russian bots and people who have made racist or sexist statements against people I know). And I’m pretty sure I know the reason why Ramsey blocked me—this interview that I did with Money magazine last spring in which I noted that his advice to avoid all college debt is a generally bad idea for students. Limiting ridiculous credit card debt and having a plan to pay off debt eventually are sound recommendations, but delaying the labor market benefits of a college credential to work your way through debt-free just doesn’t make long-term sense for most people. (And research shows that borrowing for college can improve student outcomes.)

On the other hand, students also should be reasonable about how much they borrow for college. While I was pulling up the Money magazine link for the previous paragraph, I noticed that their feature piece today is on someone with $185,000 in student loan debt and who is struggling to make minimum payments. There are key details missing in the piece, such as how much of the debt is for graduate school, the person’s income, and how much interest has capitalized, but this is certainly a cause for concern absent additional information (which seems to be missing from many of these pieces).

So this brings me to a question that I get asked quite a bit: how much should students borrow for college? To me, the correct answer is generally “it depends”—but most people don’t like that classic answer from a tenured professor. This leads me to specify some basic ground rules that students and their families should consider before signing that Master Promissory Note.

For undergraduate students: I am generally not concerned if students take out the maximum amount in federal student loans in their own name while in college. Younger (dependent) students can typically take out up to $31,000 in federal loans, while independent students can take out up to $57,500. These loans have generous income-driven repayment options that reduce payments if college doesn’t work out financially for a student. (Any forgiven balance outside of Public Service Loan Forgiveness may be taxed, but my guess is that Congress patches that fix on an annual basis going forward.)

Beyond that amount, students and their families may be able to get Parent PLUS or private loans, which generally require a co-signer and varied levels of creditworthiness in order to qualify. Parent PLUS loans scare me (as I talked about last fall with NPR), as they require many parents to pay loans into their retirement and have much lower credit standards than private loans. Students and their families need to have long and hard conversations about borrowing beyond the federal student loan limit to see if parents or co-signers can afford to repay those loans and the student’s likely ability to help parents repay those debts.

For graduate students: Most six-figure student debt burdens are from graduate school, since students can borrow up to the full cost of attendance in their own name through the Grad PLUS program and many of these programs tend to be expensive. New program-level College Scorecard data show that a large number of master’s and professional doctorate programs graduate students with more than $100,000 in debt. And I can speak to this personally as my wife and I are down to the final year of payments on her $110,000 in law school debt.

Income-driven repayment plans and PSLF extend to all graduate debt through the federal government, so there is some protection against low earnings after attending graduate school. However, unless a student is sure that he or she is going to be in a public service field and receive PSLF, it is important to keep loan balances in mind. Income-driven repayment plans require 20 years of payments instead of the ten years under PSLF, and this requires committing ten percent of your income over 150% of the poverty line for much of your prime earning years. Sit down with your family and try to get a handle on expected future earnings (program-level earnings data will come out this fall) and other expenses such as childcare and housing and see what is affordable. $100,000 in debt is extremely manageable for a two-income household making $150,000 per year, but much harder for a single adult making $60,000 per year.

The right answer for how much a student should borrow for college depends quite a bit on individual circumstances, but in general the modest federal loan limits for undergraduate students are manageable for most graduates with the help of income-driven repayment programs. Dave Ramsey may be an influential voice in the personal finance world, but following all of his advice on paying for college is likely to be a losing proposition for many students.

Which Strings Will States Attach to Free College Programs?

There is plenty of uncertainty about exactly how the upcoming midterm elections (enough nasty campaign ads already, everyone!) will shake out at the state and federal levels. Regardless of the outcomes, the idea of tuition-free college will continue to be discussed across both conservative and liberal states. But one thing is becoming clear: states are exploring a range of restrictions as they begin to adopt programs. In this post, I discuss some of the restrictions in today’s programs (see this Education Trust report for a more thorough treatment from an advocacy perspective) and some of the restrictions that I would not be surprised to see going forward.

Currently, there are four types of restrictions that exist across many current and proposed programs. The first one is the type of institution that students can attend. Most tuition-free college programs cover community colleges only due to the higher price tag of covering four-year colleges. (New York’s Excelsior program skirts this somewhat by not covering fees, which are substantial in the state.)

The second restriction is based on family income, since the last-dollar nature of tuition-free college programs means that programs become much more expensive up the income distribution. New Jersey’s new program, which covers tuition and fees at 13 of the state’s 19 community colleges, set an income cutoff of $45,000 per year to stretch limited state funds. But the state set up an income cap that low to allow for two other common restrictions (the age of the student and enrollment intensity) not to apply there. Other states, however, limit their programs to full-time students straight out of high school (and this is also common for standard grant aid programs).

Two other restrictions have popped up in a small number of states, and I would not be surprised to see them expand to other states that are considering tuition-free college programs. The programs in New York and Rhode Island require students to stay in state after college for a number of years or the grant converts into a loan (the dreaded “groan” in financial aid lingo). A few other states, such as Kentucky, have discussed limiting tuition-free programs to certain high-demand majors to better meet state workforce needs. This is similar to how some states provide additional money in their performance-based funding systems for each STEM major who graduates.

The intersection of the power of the phrase “free college” and concerns about the state’s return on investment is likely to result in even more restrictions appearing in states’ new programs. West Virginia saw a proposed program pass the state Senate (but see no action in the House) in 2018 that would have included both a residency requirement and a drug test requirement—something that does not apply to other types of financial aid the state gives. Students would have had to pay for the drug test, which would have kept down the price tag.

While I was on a panel on free college at the Brookings Institution earlier this fall, one idea came to my mind during the discussion. I said that I would not be surprised to see legislators propose that free college come with a clawback provision that pulls the money back if a student does not graduate within a certain number of years. This would be an incredibly painful provision for students who do not finish college for a variety of reasons, but it would be popular among budget hawks. States are also likely to set high initial academic requirements in the future (such as high school grades and ACT/SAT scores), essentially turning existing merit aid programs into new “free college” programs.

The 2019 legislative season is likely to bring dozens of free college proposals of various types across states, even as higher education policy gridlock remains likely in Washington. My request for states is that they be open to having their programs, particularly those with new restrictions, be evaluated by researchers so they can be improved going forward as needed.

New Experimental Evidence on the Effectiveness of Need-Based Financial Aid

My first experience doing higher education research began in the spring 2008, when I (then a graduate student in economics) responded to an e-mail from an education professor at the University of Wisconsin who was looking for students to help her with an interesting new study. Sara Goldrick-Rab was co-leading an evaluation of the Wisconsin Scholars Grant (WSG)—a rare case of need-based financial aid being given to students from low-income families via random assignment. Over the past decade, the Wisconsin Hope Lab team published articles on the effectiveness of the WSG in improving on-time graduation rates among university students and on changing students’ work patterns.

A decade later, we were able to conduct a follow-up study to examine the outcomes of treatment and control group students who started college between 2008 and 2011. This sort of long-term analysis of financial aid programs has rarely been conducted—and the two best existing evaluations (of the Cal Grant and the West Virginia PROMISE program) are on programs with substantial merit-based components. Eligibility for the WSG was solely based on financial need (conditional on being a first-time, full-time student), providing the first long-term experimental evaluation of a need-based program.

Along with longtime collaborators from our days in Wisconsin (Drew Anderson of the RAND Corporation, Katharine Broton of the University of Iowa, and Sara Goldrick-Rab of Temple University), I am pleased to announce the release of our new working paper on the long-term effects of the WSG to kick off the opening of the new Hope Center for College, Community and Justice at Temple University. We found some evidence that students who began at four-year colleges who were assigned to receive the WSG had improved academic outcomes. The positive impacts on degree completion for the initial cohort of students in 2008 did fade out over a period of up to nine years, but the grant still helped students complete their degrees more quickly than the comparison group. Additionally, there was a positive impact on six-year graduation rates in later cohorts, with treatment students in the 2011 cohort being 5.4 percentage points more likely to graduate than the control group.

The grant generated clear increases in the percentage of students who both declared and completed STEM majors, even though the grant made no mentions whatsoever of STEM and had no major requirements. A second new paper by Katharine Broton and David Monaghan of Shippensburg University found that university students assigned to treatment were eight percentage points more likely to declare a STEM major, while our paper estimated a 3.6 percentage point increase in the likelihood of graduating with a STEM major. This strongly suggests that additional need-based financial aid can free students to pursue a wider range of majors, including ones that may require more expensive textbooks and additional hours spent in laboratory sessions.

However, the WSG did not generate across-the-board positive impacts. Impacts on persistence, degree completion, and transfer for students who began at two-year colleges were generally null, which could be due to the smaller size of the grant ($1,800 per year at two-year colleges versus $3,500 at four-year colleges) or the rather unusual population of first-time, full-time students attending mainly transfer-focused two-year colleges. We also found no effects of the grant on graduate school enrollment among students who started at four-year colleges, although this trend is worth re-examining in the future as people may choose to enroll after several years of work experience.

It has been an absolute delight to reunite with my longstanding group of colleagues to conduct this long-term evaluation of the WSG. We welcome any comments on our working paper and look forward to continuing our work in this area through the Hope Center.

Trends in Zero EFC Receipt

In my third blog post using newly-released data from the 2015-16 National Postsecondary Student Aid Study (NPSAS), I turn my attention away from graduate and professional students and toward undergraduate students. Here, I update a 2015 article that I wrote for the Journal of Student Financial Aid examining trends in the share and types of students who have an expected family contribution of zero—the students who have the least financial ability to pay for college and thus qualify for the maximum Pell Grant.

Using the handy TrendStats tool on the National Center for Education Statistics’s DataLab website, I looked at six NPSAS waves from the 1995-96 to 2015-16 and pulled data for all students and then by student and institutional characteristics. The full spreadsheet can be downloaded here (including data by gender and age that I do not cover in this post), and I go through some of the highlights below.

Overall, the percentage of students with a zero EFC has steadily increased every four years since the 1999-2000 academic year in spite of ebbs and flows in the economy. Part of this is likely due to changes in the rules of who automatically qualifies for a zero EFC based on family income and means-tested benefit receipt (currently, the income limit is $25,000 per year), but increased student diversity in American higher education also plays a role. The percentages in each year are as follows:

1995-96: 18.6%

1999-2000: 17.7%

2003-04: 20.7%

2007-08: 25.4%

2011-12: 37.9%

2015-16: 39.1%

There are stark differences in the percentage of students with a zero EFC by dependency status that have grown larger over time. Independent students with dependents of their own have always been the most likely to have a zero EFC, especially because childcare obligations often limit work hours (resulting in a lower household income). The percentage of students in this category with a zero EFC remained between 35 and 40 percent through 2007-08 before spiking to 61% in 2011-12 and 67.3% in 2015-16. Dependents and independent students with no dependents had generally similar zero EFC rates in the teens through 2003-04, but then independent students started to qualify for zero EFCs at much higher rates. By 2015-16, the gap grew to 18 percentage points (42.2% versus 24.2%).

Turning next to institutional type, for-profit colleges (which tend to enroll more independent students with families of their own) have traditionally had higher zero EFC rates than other sectors. 62.2% of students at for-profits had a zero EFC in 2015-16, up from 56.8% in the last NPSAS wave and around 40% before the Great Recession. In the 1990s, community colleges, public 4-year colleges, and private nonprofit 4-year colleges all had zero EFC rates of around 15%. Community colleges’ rates passed 40% in 2011-12, while four-year public and nonprofit colleges’ rates exceeded 30% in 2015-16. Notably, the percentage of zero EFC students at four-year private nonprofit colleges jumped from 25.7% to 30.5% in this NPSAS wave, a much larger increase than among public 4-year colleges.

Readers of my last two blog posts should not be terribly surprised to see that African-American students have been the most likely to have a zero EFC across the last six NPSAS administrations, although there was a slight decrease between 2011-12 and 2015-16 (60.0% to 58.2%). American Indian/Alaska Native students had the next highest zero EFC percentage (51.2%), followed by Hispanic/Latino students (47.6%), Asian students (39.2%), and white students (29.8%). Multiracial students saw an increase in zero EFC rates from 39.1% to 41.8%, but this group is not shown in the chart due to changes in how the Department of Education has classified race and ethnicity over time.

Finally, I examine zero EFC receipt trends by parental education—beginning in the 1999-2000 academic year due to changes in the survey question following the 1995-96 NPSAS. There is a clear relationship between parental education and zero EFC rates, with more than half of all students whose parents never attended college having a zero EFC in 2015-16 and progressively lower rates for students with highly-educated parents. However, two trends stand out among non-first-generation students. The largest increase in zero EFC rates by parental education in the last two NPSAS waves was among families with some college experience or an associate degree (rising from 37.9% to 42.6%). Meanwhile, even among students who had at least one parent with a graduate degree, 27.5% still qualified for a zero EFC.

Readers, if there are any pieces of the new NPSAS data that you would like me to examine in a future blog post, leave me a note in the comments section or send me a tweet. I’m happy to dig into other pieces of the dataset!

The Potential Role of States in Setting Living Allowance Estimates

For most American college students, the non-tuition portions of the cost of attendance (room and board, books and supplies, and a miscellaneous expenses category) are larger than tuition and fees. Colleges can set these estimates as they deem fit, and previous research by me, Sara Goldrick-Rab of Temple University, and Braden Hosch of Stony Brook University shows a large amount of variation in living allowances among colleges in the same geographic area. This means that similar students can access different amounts of financial aid—and that colleges with the same tuition price can look much different in a range of accountability measures.

As the U.S. Department of Education currently does not provide guidance for colleges in setting these allowances (and Higher Education Act reauthorization looks increasingly unlikely in 2018), it is worth exploring whether states should step in and provide some assistance for their public colleges and universities. In the two blog posts below, I teamed up with David Tandberg of the State Higher Executive Officers Association and Sarah Pingel of Education Commission of the States to further examine the topic.

Detailed post (with data on variations within and across states)

Summary post

We would love to hear your thoughts on this issue, so send them along!

Key Takeaways from the House Higher Education Act Reauthorization Bill

Majority Republicans on the U.S. House Committee on Education and the Workforce unveiled their draft legislation today to reauthorize the Higher Education Act—the most important piece of legislation affecting American higher education. The Promoting Real Opportunity, Success, and Prosperity through Education Reform (PROSPER) Act checks in at a hefty 542 pages and touches many important aspects of higher education. I live-tweeted my first read through the bill (read the thread here), and in this blog post I am sharing some thoughts on the key themes of the legislation.

Takeaway 1: This bill would undo many Obama-era regulations and salt the earth on future regulations. It’s no secret that Republicans didn’t care for regulations such as gainful employment, borrower defense to repayment, or providing a federal definition of the credit hour. The PROSPER Act would not only undo the regulations, but prohibit the Secretary of Education from promulgating any future regulations (meaning that Congress would have to pass legislation to create any new rules). The Secretary of Education would also be prohibited from creating a federal college ratings system, even though the Obama-era effort to do so was unsuccessful.

Takeaway 2: The federal student loan system would be radically overhauled. Instead of the array of loans that are now available, there would be three flavors of a federal ONE Loan—for undergraduates, parents, and graduate students. The key details are below.

	Undergrad (dependent)	Undergrad (independent)	Parent	Grad student
Annual limit (current)	$5,500-$7,500	$9,500-$12,500	Cost of attendance	Cost of attendance
Annual limit (PROSPER)	$7,500-$11,500	$11,500-$14,500	$12,500	$28,500
Lifetime limit (current)	$31,000	$57,500	Cost of attendance	Cost of attendance
Lifetime limit (PROSPER)	$39,000	$60,250	$56,250	$150,000

Note: Medical students have higher loan limits than what is listed above.

Undergraduate students actually have higher loan limits, but the PROSPER Act would also allow colleges to limit borrowing by student major if they feel students are unlikely to repay their obligations. Financial aid administrators have sought this authority for years, which means that students could actually see lower loan limits. Graduate students, on the other hand, would be limited to $28,500 per year and $150,000 overall in federal loans. Given that tuition alone often exceeds this number, expect students to turn to the private market (when possible) to finance their education.

The PROSPER Act also drastically changes income-driven repayment programs. Instead of the range of programs available now, future borrowers could choose between the standard ten-year payment plan or an income-driven plan that would allow them to pay 15% of their discretionary income (over 150% of the federal poverty line) for as long as necessary to repay the loan. There would be no ending date to payments, and payments for married couples would be based on both spouses’ incomes even if they file their taxes separately. (Both of these provisions differ from current law.) The Public Service Loan Forgiveness program, which was only mentioned once in passing in the entire bill, would also end. However, people in the program now would be grandfathered in.

Takeaway 3: Colleges would be held accountable for their outcomes in new ways. The cohort default rate metric (which I’m no fan of) would be replaced by a repayment rate metric. If a program (not a college) had more than 45% of its borrowers at least 90 days delinquent or in certain types of deferment for three consecutive years, it would lose access to all federal financial aid. This is a more generous definition of repayment for colleges than the College Scorecard’s definition (repaying at least $1 in principal), so I can’t say how many colleges would actually be affected.

Another interesting piece is that colleges would have to repay at least a portion of federal financial aid dollars given to students who left college during a semester. Right now, colleges can try to claw back those funds, but this proposal would limit colleges to trying to collect 10% of the amount owed back from students. This is similar to what Matt Chingos and Kristin Blagg have proposed in a policy brief.

There are so many other interesting points in this legislation, but I think these are the three most important ones that I can speak to based on my experience and research. Keep in mind that the Senate will also introduce a Higher Education Act reauthorization bill sometime in 2018, and that the two bills may differ significantly from each other.

Not-so-Free College and the Disappointment Effect

One of the most appealing aspects of tuition-free higher education proposals is that they convey a simple message about higher education affordability. Although students will need to come up with a substantial amount of money to cover textbooks, fees, and living expenses, one key expense will be covered if students hold up their end of the bargain. That is why the results of existing private-sector college promise programs are generally promising, as shown in this policy brief that I wrote for my friends at the Midwestern Higher Education Compact.

But free college programs in the public sector often come with a key limitation—the amount of money that the state has to fund the program in a given year. Tennessee largely avoided this concern by endowing the Tennessee Promise program through lottery funds, and the program appears to be in good financial shape at this point. However, two other states are finding that available funds are insufficient to meet program demand.

Oregon will provide only $40 million of the $48 million needed to fund its nearly tuition-free community college program (which requires a $50 student copay). As a result, the state will eliminate grants to the 15% to 20% of students with the highest expected family contributions (a very rough proxy for ability to pay).
New York received 75,000 completed applications for its tuition-free public college program, yet still only expects to give out 23,000 scholarships. Some of this dropoff may be due to students attending other colleges, but other students are probably still counting on the money.

In both states, a number of students who expected to get state grant aid will not receive any money. While rationing of state aid dollars is nothing new (many states’ aid programs are first-come, first-served), advertising tuition-free college and then telling students they won’t receive grant aid close to the beginning of the academic year may have negative effects such as choosing not to attend college at all or diminished academic performance if they do attend. There is a sizable body of literature documenting the “disappointment effect” in other areas, but relatively little in financial aid. There is evidence that losing grant aid can hurt continuing students, yet this does not separate out the potential effect of not having money from the potential disappointment effect.

The Oregon and New York experiences provide for a great opportunity to test the disappointment effect. Both states could compare students who applied for but did not receive the grant in 2017-18 to similar students in years prior to the free college programs. This would allow for a reasonably clean test of whether the disappointment effect had any implications for college choice and eventual persistence.