Borrower Defense to Repayment Regulations: The Obama Administration’s Greatest Higher Education Legacy?

President Obama famously said in 2014 that “I’ve got a pen, and I’ve got a phone.” Although he has used his pen to sign some substantial changes in federal higher education policy (such as ending the bank-based student loan program in favor of federal Direct Loans), his pen has been used more frequently to authorize the Department of Education to start implementing new regulations without going through Congress. The regulatory process has been used to expand income-driven repayment programs, implement gainful employment rules for students in select vocationally-oriented programs, and tie federal TEACH grants to some measure of teachers’ effectiveness. These efforts have been generally opposed by congressional Republicans, which have held a majority in at least one chamber of Congress since 2011.

But from the perspective of colleges, the newest set of regulations may end up being the most influential. The Department of Education recently unveiled the final regulations known as “borrower defense to repayment” in a response to concerns about colleges defrauding students or suddenly closing their doors. These wide-ranging regulations, which will take effect on July 1, 2017 (a summary is available here) allow individuals with student loans to get relief if there is a breach of contract or court decision affecting that college or if there is “a substantial misrepresentation by the school about the nature of the educational program, the nature of financial changes, or the employability of graduates.”

The language regarding “substantial misrepresentation” could have the largest impact for both for-profit and nonprofit colleges, as students will have six years to bring lawsuits if loans are made after July 1, 2017. Notably, this language treats intentional misrepresentation and honest errors in the same way, and also does not define what “substantial” is. For example, if a student enrolls in a program with a posted job placement rate of 98% and later finds out that college administrators e-mailed each other about how to hide a 48% placement rate, most courts would probably consider this to be substantial misrepresentation. But what if a well-meaning person accidentally transposed an 89% placement rate to get 98%? These errors do happen in data submitted to the federal government, and currently there is no penalty for this type of mistake.

As some have warned, the ambiguity of the language will likely open up the door for more lawsuits against colleges with a wide range of misrepresentations—particularly as the regulations allow for class-action lawsuits that colleges could previously restrict. Courts across the country vary considerably in their friendliness toward plaintiffs relative to defendants, meaning that colleges located in more plaintiff-friendly states such as California and Illinois may be more at risk of lawsuits than colleges in defendant-friendly states such as Delaware and Iowa. But even if a college can prevail in a lawsuit, it still has to pay its legal fees and also may be subject to bad publicity.

Although these new regulations are a clear and needed victory for students who attended undeniably fraudulent colleges, the ripple effects regarding the definition of “substantial” misrepresentation could affect a broad group of well-intending nonprofit colleges that either made honest mistakes or happened across a sympathetic judge or jury. Eventually, a series of court cases—perhaps in conjunction with additional federal guidance—should help settle the legal landscape, but in the meantime colleges will be watching these regulations with a great deal of anxiety.

The Price and Cost of College Are Different Things

As someone who spends a lot of time thinking about some of the wonkier issues of higher education finance, there are some common statements that just drive me nuts. For example, people who refer to the U.S. Department of Education as the “DOE” (it’s “ED” and the Department of Energy is “DOE”) or pronounce the FAFSA as “FASFA” might as well be screeching their fingernails on a chalkboard. But, as much as those things annoy me, they’re examples of inside baseball at their finest—they don’t affect students, but they’re still deviations from the norm. So I’ll try to hide my grimaces in those situations going forward.

However, I will say something every time someone erroneously refers to the cost of college when they truly mean the price of college, as these are two distinctly different concepts. Here are the definitions of the two terms:

Price: This represents how much money a student and/or their family has to pay for college.

Cost: This represents how much money it takes to provide an education.

With the presence of federal, state, and institutional financial aid as well as direct state appropriations to colleges, the price that many students pay can be far below the true cost of providing the education. On the other hand, due to the tangled web of subsidies present in the “awkward economics” of higher education, some students (such as full-freight international students and master’s students as well as those enrolled in large lecture classes) may be paying far more than it costs to provide their education.

From a policymaker’s perspective, it if far easier to propose bringing down the price of college than the cost of college—even though these proposals have large price tags and finding funding can be difficult. (An exception is so-called “last dollar” programs at community colleges, which often leverage other grant aid sources instead of using much of their own money.) Bending the cost curve is a far more difficult endeavor, as technology generally hasn’t done much to reduce costs (a promising master’s degree program at Georgia Tech notwithstanding) and other options such as increasing class sizes or spending less on facilities frequently run into opposition.

Efforts to bring down the price of college have become increasingly popular over the last several years, but they must be accompanied with a willingness to reduce costs in order for these programs to be financially feasible in the long run. To this point, cost control has remained a distant goal for most policymakers—a perfectly reasonable position given the shorter time horizons of most politicians. Bringing down prices today gets attention, while the crucial step of bringing down costs in the future is nowhere near as exciting.

Clinton’s New College Compact Plan Explained

This article was originally published on The Conversation.

Ahead of the Democratic National Convention – on July 5 – Hillary Clinton announced a set of new proposals on higher education. Key measures included eliminating college tuition for families with annual incomes under US$125,000 and a three-month moratorium on federal student loan payments.

Clinton’s original plan had called for the federal government and states to fund public colleges so students wouldn’t have to borrow to cover tuition if they worked at least 10 hours per week.

The revised higher education plan represents a clear leftward shift and is likely an effort to solidify her support among still-skeptical young supporters of Bernie Sanders.

As a researcher of higher education finance, my question is whether these proposals, estimated to cost $450 billion over the next 10 years, will benefit enough of the over 10 million college-going voters struggling to repay loans.

How student loan interest rates work

Typically, students pay interest rates set by Congress and the president on their federal student loans.

Over the last decade, interest rates for undergraduate students have fluctuated between 3.4 percent and 6.8 percent. Rates for federal PLUS loans have ranged from 6.3 percent to 8.5 percent. Federal PLUS loans require a credit check and are often cosigned by a parent or spouse. Federal student loans do not have those requirements.

While students pay this high a rate of interest, rates on 15-year mortgages are currently below three percent.

Several private companies have entered the student loan market.
Application form image via www.shutterstock.com

It is also important to note the role of private loan companies that have recently entered this market. In the last several years, private companies such as CommonBond, Earnest and SoFi as well as traditional banks have offered to refinance select students’ loans at interest rates that range from two percent to eight percent based on a student’s earnings and their credit history.

However, unlike federal loans (which are available to nearly everyone attending colleges participating in the federal financial aid programs), private companies limit refinancing to students who have already graduated from college, have a job and earn a high income relative to the monthly loan payments.

Analysts have estimated that $150 billion of the federal government’s $1.25 trillion student loan portfolio – or more than 10 percent of all loan dollars – is likely eligible for refinancing through the private market – much of it likely for graduate school.

Many Democrats, such as Senator Elizabeth Warren of Massachusetts, have pushed for all students to receive lower interest rates on their federal loans for years. Republican nominee Donald Trump too has questioned why the federal government profits on student loans – although whether the government actually profits is less clear.

Issues with refinancing of loans

Interest rates on student loans were far higher five to 10 years ago (ranging from 6.8 percent to 8.5 percent based on the type of loan). Allowing students to refinance at current rates ranging from 3.76 percent to 6.31 percent would mean that some students could possibly lower their monthly payments.

But the question is, how many students will benefit from the refinance?

Struggling borrowers are likely the ones with least debt.
Robert Galbraith/Reuters

Students with the most debt are typically college graduates and are the least likely to struggle to repay their loans. In addition, they can often refinance through the private market at rates comparable to what the federal government would offer.

Struggling borrowers, on the other hand, already have a range of income-driven repayment options through the federal government that can help them manage their loans. Some of their loans could also be forgiven after 10 to 25 years of payments.

Furthermore, the majority of the growth in federal student loans is now in income-driven plans, making refinancing far less beneficial than it would have been 10 years ago. Under income-driven plans, monthly payments are not tied to interest rates.

So, on the face of it, allowing students to refinance federal loans would appear to be beneficial. But, in reality, because of the growth of private refinancing for higher-income students and the availability of income-driven plans for lower-income students, relatively few students would likely benefit.

Why implementing a moratorium will be hard

On the proposed three-month moratorium, Clinton has said she could proceed on it via executive action as soon as she takes office – potentially making it the most important part of her plan.

During these three months, the Department of Education and companies servicing student loans would reach out to borrowers to help them enroll in income-driven plans that would reduce monthly payments.

So, would a moratorium on student loan payments help struggling borrowers?

The challenge is that reaching out to each and every one of the estimated 41.7 million students with federal student loans in a three-month period would be a Herculean task given the Department of Education’s available resources.

Currently, about one-fifth of the federal government’s student loan portfolio, or $260 billion is in deferment or forbearance, meaning that students are deferring payments until later.

To put this another way, about 3.5 million loans are at least 30 days behind on payments, and eight million loans are in default. This could mean that those students haven’t made a payment in at least a year.

Just trying to contact 3.5 million students in a three-month window would be a difficult proposition, let alone contacting the millions of additional students who are putting off payments until later.

Currently eight million loans are in default.
Andrew Burton/Reuters

There are also other issues that Department of Education staffers and loan servicers must deal with that may be more important than an overall repayment moratorium.

Nearly 60 percent of students who were enrolled in income-driven repayment plans fail to file the annual paperwork. That paperwork is necessary if students are to stay in those programs. And failure to do so results in many students facing higher monthly payments.

Focus needed on most in need students

In my view, Clinton’s proposals of allowing students to refinance their loans at lower rates through the federal government and a three-month moratorium on payments are unlikely to benefit that many students.

Hopefully, the Clinton campaign will focus later versions of the proposal on borrowers most in need of assistance. If not, this could present an opportunity for the Trump campaign to release a coherent higher education agenda.

The Conversation

Proposed Student Finance Regulations May Hamper Small Institutions

This post originally appeared on the Brookings Institution’s Brown Center Chalkboard blog.

In June, the U.S. Department of Education released a 530-page set of proposed regulations on the topic of ‘defense to repayment.’ Although this sounds like an obscure topic (and reading the document is no picnic!), these proposed rules, if adopted, could allow students to be able to have their student loan debt forgiven if colleges misrepresented themselves to students. The Department of Education is currently working through this process for former Corinthian Colleges students, and tens of thousands more students could be eligible under the proposed rules.

Although forgiving student loans has the potential to benefit many financially struggling students, this will likely come at a significant cost to taxpayers. The official cost estimate of the proposed rules is between $199 million and $4.23 billion, which reflects both the number of colleges expected to be subject to the regulations and the large amount of uncertainty in the final number of students affected. To guard taxpayer dollars, the Department of Education is also proposing increasing the number of reasons for which colleges will have to post letters of credit—bonds that the federal government can keep if a college closes in order to compensate former students.

Currently, colleges have to post a letter of credit if they have a low financial responsibility score or if there are serious governance or fraud concerns. But these proposed rules would extend posting letters of credit to private nonprofit and for-profit colleges that have “significant fluctuations” in their Pell Grant and student loan awards, with the definition of “significant” left to the Department of Education to determine. However, on page 358 of the proposed rules, the Department of Education noted that 991 of 3,590 private nonprofit and for-profit colleges had a change in student loan volume of 25% or more between the 2013-14 and 2014-15 academic year. I use this 25% change as a guide in this analysis, as well as looking at the changes in dollar values.

I used data from the Office of Federal Student Aid’s Title IV volume reports to look at the number of colleges with large changes in their Pell Grant and student loan awards between 2013-14 and 2014-15, with my sample consisting of 3,575 colleges that received Pell Grant and/or student loan dollars in both years.1 Of these colleges, 1,088 (30%) had at least a 25% change in Pell Grant or student loan dollars during this period. Much of this rate is driven by for-profit colleges, of which 43% saw large changes; just 15% of nonprofit colleges had similar changes.

The tendency of for-profit colleges to have larger percentage changes in both Pell Grant and student loan awards can be seen in the below two charts, with the two red vertical lines representing changes of -25% and 25% between 2013-14 and 2014-15. It is also worth noting that the typical for-profit college saw a sizable decline in both types of aid, while the typical nonprofit college had little to no change in aid. This can be attributed to the rapid decline in enrollment at for-profit colleges over the past several years.

defrepay_fig1

defrepay_fig2

The drawback of using a metric based on the percent change in aid awarded is that very small institutions can have large percentage changes with relatively small dollar changes. The next two charts show that the vast majority of colleges with changes above 25% had relatively small amounts of federal aid in 2013-14. The median college with a change that could subject them to a letter of credit had about $250,000 in Pell Grant revenue or $550,000 in student loan revenue, which explains all of the dots right along the axis in the charts.

defrepay_fig3defrepay_fig4

There were a small number of colleges with both sizable amounts of federal student aid in 2013-14 and large changes between 2013-14 and 2014-15. Ten colleges had more than $10 million in Pell Grants and a 25% change the following year, of which only two (nonprofit Southern New Hampshire University and for-profit United Education Institute) had gains. The eight colleges with large losses in Pell awards were all for-profits, and seven are now closed or under new ownership. The only one that is still open is Fortis College, which saw a 39% drop in Pell awards in just one year.

Colleges with large changes in Pell Grant awards, 2013-14 to 2014-15
Name For-profit? 2013-14 Pell ($mil) 2014-15 change (pct) Now closed?
Southern New Hampshire U. No 31.5 +77.2 No
United Education Institute (UEI) Yes 10.6 50.4 No
Florida Career College Yes 22.7 -25.3 Yes
Sanford-Brown College Yes 13.1 -33.0 Yes
Heald College Yes 66.9 -34.1 Yes
Fortis College Yes 12.6 -38.9 No
Everest University Yes 169.0 -39.8 New owner
Wyotech Yes 10.3 -41.1 New owner
Drake College of Business Yes 12.3 -41.2 Yes
Anthem College Yes 11.8 -91.6 Yes

 

Six colleges with more than $100 million in student loans in 2013-14 had changes of more than 25% in 2014-15, with just one college (for-profit Ultimate Medical Academy) seeing an increase of at least 25%. Of the five colleges with large declines, for-profits Everest University (now under new ownership) and Heald College (now closed) show up again, while nonprofits Loma Linda University, Webster University, and Southern New Hampshire University had large declines. SNHU is particularly interesting, as it saw a 77.2% increase in Pell dollars at the same time it saw a 43% drop in student loan dollars.

Colleges with large changes in student loans, 2013-14 to 2014-15
Name For-profit? 2013-14 loans ($mil) 2014-15 change (pct) Now closed?
Ultimate Medical Academy Yes 100.9 28.7 No
Webster University No 159.4 -36.0 No
Loma Linda University No 143.6 -36.0 No
Southern New Hampshire University No 346.1 -42.7 No
Everest University Yes 317.1 -50.1 New owner
Heald College Yes 150.5 -59.4 Yes

 

If the Department of Education sticks to the percentage change metric for examining which colleges should post letters of credit, the smallest colleges will be disproportionately affected. Meanwhile, the University of Phoenix, which received over $2.6 billion in Pell and loan revenue with declines of between 15% and 20% in both categories, would not face additional scrutiny even though more students would be affected by any changes. And by extension, more taxpayers would be liable in the case of a bailout of these students. As being unable to obtain a letter of credit may cause some colleges to close, the federal government should potentially consider a sliding scale based on a combination of initial enrollment or federal financial aid volume for considering percentage changes in aid received.

1 I was unable to perfectly match the number of colleges the Department of Education had in its analysis using publicly available data from the Office of Federal Student Aid. This likely leads me to slightly understate the number of colleges that could be affected, as the colleges not in my dataset are probably quite small or had stopped participating in federal financial aid programs during the period of analysis.

Why I Support the File Once FAFSA Act

This year will mark the biggest change to the federal financial aid process in quite a few years, with students being able to file the Free Application for Federal Student Aid (FAFSA) for the 2017-18 academic year on October 1, 2016 instead of January 1, 2017 using 2015 tax data. This change, known as prior prior year (PPY) or early FAFSA, has the potential to give more students information about their federal financial aid eligibility around when they are applying to colleges. My research on the topic (thanks to the generous support and assistance of my friends at the National Association of Student Financial Aid Administrators) found that most students will see similar Pell Grant awards under PPY than under the current system, which helped alleviate concerns about what PPY would mean for both the federal budget and financial aid offices. However, I remain concerned that colleges will not notify students of institutional aid earlier than under current rules due to concerns about their financial aid budgets.

While prior prior year is a step in the right direction for students and their families, there really isn’t a good reason why many students have to fill out the FAFSA every year. While the U.S. Department of Education claims that it takes the average student 21 minutes to file the FAFSA, this number is undoubtedly higher for students with more complex family situations or students whose parents struggle to navigate the form due to limited English proficiency or the FAFSA’s complicated instructions. As a result, an estimated 10% of Pell-eligible students who remained enrolled in college fail to refile the FAFSA.

In 2013, I wrote a piece in The Chronicle of Higher Education with Sara Goldrick-Rab (now at Temple University) titled “Change FAFSA Now.” In that piece, we argued for one-time FAFSA filing to reduce the burden on both students and the U.S. Department of Education. Today, I am happy to see a piece of legislation called the File Once FAFSA Act of 2016, introduced by Rep. Bobby Scott (D-VA), that would allow dependent Pell Grant-eligible students to file the FAFSA just once as long as they remain dependents. (Students with large changes in family income could get their expected family contribution (EFC) changed by talking with their financial aid office.)

While I am pleased to support the legislation, I would like to see two additional groups of students become eligible for a one-time FAFSA. The first group is those students who file the FAFSA just to receive a federal unsubsidized loan. All students attending participating colleges can receive these loans regardless of financial need, so making students repeatedly file the FAFSA just to get these loans makes little sense. This would be particularly beneficial for graduate students, who can no longer receive any federal subsidized loans.

The second group of students who should become eligible is independent students with dependents of their own. In the 2011-12 academic year, 61% of students in this category had an EFC of zero—reflecting a large amount of financial need. This compares to just 24% of dependent students having a zero EFC. Moreover, in a 2015 article, I showed that over 98% of independent students without dependents who had a zero EFC one year and refiled the FAFSA two years later received a Pell Grant that year. Therefore, extending the one-time FAFSA to this category of students make sense.

The idea of a one-time FAFSA should garner bipartisan support, as evidenced by a similar idea being a part of former Republican presidential candidate Jeb Bush’s higher education proposal. I welcome and support Rep. Scott’s proposal as a first step to helping more students whose family circumstances don’t change much while they are in college spend time doing something more productive than completing the FAFSA.

Examining Trends in Pell Grant Award Data

The U.S. Department of Education recently released its annual report on the federal Pell Grant program, which provides detailed information about the program’s finances and who is receiving grants. The most recent report includes data from the 2014-15 academic year, and I summarize the data and trends over the last two decades in this post. (Very preliminary data on Pell receipt for the first three quarters of the 2015-16 academic year can be found in the Title IV program volume reports on the Office of Federal Student Aid’s website.)

For the third year in a row, the number of Pell recipients fell, going from a peak of 9.44 million students in 2011-12 to 8.32 million in 2014-15 (a 12% decrease). This drop in recipients is almost entirely due to students who are considered independent for financial aid purposes (typically students who are at least 24 years of age, are married, or have a child). The number of independent Pell recipients fell by 18% in the last three years (to 4.56 million), while the number of dependent Pell recipients fell by just 2.7% (to 3.75 million), as shown in the chart below. However, independent students still make up the majority of Pell recipients, as they have every year since 1993.

pell2016_fig1

There has been an even larger drop in the number of students with zero expected family contribution, who automatically qualify for the maximum Pell Grant. (For more on these students, check out this article I wrote in the Journal of Student Financial Aid last year.) Nearly 900,000 fewer students received a zero EFC since 2011-12, with decreases of 9% among dependent students and 17% among independent students.

pell2016_fig2

In the next chart, I show the number of students receiving Pell Grants by sector since 1993. The number of Pell recipients dropped by almost 225,000 students at community colleges and 230,000 students at for-profit colleges between 2013-14 and 2014-15, while Pell enrollment at both public four-year and private nonprofit colleges increased by about 55,000 students each. Since 2011-12, community college Pell enrollment is down by 17% and for-profit Pell enrollment is down 26%, while other sectors are basically flat. These trends fit well with economic conditions, as more vocationally-oriented colleges see enrollment spikes during recessions and sizable drops during better times (like today).

pell2016_fig3

Expenditures for the Pell Grant program declined for a fourth consecutive year, going from $35.7 billion (in nominal dollars) in 2010-11 to $30.6 billion in 2014-15. However, in inflation-adjusted dollars, Pell spending has still more than doubled since 2007-08.

pell2016_fig4

The large decrease in Pell expenditures led to a $7.8 billion surplus in the Pell program going forward, but Congress has plans to spend part of that surplus. A U.S. Senate subcommittee approved bringing back year-round Pell Grants (an idea with strong bipartisan support that would allow students to get Pell Grants for more than two full-time semesters per year) as well as transferring some of the funding to the National Institutes of Health and K-12 education. But will Pell expenditures continue to drop? It’s possible if the economy continues to improve while parts of the for-profit college sector continue to collapse, but the trend toward a more economically diverse group of young adults will likely increase Pell enrollment in future years.

Who Exactly is a “Hard Working” Student?

Most people don’t like giving money to slackers. After all, people who work hard for their money don’t want to hand it over to people who aren’t working so hard—a very reasonable position to take. But the challenge is defining what “hard working” actually means, particularly as individuals’ definitions may differ and it is generally difficult or expensive to observe someone’s effort level. (I’m not the only academic to note this challenge.) A classic example of struggling to define hard work comes from the welfare reform debates of the 1980s and 1990s (which eventually resulted in major welfare reform in 1996) and has clear linkages to higher education debates.

Similar to the famous “welfare queen” example that Ronald Reagan first used in 1976 of a woman who defrauded the federal welfare system, there have been concerns about “Pell runners”—people who go from college to college in an effort to defraud taxpayers instead of get an education—for years. While the U.S. Department of Education estimates that 2.5% of Pell dollars are improperly spent (either due to fraud or errors by the college or the federal government), there are concerns that students are not putting in sufficient effort to get support from the federal government. In 2011, then-Representative Denny Rehberg (R-MT) called the Pell program “the welfare of the 21st century,” a concern shared by some who point to the billions of dollars each year going to students who do not graduate (although barriers to graduation may include family or financial issues in addition to academic success or work ethic).

Politicians supporting increased funding for financially needy students have taken great care to explain how their plan helps “hard working” students in an effort to gain political support. For example, President Obama and the White House communications team have repeatedly referred to “hard working” students in describing the administration’s plans for tuition-free community college and other proposals for reform. Obama’s tuition-free community college proposal defines “hard working” as having a 2.5 GPA, enrolled half-time, and making satisfactory progress toward a degree. These requirements are tighter than the Pell Grant’s rules, which require a 2.0 GPA and satisfactory academic progress with no enrollment intensity requirement. Last week, two Democrats on the House Education and the Workforce Committee referred to current Pell recipients as “hard working” in their appeal to use a $7.8 billion surplus in the Pell program to increase awards to current students.

As in most cases in life, it’s worth reading the fine print to see exactly who politicians, advocates, or others consider to be “hard working” students. The term sounds really good, but be wary of people defining the term in such a way that it aligns with their political priorities. I don’t have a perfect definition of what it means to be hard working in college, so I would love your suggestions in the comments section below.

Are Income Share Agreements a Good Way to Pay for College?

This article was originally published on The Conversation. Read the original article.

Millions of Americans are struggling to pay for college. Nearly 10 million students and their families took out almost $100 billion in student loans from the federal government in the 2014-15 academic year, pushing outstanding student loan debt to more than $1.2 trillion by the end of 2015.

The traditional way to repay student loans is to make the same monthly payment each month for 10-20 years, similar to how mortgages work. But this isn’t always the best setup for students, particularly as college doesn’t always pay off immediately in terms of increased earnings.

Newly released government data show that many students are having difficulty repaying their loans after leaving college. About 40 percent of students had not been able to pay any part of the principal within three years of entering repayment.

A new idea in paying for college in the United States is Income Share Agreements (ISAs), in which students agree to pay a percentage of their future income to a private company or lender in exchange for additional money to cover college expenses.

What is an income share agreement and is it a viable option for students?

ISA and past efforts

ISAs function similarly to certain types of federal loans, which allow students to tie their student loan payments to their income.

However, the amount that undergraduates can borrow under income-based repayment plans isn’t always enough to pay for college. The typical college student straight out of high school can borrow only $31,000 from the federal government for college with a current interest rate of 4.29 percent. This means many students may need to turn to expensive private loans as an alternative.

And here is where an ISA can help. Technically, ISAs are not loans since students don’t have to pay any money back if their earnings are not adequate. This means that if students don’t make money, they could pay back less than what they took out in loans. Instead of interest rates, lenders offer students contracts with the percentage of future earnings paid to the ISA provider and the time period based on a student’s major, year in school and amount borrowed.

ISAs have been in use in Latin America for more than a decade with providers such as Lumni financing the college educations of thousands of students. In the United States, there have been a few small efforts to introduce ISAs, but they have largely been unsuccessful.

In 2014, Senator Marco Rubio (R-Florida) and Congressman Tom Petri (R-Wisconsin) introduced legislation for an income share repayment option, with a similar bill introduced in 2015 by Representatives Todd Young (R-Indiana) and Jared Polis (D-Colorado). Lawmakers in Oregon too have been pushing a similar program called Pay it Forward. However, none of these attempts worked.

Purdue plan

More recently, in a first-of-its-kind development, Purdue University launched an Income Share Agreement plan “Back a Boiler” (originally “Bet on a Boiler”) program to help juniors and seniors pay for college. This name plays on Purdue’s mascot of the Boilermaker, a vehicle outfitted to look like the 19th-century steam engines that boilermakers built throughout the country, which fits the STEM-heavy university well.

Under the Purdue plan, students would be offered a contract that would specify, based on their major, what percentage of their earnings would be paid and for how many years. Students can receive money to cover any remaining financial need after grants and scholarships, with payment terms based on the total amount of money needed.

For example, a student majoring in biological engineering and expecting to graduate in 2018 would pay 3.32 percent of her income to Purdue for 96 months after graduation in exchange for $10,000 today, while an elementary education major would pay 4.97 percent of his income back for 116 months after graduation.

Students who make less than $20,000 per year will not need to pay anything back. Their maximum lifetime payment is capped at 2.5 times the initial amount of money provided.

One size does not fit all

Although some students could benefit from ISAs, they certainly aren’t for everyone.
So, who should consider income share agreements?

In my view, income share agreements make the most sense for three groups of students.

First, students in need of additional funds beyond federal loans should consider ISAs as a potential option. Second, since ISAs are technically not loans, they may appeal to students who are particularly averse to taking on debt to pay for college. Loan aversion is particularly common among minority and first-generation students. So a product that doesn’t come with fixed payments might benefit these students.

Finally, not all students can access federal loans. About one million students attend community colleges that do not participate in the federal student loan program. Federal loans also aren’t available for educational opportunities such as bar exam prep for law students or “boot camp” courses designed to teach students particular skills outside the traditional college setting.

ISAs might be particularly well-suited to these types of programs that are closely tied to employment.

Not for high-income earners

Who might not be the right fit?

Students who don’t need to borrow beyond the $31,000 in federal loans for a bachelor’s degree are better off with federal loans.

This is particularly true for students who plan to work in public service fields and could benefit from the federal government’s Public Service Loan Forgiveness program, that can forgive debt not repaid after 10 years. The terms for ISAs likely aren’t as favorable, as private lenders may offer students contracts of longer than 10 years in order to at least break even. The 40 percent of students unable to pay down the principal on their loans are unlikely to get terms as good as with federal loans.

Students who think they’ll make a lot of money after college may not want to consider the ISAs either. ISAs require students to pay a fixed percentage of their income. So, they can be an expensive proposition for students who do really well even if the terms are better than for other majors.

These students would be better off taking on federal and private loans and then consider joining the growing number of students who are getting their loans refinanced by a new generation of private lenders, who are willing to give borrowers with successful careers loans on lower interest.

In theory, ISAs have a market, but whether students take up this new product will determine its success.

The Conversation

Which Colleges’ Students Use Income-Driven Repayment Plans? We Don’t Know

The Obama Administration has made expanding access to income-driven repayment (IDR) plans for federal student loans a key part of its higher education policy agenda. The U.S. Department of Education now offers four different IDR plans, all of which allow former students to tie their payments to their income instead of the traditional system of fixed monthly payments. The newest plan, Revised Pay as You Earn (REPAYE), allows millions of students with federal loans to pay 10% of their income above 150% of the federal poverty line—which can represent a significant decline in monthly payments for students with modest incomes relative to their debt burdens.

As IDR plans have become more generous, more students have signed up for these plans. In the third quarter of Fiscal Year 2013, only $72.3 billion in Direct Loans was tied to income-based plans while $247.3 billion was tied to a traditional payment plan. By the first quarter of Fiscal Year 2016, the amount of loans in IDR tripled to $232.5 billion, while the amount in traditional payment plans increased to $353.3 billion—meaning that a majority of additional Direct Loan debt was being repaid via income-driven plans. Data released by the White House show that about one-fifth of students are enrolled in IDR as of early 2016, double the rate of just two years ago.

Income-driven repayment plans likely benefit two different types of students. The first group of students includes those for whom college simply didn’t work out in terms of increasing their earnings potential. IDR is an important safety net for these students, as it helps to insure against the risk of high student loan payments relative to one’s income. Given that students with less than $5,000 in debt are nearly twice as likely to default on their loans than those with more than $100,000 in debt, the availability of IDR should help these students the most.

But a second group of students appears to be the more common users of income-driven plans—graduate students in relatively low-wage fields, particularly those who qualify for the Public Service Loan Forgiveness (PSLF) program that limits payments to a 10-year period instead of 20-25 years for those working for a qualifying nonprofit or public-sector organization. Jason Delisle of New America (who is moving to the American Enterprise Institute soon) has repeatedly raised concerns about the fiscal impacts of IDR for graduate students, noting that the typical borrower in PSLF has between $60,000 and $70,000 in debt and graduate programs have incentives to further raise tuition as the typical student won’t pay back the additional dollars borrowed. Georgetown Law School actually did this by creating a Loan Repayment Assistance Program that covered the loan payments of students who worked in public service and made less than $75,000 per year.

Given the rising cost of IDR programs, it would be useful to know which colleges encourage their students to enroll in income-driven plans or provide assistance to help navigate an often-complex process to annually certify their income. And it would be even more helpful to get this information broken down for undergraduate and graduate students, as the types of students enrolled in IDR likely differ across these two groups. Yet, as with many other important issues (such as graduation rates for Pell Grant recipients or the default rates on PLUS loans), this information is not yet available to the taxpaying public. The White House did release the following chart last week of the number of borrowers in IDR by state, but this chart (released as a picture instead of a spreadsheet!) doesn’t get at the behaviors of individual colleges while also excluding Washington, DC:

state_idr

The Department of Education’s Office of Federal Student Aid has the ability to release data on which colleges’ students use income-based repayment plans and whether those students are undergraduates with low earnings who are hard on their luck or grad students with lots of debt but incomes at or above the national average. Releasing these data would help inform conversations about the value of IDR plans and what colleges and loan servicers can do to help enroll the neediest students in these programs.

Will Colleges Send Out Financial Aid Packages Earlier Next Year?

I’m looking forward to college students being able to submit the Free Application for Federal Student Aid (FAFSA) three months earlier next year. Instead of being able to submit starting January 1 for the 2017-18 academic year, students will be able to submit beginning October 1—giving students an additional three months to complete the form thanks to using ‘prior prior year’ (PPY) income and asset data. This means that students can get an estimate of their eligibility for federal grants and loans as soon as late fall, which has the potential to help inform the college choice process.

But there is no guarantee that students will get their final financial aid package from the college any earlier as a result of prior prior year. Recognizing this, Undersecretary of Education Ted Mitchell recently sent a letter to college presidents asking colleges to send out their aid packages earlier in order for students to fully benefit from PPY. Will colleges follow suit? I expect that some will, but the colleges with the greatest ability to offer institutional grant aid probably won’t. Below, I explain why.

The types of colleges that can easily respond to PPY by getting aid packages out earlier are those institutions with rolling admissions deadlines. (Essentially, it’s first-come, first-served among students who meet whatever admissions criteria are present—less-selective four-year and virtually all two-year colleges operate in this manner.) Some of these colleges already offer their own grant aid upon admission, but these colleges tend to have less grant aid to offer on account of relatively low sticker prices and fewer institutional resources. Additionally, these colleges often take applications well into the spring and summer—after students can already file the FAFSA under current rules.

It is less likely that the relatively small number of highly-selective colleges that get a disproportionate amount of media coverage will respond to PPY by getting financial aid offers out any earlier. For example, the Ivy League institutions didn’t even release their admissions notifications for students applying through the regular route until the last day of March, which gives students plenty of time to complete the FAFSA under current rules. Moving up the notification date to January is definitely feasible under PPY, but it requires students to apply earlier—and thus take tests like the ACT or SAT earlier. All students are supposed to commit to one college by May 1, giving students one month under current rules to compare aid packages and make a decision. Colleges may oppose extending this decision period as students have more time to compare offers and potentially request more money from colleges.

I suspect the Department of Education sent their letter to colleges in an effort to get the admissions notification dates at selective colleges moved up, but this goes against the incentives in place at some colleges to reduce the comparison shopping period. Prior prior year still allows students to get their federal aid eligibility earlier, which is a good thing. But for quite a few students, they won’t get their complete financial aid package any earlier.