Fiscal Responsibility and Student Aid

Yesterday, Marshall University's student newspaper, the Parthenon, published (essentially) an op-ed by the federal issues coordinator of the West Virginia Citizen Action Group that caught my interest and drove me to do some research. The column concerned the House Education and Workforce Committee's budget cut proposals, made at the request of GOP leaders in Congress to curb the widening budget gap. Initially, Congress had been asked to shoot for $35 billion in reductions, but the rising costs of hurricane relief have driven Congressional leaders to ask for an extra $15 billion in reductions from a wide range of committees.

The Education and Workforce Committee was tasked with finding $18 billion in net savings from direct spending programs. In the course of its investigation, it discovered some inefficiency in the federally-subsidized student aid programs in place under the Higher Education Act. To quote the Committee's report from October 25, 2005, (emphasis mine)

Since 1965, the federal government has invested hundreds of billions of dollars in higher education on the premise that all students, regardless of financial circumstance, should have the opportunity to pursue postsecondary education. Four decades later, taxpayers are spending more than ever before on higher education, yet the goal of higher education access remains elusive to far too many American students.

There is no question that an investment in higher education pays dividends for the future. An educated workforce drives economic growth. Scientific breakthroughs keep America on the cutting edge of technological advancement. Children whose parents are college educated are more likely to pursue postsecondary education themselves, continuing the cycle of success and prosperity. Yet despite the clear imperative for an effective and efficient investment in higher education, billions of taxpayer dollars are being wasted through inefficiency and unwise public policy.
After more than a decade of tuition increases that have far outpaced the rate of inflation and growth in family incomes, it has become clear that blindly increasing federal student aid is doing nothing to solve the challenge of skyrocketing college costs. Indeed, the vast increases in federal student aid have coincided with these tuition increases, calling into question whether the current federal investments in higher education may actually be a contributing factor to the college cost explosion that is squeezing the budgets of hard working low- and middle-income American families.

Taxpayers are carrying a tremendous higher education cost burden on many fronts. In addition to the more than $70 billion in direct student aid paid for by taxpayers in FY 2005, American families are subsidizing aid to institutions, research, and numerous federal programs outside the Higher Education Act that award funding to colleges and universities. Moreover, higher education consumes a significant portion of the taxes paid at the state level, and even after all of this, families with children enrolled in college are paying more than ever before for their own tuition bills.
To ensure the federal investment in higher education is made in the best interests of students, families, and taxpayers, the Committee has developed comprehensive reforms that will expand college access for low- and middle-income students while simultaneously generating savings for taxpayers by eliminating program waste and inefficiency, trimming excess subsidies paid to lenders, and placing the aid programs on a more stable financial foundation to ensure their long-term viability and success for future generations of American students.

The Congressional Budget Office estimates these reforms would save between $14 billion and $15 billion over five years, eliminating waste on behalf of taxpayers while expanding student benefits. Taken together, these reforms will help put student aid programs on a strong financial foundation to ensure their stability now and into the future, protecting both students and taxpayers.

In short, the people who proposed this (read: Republicans) are not anti-education. They're not even trying to keep poor and middle-class West Virginians from going to Marshall. More importantly, this legislative proposal doesn't have any such results. Let's break it down.

First, let's look at the efficacy of trimming government spending on student aid while maintaining or improving the level of service. More and more American students are pursuing higher education every year. At the same time, over the last decade, tuition costs have continued to rise steadily. As such, student loan programs have grown significantly over recent years. Through investment in technology and refining its programs to maximize efficiency, loan programs have been able to provide better services to borrowers and to do so at reduced costs. The loan programs, however, are still collecting subsidies from the federal government well in excess of today's required costs for running the programs. The new proposal requires all funds acquired above the minimum guaranteed be returned to the federal government to be reinvested in the student aid program.

Today, borrowers who wish to consolidate their student loans must lock on to the prevailing fixed-interest rate of the day, regardless of whether interest rates will go down in the future. The Committee's proposal offers borrowers, for the first time in history, the opportunity to choose between keeping the variable interest rates of their student loans when consolidating or selecting a long-term fixed rate that suits each borrower's financing plans. Most consumer loan products (like mortgages) charge a 2% premium to lock in long-term fixed rates, whereas the Committee's proposal will cost the borrower 1% above the variable interest rate of the year the loan is consolidated. A one-time 1% offset fee by the borrower will allow the federal government to secure the fixed rate for up to thirty years.

Another area the Committee's proposal targets is the security of tax-payers in responsibility for loan defaults. The proposal reduces the amount of money the federal government will pay to loan companies on defaulted loans, increasing the incentive for loan companies to work with borrowers to prevent defaults in the first place so tax payers aren't forced to bear the burden.

Student borrowers pay up to 4% in loan fees today, including a 3% origination fee and a 1% default fee charged to some borrowers. With a stronger default fee structure, the Committee's proposal was able to reduce origination fees for all borrowers, resulting in total loan fees of 1%.

The proposal also attempts to compensate for tuition inflation by increasing the borrowing limit for first and second-year students (from $2,625 to $3,500 and $3,500 to $4,500, respectively), although aggregate limits will remain at $23,000. Graduate limits will increase from $10,000 to $12,000 annually.

In addition, the "single holder" rule, which which limits consumers’ ability to consolidate with the lender of their choice by requiring consumers who have all of their loans held by a single lender to consolidate with that lender, even if they could obtain better terms and service elsewhere.

There are more benefits to the Committee's proposal, all of which you can read about in their report, from which a great majority of this information was acquired.

In my next post, we can talk about why the op-ed concerns me and why it concerns me even moreso that no one (no political groups on campus, no student interest groups, no Student Government official, and certainly no one on the Parthenon's staff) found the column's egregious claims even remotely newsworthy, warranting any kind of comment or rebuttal. If student financial aid isn't important to college students, who do you think's going to care? (Wrong answer: Their parents. You don't belong in college. Go get a real job.)