A roundup of pending federal college financial aid changes

Some changes in federal financial aid for college students are coming soon.

Pending higher student loan interest rates are in limbo.  Unless Congress acts to delay this change, the interest rate for subsidized federal student loans will double to 6.8% in July.  Although both parties agree on keeping the lower rates, disagreement on how to pay for this benefit has stalled action on this issue.

In addition, the maximum eligibility period for Pell Grants will be cut from eight to six years starting with the 2012-13 school year.

More new developments in federal financial aid affecting high school graduates heading for college this fall:

• If a student’s family income doesn’t exceed $23,000, their expected family contribution will automatically fall to zero — this has been reduced from the previous maximum income of $32,000.
• To qualify for federal student aid, students applying in higher education for the first time must have either a high school diploma or a recognized equivalent such as a GED, or have been home schooled. This erases a previous option of passing an approved test or completing at least six credit hours or 225 clock hours of post-secondary education.
• Direct subsidized loans will not be eligible for an interest subsidy during the six-month grace period after graduation, meaning interest will begin to accrue as soon as a student graduates or leaves college.
• Graduate and professional students are no longer eligible to receive subsidized loans, but can qualify for up to $20,500 in unsubsidized loans each year.
• The U.S. Department of Education can no longer offer borrowers repayment incentives, except interest rate reductions to borrowers who agree to have payments automatically electronically debited from their bank account.

Related:

• Why the extra Stafford loan subsidy should expire as originally planned
• Political battle looms over doubling of student loan interest rate to 6.8%

Stricter Pell Grant rules raise standards for ‘satisfactory academic progress’

Under the new rules, students lose their eligibility for aid such as Pell Grants if they’re on academic probation for more than one semester and do not file a successful appeal. The previous limit was two semesters. This is on top of the existing SAP requirements: a cumulative GPA of at least 2.0, successful completion of a certain percent (usually 67 percent) of classes attempted, and completion of no more than 150 of the number of hours required for a credential.

This seems fair.   (Until it’s my child who’s failing . . .)

These standards also apply to other types of federal financial aid.
… 

New Pell rules cut off failing students

Federal Student Aid:  Satisfactory Academic Progress (SAP)

Political battle looms over doubling of student loan interest rate to 6.8%

President Obama begins an all-out push on Friday to get Congress to extend the low interest rate on federal student loans, White House officials said, an effort that is likely to become a heated battle along party lines. If Congress fails to act, the interest rate on the loans, which are taken out by nearly eight million students each year, will double on July 1, to 6.8 percent….

With student debt at a record high of $1 trillion, the effects of this change would be widespread.  The debate becomes about who should pay, the borrowers or the taxpayers?

The Congressional Budget Office has estimated that a one-year freeze on the interest rate for subsidized Stafford loans would cost $6 billion.

The history

The low interest rate stemmed from the 2007 College Cost Reduction and Access Act, which reduced interest rates on subsidized Stafford loans over the following four academic years — from 6.8 percent to the current 3.4 percent — with the proviso that the rates would revert to 6.8 percent this July…

A political trap for Republicans and a win-win situation for President Obama

The pre-planned doubling forces GOP politicians to either approve a Democratic measure that extends the low interest rates, or else face protest from millions of students and their middle-class parents.

Many GOP legislators dislike the subsidized interest rate because it inflates education costs while delivering a disguised subsidy to the Democrats’ political allies in the education industry.

The trap “kinda makes sense,” said Mark Kantrowitz, publisher of Finaid.org, a financial aid website.

“It’s a ‘Heads I win, tails you lose,’ scenario, where if President Obama succeeds in getting it extended a for a year he gets a victory for a key segment of the voters [and] if it gets blocked, he can blame his opponents for blocking it.”

“Either way he wins,“ Kantrowitz said.

Mr. Courtney said he was hopeful that some Republican support would be forthcoming as the political stakes became more apparent.

If higher loan subsidies are approved, the poorest students could come out losing.

Outside Congress, even some of the strongest student-aid advocates debate the question. While nearly everyone is in favor of the broad goal of college affordability, some experts point out that even 6.8 percent is lower than the rate on most private student loans. And they question whether it is worth risking cutbacks in the Pell program for low-income students, one possible consequence of using more federal money to keep interest rates low on the Stafford loans, which are in wide use by middle-income students.

Reminder – automatic zero EFC maximum income DROPPED TO $23,000

Last month Congress made it harder to qualify for an automatic zero EFC by reducing the maximum income allowed from $32,000 to $23,000 for the 2012-13 Award Year.  A zero EFC usually makes a family eligible for the highest amount of financial aid.

This significant change seemed to have stayed mainly under the radar, even though it will hit low-income families hard since over 4 million students qualify for the automatic zero provision this year.   Perhaps some provisions of President Obama’s 2012 “Blueprint for Keeping College Affordable and Within Reach for All Americans” will counteract this benefit cut to poor families.

Here are more details about how dependent students can qualify for the automatic zero EFC, updated from last year’s post.

For the 2012-2013 school year, a dependent student automatically qualifies for a zero EFC if both (1) and (2) … are true.

1) Anyone included in the parents’ household size (as defined on the FAFSA) received benefits during 2010 or 2011 from any of the designated means-tested Federal benefit programs: the SSI Program, the Food Stamp Program9, the Free and Reduced Price School Lunch Program, the TANF Program, and WIC; OR
The student’s parents:
• filed or were eligible to file a 2011 IRS Form 1040A or 1040EZ11,
• filed a 2011 IRS Form 1040 but were not required to do so, or
• were not required to file any income tax return; OR
the student’s parent is a dislocated worker.

AND

(2) The 2011 income of the student’s parents is $23,000 or less.
• For tax filers, use the parents’ adjusted gross income from the tax return to determine if income is $23,000 or less.
• For non-tax filers, use the income shown on the 2011 W-2 forms of both parents (plus any other earnings from work not included on the W-2s) to determine if income is $23,000 or less.

Federal Pell Grant Program of the Higher Education Act – Background, Recent Changes, and Current Legislative Issues  (pages 20 & 22)

Related:  Congress curtails Pell Grants and federal loan grace period 

Fewer poor students at top colleges

It’s not surprising that lower-income students are underrepresented at top universities.  Family income correlates with many measures of academic achievement, suggesting this as a factor.  And according to  Caroline Hoxby, an economics professor at Stanford, there are many low-income students out there who are able to fulfill admissions criteria at these schools but are not applying.  Among other reasons, these students often do not have access to knowledgeable guidance counselors who are aware that top schools typically offer generous financial aid.

Pell Grants as a proxy for income
Most (about 60%) Pell Grant recipients come from families with incomes below $30,000, making it a useful indicator for low-income students.   (Over 90% have incomes below $50,000.)  Here are the average per-school Pell Grant percentage figures for several categories of universities among those ranked on a national level by US News & World Report for the 2009-10 school year.

Category                                                                      Percentage Pell Grant Recipients Per School
All universities (250 total)                                                      29%
Mid-ranked universities (13 total, ranked 119-128)              26%
Top ten ranked universities                                                   16%

…
More details for the top ten universities, based on 2009-10 school year:

Columbia stands out as having the highest number, just slightly below the average for all nationally ranked universities.  I wonder if it’s partly due to its relatively higher renown among the general population.  It also could be that a lower-income student finds it easier to blend in among the New York City student body than among those of other elite schools.  That’s just my speculation based on my relative familiarity with New York.  Perhaps Columbia simply has a very aggressive recruiting program for low-income students.  (Since this number increased significantly over the previous year, it could be a reporting error.)

Given the relatively low economic diversity at these universities, low-income students probably feel greater pressure to try to keep up with their wealthier peers than they might at many other schools.  I recently heard about a student who was unable to attend a business symposium at an elite school because he didn’t own the proper attire.

Sources for Pell Grant recipient income information:
AN ARBITRARY MAXIMUM INCOME CAPWOULD ELIMINATE PELL GRANTS FOR NEEDY STUDENTS
Department of Education FEDERAL PELL GRANTS Fiscal Year 2011 Budget Request

Congress curtails Pell Grants and federal loan grace period

The budget finalized by Congress on Saturday curtails some federal student financial aid programs.

The two most important changes: A reduction in the number of years students can receive Pell Grant money and the temporary elimination of a six-month grace period on interest payments on federal student loans.

Pell Grant maximum eligibility period cut from eight to six years

College students taking longer than six years to obtain their undergraduate degree would have their Pell grants cut off next school year under a $1 trillion budget bill passed Friday in the House.

Millions of students each year receive Pell grants, which are offered to low-income students and don’t have to be paid back.

The bill keeps the maximum grant award at $5,550, but seeks to save $11 billion over the next decade in Pell dollars, in part, by reducing the maximum number of years the grant can be received from nine to six.

It is estimated that this change would affect about 100,000 individuals, typically part-time or transfer students.

Federal loan grace period

… Congress suspended the six-month grace period on loan interest for graduates with subsidized Stafford loans.

Stafford loan borrowers will still get a six-month reprieve upon graduation from having to pay back their loans, but the principal on the loans will accumulate interest during that period for loans issued between July 1, 2012, and July 1, 2014.

Also will be harder to qualify for automatic zero Expected Financial Contribution (EFC)

It appears that a lower income will be needed to qualify for the automatic zero EFC loophole

The bill also reduces the income level under which a student will automatically be eligible to receive the maximum Pell grants from $30,000 to $23,000. 

Some basic college financial aid terms

FAFSA -Free Application for Federal Student Aid
It’s a form you fill out and submit to the government. The Office of Federal Student Aid determines your eligibility for getting student aid (including PELL grants, and work-study programs). You’ll need your parent or guardian’s help though, because it asks for information such as their income. It is recommended that you fill out the form as close to January 1st as possible. Don’t wait! Completing, and submitting this form should be the first step of your financial aid process.

EFC-Expected Family Contribution
This dollar figure is how much (the government) expects your family to contribute to your education for one year. The figure is calculated from the FAFSA information you provided, and factors such as family size, number of family members in college, family savings, and current earnings affect it. Usually, the lower your EFC, the more financial aid you’ll receive.

SAR-Student Aid Report- (ISIR- The Electronic Version of SAR)
A summary of your FAFSA responses, it’s sent back to the student electronically or in paper version after their FAFSA is processed. The SAR is also sent to the college’s you’ve selected to receive it. The colleges or universities will use this information to determine if you’re eligible for federal-and possibly non-federal-financial aid.

PROFILE
This is an online financial aid application service offered by the College Board, used to determine if you qualify for non-federal student aid. More than 500 colleges, universities, graduate and professional schools use it. It’s an efficient way for students to report their financial data to their schools of choice.

PELL
Federal Pell Grants are awarded to (usually) undergraduate students. They are not a loan; they do not have to be repaid. The amount you receive will depend on your financial need, your costs to attend school, whether your a part-time or full-time student, and your plans for length of attending school.

STAFFORD
Stafford loans are low-interest loans for (eligible) students to help cover the cost of higher education. You can use it for a four-year school, community college, or trade, career, or technical school. Students borrow directly from the U.S. Department of Education at participating schools.

There are two types of Direct Stafford Loans: Direct Subsidized Loans and Direct Unsubsidized Loans. Direct Subsidized Loans, as the ones described above, are for students with financial need. They are not charged interest while in school, as long as it’s part time. For Direct Unsubsidized Loans, you are not required to prove financial need, and interest accumulates on the loan from the first time you borrow the money.

From Noelle Smith, a student at Drake University in Des Moines, Iowa.

Pell Grants saved in debt ceiling bill

Some graduate student loan subsidies were eliminated, but Pell Grants were kept intact.

A federal subsidy that aids graduate students would be eliminated to boost funding for Pell grants that help low-income undergraduates under the compromise debt-ceiling bill in Congress. That trade-off is one of the few program changes specified in the bill.

The maximum Pell grant of $5,550 would be preserved for an estimated 9 million undergraduates, according to the White House. To pay for that, graduate students who get federally subsidized loans would see the interest on those loans begin to accrue while they’re still in school, beginning July 1 next year. Currently, that interest doesn’t begin accruing until the students graduate.

Uncertainty over the future of federal programs continues.

“It gives some stability to the Pell Grant program for a couple of years,” said Becky Timmons, assistant vice president for government relations at the American Council on Education. “Going forward, with the second part of the deal calling for pretty drastic cuts, it’s anybody’s guess how deep that will go.”

Cutting Pell Grants and subsidized loans would lead to student riots?

This weekend, July 16th and 17th, members of Congress and the President are likely to craft a debt reduction deal that could slash Pell grants.

July 25 is Save Pell Day.

Mark Kantrowitz predicts dire consequences, including colleges forced to close and students rioting:

The game of chicken being played out in Washington, DC, may have serious consequences for student financial aid as well as the rest of the economy….

Instead of defaulting on the debt, the White House would need to decide which among the other expenses must be cut….

In such an environment, spending on student financial aid would almost certainly be eliminated. Student financial aid is not one of the top spending priorities according to internal rankings by the Office of Management and Budget. It isn’t even in the top 10. Effectively this means that the Federal Pell Grant program and the federal education loan programs, which together represent more than $150 billion a year, would be suspended. This would force millions of students to drop out of college because they could not afford to pay for college without student aid. This, in turn, would force most colleges to lay off faculty and staff. Many colleges would have to close. The only alternative would involve doubling tuition rates, guaranteeing nationwide tuition riots.…

During the ongoing debt negotiations, one side proposed eliminating the subsidized interest on federal student loans. Currently, the federal government pays the interest on subsidized Stafford loans during the in-school and grace periods. Both parties have already proposed eliminating the subsidized interest on loans to graduate and professional students. The new proposal would eliminate the subsidized interest for undergraduate students as well, saving the federal government an additional $4.3 billion a year.

According to Kantrowitz, eliminating the subsidized interest benefits would increase the amount of debt at graduation by about 8%.   That’s not good, especially for students graduating with poor prospects for well-paying jobs.

Cuts in federal financial aid spending will likely curtail the administration’s overriding objective of enrolling more students in college, which might not be a bad thing.  Fixing the problem of high school graduates unprepared for college-level work should take priority over the goal of higher education for everyone.

Previous post:  The end of subsidized Stafford loans?

The end of subsidized Stafford loans?

Inside High er Ed– As talks continue and the deadline approaches on increasing the federal debt limit, the federal government’s subsidy for undergraduate student loans is now on the table….

The proposal would end the subsidized Stafford loan program, in which the federal government pays the interest that accrues while students are enrolled in school….

Subsidized loans, which are awarded based on financial need, make up just under half of all Stafford loans, which are the federal government’s largest pool of student loans. Students who borrow the maximum amount of subsidized loans, $23,000, and take six years to graduate would owe $5,000 more by graduation and $9,000 after a 20-year repayment period, said Pauline Abernathy, vice president of the Institute for College Access and Success…

The elimination of the subsidy, combined with the fact that the interest rate on federal student loans is slated to double next year — to 6.8 percent — would mean that low-income college students would graduate with far more debt…

As Congress and the White House have put forward plans that slash spending in recent months, student aid programs have come in for their share of cuts, and there is widespread agreement, even among the programs’ supporters, that some kinds of changes will be necessary. The Pell Grant Program, which has become increasingly expensive, is perceived to be vulnerable not only in the talks about long-term deficits, but in more immediate deliberations over the next federal budget, for 2012….

Losing the interest subsidy is far from ideal, and could harm student borrowers, they said. But other options, such as a Pell Grant cut, would be far worse.

“Certainly it would be a blow to students,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators, who said he strongly objected to the idea of shifting funds from student aid toward deficit reduction. “But it doesn’t decrease the total amount of aid available to them up front to pay for college.” A cut that could change whether students are able to pay for school at all, such as lowering the maximum Pell Grant, would have a more dramatic effect, he said.

It sounds as if any change to Stafford loans would simply add more to the amount owed upon graduation.  With all the stories of naive students taking on massive debt while failing to realize the potential negative repercussions, maybe an “up front” cut in aid would actually be a better idea.  Or, is that being too harsh?

President Obama’s reaction to cutting student loan subsidies:

 “I’m not going to do that,” Obama said. “I’m not going to take money from old people and screw students,” not without some compromise on the tax-increase side.

Found at Instapundit