How Congress Could Increase Federal Student Aid Funding at No Additional Cost to Taxpayers
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Easy Money $ $ $ $ $ How Congress Could Increase Federal Student Aid Funding at No Additional Cost to Taxpayers May 2005 American Association of Collegiate Registrars and Admissions Officers State Public Interest Research Groups’ Higher Education Project U.S. Student Association Table of Contents Executive Summary...................................................................................................................... 2 Introduction................................................................................................................................... 3 Background: A Tale of Two Loan Programs............................................................................. 4 A Win-Win Proposal for Students and Taxpayers .................................................................... 5 Findings: Billions of Dollars in Additional Student Aid ........................................................... 5 Lending Industry Profits from Current Structure of Student Loan Programs...................... 6 Conclusion ..................................................................................................................................... 6 Methodology .................................................................................................................................. 7 Student Aid Reward Act Funding Increases by State…………………………………………9 1 Executive Summary Over the last three decades, higher education has become an even greater necessity for all Americans. Our citizens know that the key to economic success for them and their children is to invest in education. Since the Higher Education Act was passed in 1965, the nation has made enormous strides toward realizing the dream of equal access to a college degree. However, we still fall short of ensuring that every qualified high school student has the opportunity to pursue postsecondary education, regardless of income. Over the last three years, higher education costs have increased, largely as a result of state budget cuts. Over the same period, funding for critical federal student aid programs has been level-funded, decreased, or proposed for elimination entirely. Congress recently passed a budget for Fiscal Year 2006 that includes significant cuts to critical student aid programs, including $7 billion to federal student loan programs. These cuts threaten to put affordable higher education even further out of reach for millions of students. Congress has the opportunity this year, however, to increase student aid funding by billions of dollars at no additional cost to taxpayers. Bipartisan legislation is pending in Congress that would increase federal student aid for those colleges and universities that utilize the more economically efficient of the two federal student loan programs. The Student Aid Reward (STAR) Act, introduced in March 2005, would increase student aid funding by redirecting the subsidies currently going to student loan companies to needy students. Currently, two federal student loan programs provide essentially the same loans and interest rates to students, but one costs taxpayers and the federal government several billion dollars more annually than the other. According to President Bush's 2006 education budget, student loans made through the more expensive program cost the federal government nearly $11 more for every $100 loaned to students than the same loans made directly by the federal government. By encouraging more schools to participate in the more efficient program, Congress has the opportunity to increase student aid funding by billions of dollars, without any additional cost to taxpayers, students, or their families. Key findings: ¾ The Student Aid Reward Act could generate $4.4 billion in new federal money next year, based on the savings of all colleges and universities switching into the more cost effective Direct Loan program. ¾ At least $3 billion of this money could be used to increase federal student aid funding at all colleges and universities across the country. This student aid increase would be available at no additional cost to taxpayers. ¾ This $3 billion increase would be enough to give each Pell Grant recipient almost $600 more in additional grant aid a year, which is six times the proposed increase in the Pell Grant maximum for next year in the FY06 federal budget. 2 Introduction Access to affordable higher education is critical to the future success of Americans. The rewards of federal investment in higher education include strengthening our economy and maintaining the health of our democracy. In addition to the evident cultural and personal benefits, a college degree is worth nearly 75 percent more in earnings than a high school diploma, or nearly $1 million in additional income over a lifetime in the workforce.1 Since 1965, the Higher Education Act has helped students realize the dream of equal access to a college degree. However, for many students, unacceptable barriers still exist as they pursue a college education. Students are now borrowing and working more than ever before in order to pay for the costs of a higher education. Even worse, without adequate financial assistance to help cover these costs, each year 170,000 qualified students are unable to pursue higher education due to financial constraints, according to the U.S. Department of Education’s Advisory Committee on Student Financial Assistance.2 Lagging college enrollment hurts the country’s economy and democracy. A recent College Board study found that college graduates will pay more than twice as much in federal income taxes and 78 percent more in overall taxes than those with a high school degree.3 In addition, states with higher college enrollment rates are likely to have more active citizens who vote and donate to charities in higher percentages than the national average.4 Over the last three years, higher education costs have increased while funding for critical federal student aid programs has been level-funded, decreased, or proposed for elimination entirely. The maximum Pell Grant award, which assists the neediest students in the country, is worth $800 less in real terms than its value twenty years ago. The maximum Pell Grant award has been frozen at $4,050 for the last three years, which amounts to a 10 percent cut in funding given inflation increases over this period. Congress recently passed a budget for 2006 that includes significant cuts to critical student aid programs, including $7 billion in cuts to federal student loan programs. These cuts threaten to put affordable higher education even further out of reach for millions of students. Need-based aid is essential to increase college participation rates. Greater federal investment in student aid makes the difference in thousands of students’ decisions each year as to whether they can afford to attend college, which in turn benefits our economy, our democracy, and our society. 1 ‘Education Pays: 2004.’ The College Board. http://www.collegeboard.com/prod_downloads/press/cost04/EducationPays2004.pdf 2 ‘Empty Promises: The Myth of College Access in America.’ The Advisory Committee on Student Financial Assistance. June 2002. 3 ‘Education Pays: 2004.’ The College Board. 4 Measuring Up 2002: The State by State Report Card for Higher Education. http://measuringup.highereducation.org/2002/benefits.cfm 3 Background: A Tale of Two Loan Programs The federal government operates two major loan programs to help students pay for college: the Federal Family Education Loan (FFEL) and the Direct Loan (DL) programs. In the FFEL program, the government pays private lenders and banks to offer loans to college students. In the DL program, the government offers these loans directly to students. Under current law, individual colleges choose which program they will use to make loans to their students. Approximately 25 percent of all student loan volume is currently disbursed through the Direct Loan program. President Bush’s recently released 2006 budget reveals that the bank-based (FFEL) program costs taxpayers several billion dollars more each year than the Direct Loan program. The President’s FY 2006 budget indicates that, even after administrative costs are factored in, FFEL loans are estimated to cost the government $8.91 for every $100 in loans in FY06. By contrast, even after administrative costs are factored in, Direct Loans actually save the federal government $2.06 for $100 in loans.5 Student loans made through the FFEL program therefore cost the federal government nearly $11 more for every $100 lent than the same loans made through the Direct Loan program. This cost differential between the two programs has occurred each year; for example, President Bush’s budget states that the Direct Loan program was $11.25 cheaper than FFEL loans on every $100 loaned in FY04. From 1992 to 2004, the cumulative taxpayer subsidy costs were $39 billion for FFEL loans but only $3 billion for Direct Loans.6 The larger volume of FFEL loans partially accounts for the program’s larger subsidy costs. However, even if the programs had the same exact amount of loan volume, the Direct Loan program would still cost billions of dollars less over this period, since the dollar-for-dollar subsidy costs on loans made through the DL program are less than in the FFEL program. President Bush’s budget reinforces the findings of the Government Accountability Office (GAO), the Congressional Budget Office (CBO), and the Office of Management and Budget (OMB) over the last 10 years: that the Direct Loan program saves billions