SOURCE: AP/Susan Walsh

In this June 2012 picture, President Barack Obama looks back at students as he calls on Congress to stop interest rates on student loans from doubling. One year later, Congress must again act to keep rates low.

On July 1, 2013, interest rates on federal subsidized Stafford student loans, which are provided to low- and middle-income students, are scheduled to double from 3.4 percent to 6.8 percent. Congress acted to prevent an identical rate hike from going into effect on July 1, 2012, and is preparing to act to keep rates low again this year. There are key differences, however, between the various proposals to do so and unfortunately some of the proposals are worse than the status quo.

This column analyzes the potential interest rates in coming years under the key proposals—by President Barack Obama; Rep. John Kline (R-MN), whose proposal the House of Representatives approved today; and several proposals introduced in the Senate.

Determining student loan interest rates

The goal of the student loan program is to help increase access to postsecondary education, as education beyond high school remains critical for millions of students and their families as they seek to move into or remain in a part of the middle class. Recent reports from the Bureau of Labor Statistics now show that college graduates are nearly twice as likely to find work as those with only a high school diploma. An advanced degree provides individuals with a clear path to the middle class, a higher likelihood of gainful employment, and life-long financial and personal benefits. College education also provides for a skilled workforce that is crucial to rebuilding the entire American economy.

The best solution for determining student loan interest rates is a long-term plan that is variable and would allow borrowers to take advantage of today’s historically low interest rates. A variable plan, however, must also include a cap that protects students against high interest rates in the future. Such high interest rates on student loans could discourage some students from enrolling and persisting in postsecondary education. The add-on interest rate amount should be as low as possible and avoid additional deficit reductions that shift the national debt onto students.

In addition, expanding protections such as Pay As You Earn—which lets borrowers limit their monthly payments to an affordable percentage of their income—to include all borrowers, along with the addition of a refinancing mechanism, would further strengthen the federal student loan program. The PAYE expansion—outlined in the president’s budget for fiscal year 2014—would ensure that all federal student loan borrowers could cap their monthly loan payments to 10 percent of their income so that the payments are affordable and achievable. A refinancing and loan modification mechanism would provide borrowers the option to switch their loans from their current interest rate model into the new system.

We recognize that a short-term fix may ultimately be necessary to prevent interest rates from increasing for subsidized student loan borrowers. This is far from ideal, however, and Congress should only consider a short-term fix if competing priorities interfere with the passage of high-quality, long-term legislation. It is also critical that any savings needed to pay for the short-term fix should come from sources other than the federal student aid system.

Key variables

The first key variable is whether the interest rate should remain a fixed rate set by Congress or should instead become tied to a market variable that rises and falls according to market conditions. Fixed interest rates can quickly fall out of sync with the market, and this is especially unfair to students in the context of the historically low rates currently being provided for other forms of debt. Today, for example, a borrower can receive a 30-year fixed-rate mortgage at 3.6 percent or a 15-year fixed-rate mortgage at 2.75 percent—significantly lower than the rates of 6.8 percent and higher than student borrowers would have to pay in the absence of student loan legislation.

An easy market variable to employ would be the rate the federal government pays for borrowing money. Since student loans are generally repaid in about 10 years, using the 10-year Treasury note, which currently has an interest rate around 2 percent, seems to be a straightforward option. Another option would be to use the 91-day T-Bill rate, the rate that the federal government pays for short-term borrowing, which is currently around 0.5 percent. The 91-day T-Bill rate, however, tends to be more volatile. A variable rate approach could be structured to have the rates for all loans made after July 1, 2013, change annually, or it could be used to determine the interest rate that would be fixed for all loans made that year.

The second key policy decision is to determine the level at which to set interest rates if they remain fixed—or what percentage of interest to add to the 10-year Treasury note or 91-day T-bill. This is known as the add-on and determines whether the student loan proposal is budget neutral, costs money, or actually generates savings. By charging a higher interest rate, more money is generated, but students accumulate more debt. The lower the add-on or interest rate, the less debt the students accumulate.

Third, for variable-rate proposals, policymakers must decide whether to include a ceiling on which interest rates can be charged. This is to ensure that even if the variable that the interest rate was based on hit higher levels, such as 8 percent, the interest rate being charged to students could not surpass the given cap. This is an especially important protection for a complete variable model where the interest rate on all loans reset from year to year.

Fourth, some of the proposals also introduce various other protections to students or changes to the program that are more structural in nature—for example, including a refinancing provision to allow existing borrowers to move into the new interest rate model or expansions of repayment tools such as Pay As You Earn.

Primary student loan interest rate proposals

There are three major proposals currently on the table regarding student loans that have been gaining momentum.

President Obama’s proposal

In his budget, President Obama used a variable model to determine loan rates at the point they are issued. After that time, the interest rate remains fixed for the duration of the loan. The president’s model also expands Pay As You Earn and sets the interest rate to the 10-year Treasury note plus an additional 0.93 percent for subsidized Stafford loans, 2.93 percent for unsubsidized Stafford loans, and 3.93 percent for PLUS loans, which are awarded to parents of students and to graduate school students. Under Congressional Budget Office projections, that would result in 2013-14 interest rates of 3.43 percent for subsidized Stafford loans, 5.43 percent for unsubsidized Stafford loans, and 6.43 percent for PLUS loans. It unfortunately does not include a cap on interest rates. The proposal is intended to be budget neutral and neither costs new money nor generates new savings.*

Rep. John Kline’s proposal

Rep. John Kline (R-MN), chairman of the House Committee on Education and the Workforce, recently put forth his own student loan interest rate proposal. It is a completely variable proposal, meaning that the rates on all loans fluctuate from year to year. It is tied to the 10-year Treasury note, adds an additional 2.5 percent to both subsidized and unsubsidized Stafford loans, and adds 4.5 percent to PLUS loans. It also includes a fairly high cap on interest rates—8.5 percent for Stafford loans and 10.5 percent for PLUS loans. Unfortunately, the 2.5 percent and 4.5 percent add-ons are more than necessary and result in $3.7 billion in additional revenue, which would go toward paying down the federal debt. It does not include the PAYE expansion or a refinancing mechanism. Sens. Tom Coburn (R-OK) and Richard Burr (R-NC) have a similar proposal with a 3 percent add-on for all Stafford and PLUS loans. The Coburn-Burr proposal is more generous to the PLUS borrowers, however, than any other proposal.

Sen. Tom Harkin, Sen. Harry Reid, and Sen. Jack Reed’s proposal

Sen. Tom Harkin (D-IA), chairman of the Senate Health, Education, Labor and Pensions Committee, put forth legislation with Senate Majority Leader Harry Reid (D-NV) and Sen. Jack Reed (D-RI) to extend current student loan interest rates for two years. The legislation, which has 20 co-sponsors, proposes that subsidized Stafford loans would remain at 3.4 percent for two years, and other interest rates would be unaffected. This legislation would cost $8.3 billion but is fully paid for through a package of three non-education offsets. This is designed to provide additional time to determine the best long-term solution through the reauthorization of the Higher Education Act.

Sen. Elizabeth Warren (D-MA) has also introduced a proposal that is a one-year plan to set subsidized Stafford loan interest rates at a lower rate than it is currently. She accomplishes this by tying interest rates to the Federal Reserve discount rate, which is the rate they charge their member banks for borrowing money. Sen. Warren is also a co-sponsor of the two-year extension.

Conclusion 

Congress should move forward with a long-term solution that ensures students do not have to pay rates out of sync with the market and protects them from unmanageable debt. This long-term solution should not tax students to pay down the federal debt. If consensus on a long-term solution is unattainable in the next six weeks, however, Congress must act now and pass a short-term solution to prevent interest rates from doubling.

David Bergeron is the Vice President for Postsecondary Education at the Center for American Progress. Tobin Van Ostern is the Deputy Director of Campus Progress. Carmel Martin and Anne Johnson also contributed to this column.

* The Obama administration created its proposal based upon analysis of costs provided by the Office of Management and Budget and was designed to be budget neutral. It has been scored differently by the Congressional Budget Office as actually generating a savings. The administration has indicated that it intends to modify the proposal to make it budget neutral under CBO scoring rules.

SOURCE: AP/Carolyn Kaster

President Barack Obama speaks at Ohio State University's spring commencement ceremony in the Ohio Stadium, May 5, 2013, in Columbus. He urged graduating students to be active citizens, to fight for causes they believe in, and to be better than generations before them. The rise in income inequality and the decline of the middle class have contributed to underinvestment in higher education.

State spending on colleges and universities has dropped off sharply in recent years. Most people blame the Great Recession and its effect on state budgets for this decline, but this misses the larger story. We are underinvesting in education because the middle class has weakened and no longer has the political power necessary to translate its desires into actions. And this underinvestment threatens our economic competitiveness as more students are priced out of college and other countries surpass us in educational attainment.

Polling strongly suggests that the American public would prefer higher levels of spending on higher education. A Brookings Institution/Northeastern University poll conducted in October 2012, for example, found that 70 percent of the public felt that a college education is very or extremely important for achieving the American Dream, with an additional 24 percent saying it is somewhat important. Not surprisingly, the poll found that 81 percent of Americans believe the government needs to invest more in America’s higher education system. Other polls show similarly high figures: The General Social Survey, for example, a longstanding academic survey, finds that 72 percent of Americans support spending more on education.

So if the public wants more education spending, why hasn’t the government been more responsive and boosted spending?

Undoubtedly, increased pressure on state budgets has contributed to the 28 percent reduction in state spending on higher education since the Great Recession began in December 2007. But other factors are also at work.

States can choose what to spend money on and at what level to set taxes, and thus have some ability to prioritize higher education over other demands. Indeed, two states—North Dakota and Wyoming—have actually increased spending on higher education since the Great Recession began. And in states that have reduced spending on higher education, cuts range from a low of just 3 percent to a high of 50 percent.

There are many reasons for these differences, including state income levels and demographics, but one underappreciated reason is the declining political clout of the middle class and the growing influence of the affluent. As incomes for the middle class have stagnated and those for the top 1 percent of Americans have exploded over recent decades, the political power of the rich relative to the broad middle class has consequently increased. As a host of studies show, in an increasingly unequal America the voices of the rich carry great weight with politicians, but the desires of the middle class are often ignored.

When push comes to shove, education spending generally isn’t as important for the wealthy as it is for the middle class. As a result, the United States spends less than the general public—and the middle class—would prefer.

Certainly the wealthy often support spending on public education, but the intensity of their support for education spending is far less than that of the middle class. That’s because the rich have greater ability to send their children to private colleges, while the middle class depends more upon public universities.

And compared to the middle class, the rich are much more concerned with keeping taxes low than with paying for public education. Indeed, as Princeton University political scientist Martin Gilens found in his study of nearly 2,000 poll questions, the wealthy are “much less supportive of taxes and government spending” than the middle class.

A groundbreaking poll of very rich Americans, roughly the top 1 percent of wealth holders, highlighted how the preferences of the wealthy and the middle class diverge on education. The authors—political scientists Benjamin Page, Larry Bartels, and Jason Seawright from Northwestern University and Vanderbilt University—found that only 28 percent of the wealthy agreed that the government should “make sure that everyone who wants to go to college can do so,” compared to the 78 percent of the general public that agreed. Similarly, only 35 percent of the wealthy felt that the “government should spend whatever is necessary to ensure that all children have really good public schools they can go to,” compared to 87 percent of the general public.

When the wealthy have more power, their preferences are more likely to prevail. This is clear when analyzing spending on education across the 50 states.

A simple look at the data shows that states with strong middle classes spend more on higher education. Figures 1 and 2 show that the 10 states with the strongest middle classes—defined by the share of income going to the middle 60 percent of households—spent more on higher education, both as a share of the budget and gross domestic product, or GDP. In 2010 the 10 states with the strongest middle classes the year before spent, on average, 10.5 percent of their budget and 2.05 percent of their GDP on higher education. In contrast, the 10 states with the weakest middle classes averaged expenditures of 8.8 percent of their budget and 1.53 percent of their GDP.

Critically, these results hold even when controlling for other factors that influence education spending.

Specifically, in a regression analysis that controls for other factors that affect education spending, such as state income levels, the share of the population comprised of people of color, and the age distribution of the state, states with stronger middle classes spend more—as a share of their economy and of their budget—on education. We find that a 1 percentage-point increase in the share of income going to the middle 60 percent of income earners is associated with a 0.1 percentage-point increase in the share of the state’s budget spent on higher education and a 0.015 percentage-point increase in the share of the state’s GDP spent on higher education in the next year.

These results are consistent with a more detailed report we wrote in November 2011 on elementary and secondary education, “Middle-Class Societies Invest More in Public Education.” Those interested in on our methodology and data can consult the appendix of that report for more details.

The economic future of the United States is intrinsically tied to the future of American education. In the era of heightened global competition, the United States needs to make sure that all of its citizens are prepared to seize the economic opportunities of the future. Ensuring the American population is well educated is vital to that effort.

Just as the need for a well-educated workforce is highest, however, the United States appears to be failing in this effort. While other countries have worked to ensure that their citizens have become more educated, education levels in the United States have stagnated in recent decades, and part of that stagnation is because we are underinvesting in education.

As of 2010 about 41 percent of Americans between the ages of 55 and 64 had at least a college degree, while the college-educated share of Americans between the ages of 25 and 34 was only slightly higher at roughly 42 percent, according to data from the Organisation for Economic Co-operation and Development. This small difference means that the United States has not made significant increases in college attainment in recent decades.

Compare this stagnation in college attainment to the large gains made by our neighbor to the north, Canada, whose middle class has remained relatively strong. Similar to the American population, about 42 percent of Canadians between the ages of 55 and 64 had at least a college degree as of 2010. Fifty-six percent of Canadians between the ages of 25 and 34, however, had at least a college education—a gain of 14 percentage points. While the United States has stagnated in terms of college-graduation rates, Canada and others have succeeded in furthering the education of their citizens.

Increased access to higher education is often described as one of the remedies for the current historic level of income inequality. But as this analysis shows, the rise in income inequality and the decline of the middle class has skewed public policy toward the wishes of the rich and contributed to underinvestment in higher education. This suggests that strengthening the middle class will require not only policies that directly help the middle class—such as investments in education—but also political reforms to ensure that the voice of the middle class is heard.

David Madland is a Senior Fellow at the Center for American Progress. Nick Bunker is a Research Assistant with the Economic Policy team at the Center.

SOURCE: AP/Gerald Herbert

Xavier University student Triton Brown studies in a common area on campus before going to one of his part-time jobs in New Orleans.

It seems as though everyone from homeowners to state and local governments are refinancing their debt. Refinancing allows the borrower to replace his or her existing debt with a new loan that has a lower interest rate and better conditions. Doing so would allow borrowers to lower their monthly payments, freeing up income for other necessities such as groceries or gas and creating a ripple effect, putting money back into the economy.

For former students, however, that is not currently an option. Student-loan debt in the United States now exceeds $1 trillion, and borrowers of color are disproportionately affected. Refinancing is just one option to address the looming student-debt crisis, but for borrowers of color it is one that could significantly ease the student-debt burden that drags on individuals and on our economy as a whole.

Students of color have higher loan debt

Today’s average college graduate holds $26,600 in debt when he or she graduates, and the numbers for borrowers of color are more severe. A 2010 study by the College Board Advocacy & Policy Center found that 27 percent of black bachelor’s degree recipients had student-loan debt of $30,500 or more, compared to just 16 percent of their white counterparts. Additionally, 69 percent of black students who did not finish their college degree cite the high cost of tuition, compared to 43 percent of their white peers.

These borrowers will be affected for years to come as they attempt to buy homes, open businesses, and begin families. The burden of student debt is one that is carried long after graduation, forcing borrowers to delay homeownership and retirement savings in order to pay off their loans. Since fewer workers now have access to traditional pensions, maintaining long-term savings is crucial to a secure retirement for many Americans.

The option to refinance can especially help Latinos, who continue to face an achievement gap. In 2011 only 13.2 percent of all U.S. Latinos over the age of 25 had bachelor’s degrees, compared to 31.8 percent of their white peers. A 2009 Pew Hispanic Center survey found that the most common reason for this gap was pressure to support their families financially, which forces many Latinos to choose between attending college and caring for their families. Low-interest-rate loans would therefore help open doors for Latinos to be able to go to college without having to make that difficult choice.

According to our calculation, refinancing student loans would save borrowers roughly $14 billion in 2013 alone, creating a boost of about $21 billion for the nation’s economy. For borrowers of color who face higher interest rates from private loans, refinancing is a vital option to reducing their student debt. If a student with $30,000 of student-loan debt, for example, were allowed to refinance his or her loan and reduce the interest rate on it from 6.8 percent to 3 percent for repayment over 10 years, he or she could save $6,667.05 in interest payments over the life of the loan.

The burden of student debt on borrowers of color puts communities of color at a disadvantage when compared to their white peers and exacerbates pre-existing socioeconomic inequalities.

The burden of debt on borrowers of color

About 20 million Americans attend college each year, and about 60 percent use loans to help offset the costs. About 81 percent of black students borrow money, compared to 65 percent of their white peers. The impact of student debt on borrowers of color is twofold: Students of color tend to borrow more, and when they do borrow, they often face higher interest rates than their white counterparts. Coupled with lower graduation rates and higher levels of youth unemployment, borrowers of color face unique burdens.

Higher interest rates

Students of color take out private student loans at a higher rate than white students, making them more financially vulnerable to risky interest rates. Private-loan distribution trends differ by students’ race or ethnicity, meaning that students of color take out more risky unregulated private student loans. In 2008 black students had the highest private student-loan participation rate despite the fact that only four years earlier, they had a smaller percentage than both white and Latino students. Mounting levels of high interest rates on student loans leave borrowers of color struggling to make payments on time, often resulting in unforeseen fees for deferment or forbearance—processes that can prevent or delay loan payments. Though these processes may make it easier month to month for borrowers of color, they also make loans more expensive in the long term once tacked onto the increasing interest rates that may have accrued.

Enrollment in for-profit institutions

Students of color are also more likely to enroll in for-profit schools—the payments for which currently account for nearly half of student-loan defaults. For-profit colleges and universities tend to have higher tuitions, higher dropout rates, and higher occurrences of insurmountable debt for students. This puts economic and academic barriers on students of color by reducing college affordability and shifting more of the financial burden onto students and away from college institutions.

High youth unemployment rates

Youth unemployment—defined as the unemployment rate for those ages 16 to 24 years old—is higher among people of color. According to the Bureau of Labor Statistics, in August 2012 youth unemployment was 28.6 percent for blacks and 18.5 percent for Latinos, compared to 14.9 percent for their white counterparts. Given this high youth unemployment, more young people are realizing that leaving the labor force to go to school has never been a better option. But once they graduate and are faced with significant student debt—often from predatory financial institutions offering high-interest loans to students—they are faced with a double whammy: a lot of debt and a staggering economy.

The impact of long-term debt on borrowers of color

More than 13 percent of the students whose loans came due in 2009 defaulted within three years as a result of their long-term failure to make payments. Since borrowers of color tend to take out more money at a higher interest rate to finance their college expenses and have higher rates of unemployment, it is no surprise that students of color have higher default rates as well. The long-term impact of student debt is crippling, hindering youth and inevitably preventing future generations from home ownership and a secure retirement.

Debt not only holds individuals back, it also holds back their families, communities, and the economy at large. Past-due payments on loans lead to plummeting credit ratings, lower wages, and loss of federal benefits such as tax refunds that offset loan debt. Borrowers are losing money out of their own pockets, using more of their income to pay back their student-loan debt instead of saving to buy a home or for retirement. This causes a ripple effect throughout the economy: If fewer people have money to spend throughout the greater economy, less growth will occur and industries will stagnate.

One example of this is in the housing market. First-time homebuyers are essential to the recovery of the housing market. According to the Federal Reserve, however, fewer young people are getting mortgages. Only 9 percent of 29- to 34-year-olds got a first-time mortgage from 2009 to 2011, compared to 17 percent in 2001. For those with significant student debt, the debt-to-income ratio puts homeownership out of reach.

Additionally, young people who are swimming in education-loan debt are less likely to participate in wealth building mechanisms such as 401(k)s and other retirement savings plans. Refinancing their student debt would give students of color the opportunity to save more over their lifetime, allowing them to spend more on long-term savings and leading to wealth accumulation. In fact, the wealth gap among communities of color and their white counterparts is astonishing. In 2007, the latest year for which data are available, the median wealth for married or cohabitating white non-Hispanic couples was $167,500, compared to $31,500 for blacks and $18,000 for Latinos. The numbers are bleaker for single women: White single women have a median wealth of $41,500, compared to $100 for single black women and $120 for single Latino women.

Asset and wealth building occurs over generations, providing communities with economic stability. When barriers such as significant debt hinder young people from saving and building wealth, it can have a long-term effect on their children and grandchildren. In fact, from 1999 to 2007 the Urban Institute estimates that the median net worth of black families was $18,181 and that it was $33,619 for Latino families, compared to $122,927 for whites. These gaps stem from lower asset holding over generations for communities of color.

Long-term loan debt puts entire communities at risk, especially those of color, who have historically faced higher levels of unemployment and barriers to achieving wealth over time. While programs for refinancing student debt are just one of many options to address our nation’s student-loan crisis, the need for reasonable interest rates is crucial for borrowers of color.

Sophia Kerby is a Research Assistant for Progress 2050 at the Center for American Progress.

SOURCE: AP/ Cheryl Senter

Kim Pollock, 17, goes through college materials in her bedroom in Bedford, New Hampshire. FAFSA will soon start recognizing same-sex parents on their financial aid applications.

When lawmakers first created the Free Application for Federal Student Aid, or FAFSA, in 1992, no state recognized civil unions or domestic partnerships between same-sex couples, let alone the freedom to marry. Ten states and the District of Columbia currently confer the rights and responsibilities of marriage to same-sex couples—and that number is swiftly increasing.

Recognizing this changing landscape, the U.S. Department of Education announced last week a small but significant change to the FAFSA that will make the application a more fair, effective, and efficient tool for students seeking financial aid to help pay for their college education. Starting in 2014 the Department of Education will begin collecting demographic and financial information about families headed by same-sex parents to determine eligibility for and amounts of Pell Grants and federal student loans.

Each year more than 20 million families complete the FAFSA, and these families do not necessarily all have the same family structures that the FAFSA—with its roots in the 1950s—presumes. The announced change from the Department of Education simply brings the FAFSA up to date to reflect the changing nature of the American family. What’s more, because many states, colleges, universities, and other providers of financial aid build out from the information already collected on the FAFSA or are modeled after the FAFSA, the proposed changes will likely have a trickle-down effect such that the entire process will become more fair, efficient, and effective for all families.

Below we take a look at the changes to the FAFSA, what they mean for families with same-sex parents, and remaining issues for lesbian, gay, bisexual, and transgender, or LGBT, applicants.

The FAFSA will include language allowing applicants with same-sex parents to accurately fill out the form

The FAFSA currently uses the terms “mother/stepmother” and “father/stepfather” when requesting information about an applicant’s parents. Applicants with same-sex parents must then either arbitrarily designate one parent as “mother” and the other as “father,” or omit one parent from the form entirely. In other words, the current FAFSA puts these applicants in a lose-lose scenario, forcing them to complete and submit an application that does not accurately reflect their family structure and that is therefore inaccurate.

The department’s proposal will change that. For the 2014-15 FAFSA, the department plans to replace “mother/stepmother” and “father/stepfather” with “parent 1” and “parent 2.” This change means that for the first time the department will collect same-sex parents’ financial information in the same way that it does today for married different-sex spouses. These changes not only accurately reflect—for the first time in the FAFSA’s history—the existence of LGBT families; they also capture the economic situation of these families so that students applying for aid can get the support based on financial need without any bearing on their parents’ sexual orientation.

This change mirrors similar changes made by other federal agencies. In 2011, for example, the U.S. Department of State initiated reforms to give passport application forms a more gender-neutral parental designation. Doing so required minimal changes to federal forms while significantly enhancing the accuracy, fairness, effectiveness, and efficiency of government operations. More importantly, this change effectively protects LGBT families by requiring both parents to ascend to a child’s passport application, ensuring that one parent cannot take the child and leave the country without the other’s permission.

The FAFSA will be a more efficient, effective, and accurate application

At its core, this much-needed change to the FAFSA achieves two important policy objectives.

First, it guarantees that all families are treated fairly and equally in the higher-education financial-aid process. Without accurate language to describe their families, students with same-sex parents are likely to see their application delayed due to often-unavoidable inconsistencies. More concerning is the fact that some children of same-sex couples may not apply for aid at all due to the complexity and confusion caused by the FAFSA’s use of gendered language. What results is inequitable access to financial aid for students with same-sex parents. This change, however, significantly levels the playing field for these applicants. As U.S. Secretary of Education Arne Duncan said in announcing the proposed change: “All students should be able to apply for federal student aid within a system that incorporates their unique family dynamics.”

Second, this change advances the efficiency and effectiveness of delivering aid based on need by not allowing irrelevant characteristics such as sexual orientation factor into the application process. Financial aid should be allocated based solely on financial need. Allowing other factors—such as sexual orientation—to enter the process results in the imprudent use of taxpayer dollars. In this way, the proposed change from the department would be a significant step toward enhancing the efficient use of federal funds.

But that is not to say this is the overarching goal of this change. Importantly, the change was made not to save the federal government money, but instead to ensure greater equity among aid applicants. Without accurate data on the LGBT community, we simply do not know how many families will be impacted by this change. We therefore do not know how this change will impact the budget in aggregate, since some families are likely to see larger financial-aid packages while others may see smaller ones with this change.

In announcing the change, Secretary Duncan said, “These changes will allow us to more precisely calculate federal student aid eligibility based on what a student’s whole family is able to contribute and ensure taxpayer dollars are better targeted toward those students who have the most need, as well as provide an inclusive form that reflects the diversity of American families.” With this change, if both parents are living together, both of their incomes will be considered when determining eligibility for federal aid. This will be true whether the parents are married or not and whether they are the same sex or opposite sex.

Remaining LGBT issues with the FAFSA

While the department’s proposed change is welcome news for students with same-sex parents, problems still exist for LGBT applicants.

First, even with this proposed change, antigay laws will continue to prevent the Department of Education from recognizing same-sex spouses or partners. Passed in 1996 the Defense of Marriage Act, or DOMA, defines marriage for the purposes of federal law as the union between one man and one woman. This law effectively denies more than 1,000 federal benefits and protections to legally married same-sex couples. That includes the ability to name a same-sex partner or spouse—and often their dependents—on the FAFSA. By excluding certain family members, the FAFSA calculates an “expected family contribution” that ultimately distorts the amount of aid these applicants should receive.

Second, transgender applicants face unique obstacles in obtaining financial aid. Transgender applicants often encounter problems when data mismatches occur, particularly with regards to a changed name or the gender markers on government-issued identification. If financial-aid institutions encounter data mismatches on applicants’ identification markers, this could delay the process of transgender students’ applications for financial aid. These data-mismatch issues can significantly impair these students’ ability to access aid. This is particularly problematic for transgender individuals that were identified at birth as male, as these students are required to register with the Selective Service upon turning 18 years old.

Third, accessing federal financial aid poses unique problems for LGBT youth coming from unsupportive or hostile families. The FAFSA requires most young applicants to submit their parents’ or legal guardians’ financial information, as well as provide their signatures to successfully submit an application for aid. This requirement may prove difficult for LGBT applicants who come from homes where they are unloved, neglected, abused, or even kicked out because of their sexual orientation or gender identity.

Luckily, the federal financial-aid system recognizes the difficulties facing youth with uncooperative parents by allowing them to bypass many requirements to submit their application, while asking the aid officer on campus to override the dependency determination. Still, that option is not foolproof. Some aid officers on college campuses are reluctant to do a dependency override in any circumstance and more must be done to ensure all children—estranged or not—receive the aid to which they are entitled.

Conclusion

Federal financial aid represents the gateway to a college education for many students in the United States. Individuals with a college education have higher earnings than those who do not, experience lower rates of unemployment and poverty, and have fewer health issues than those who do not or cannot attain a postsecondary education. Built into the system, however, are inherent biases against families with LGBT members, resulting in the discriminatory misallocation of federal dollars based on sexual orientation or gender identity—and not on an applicant’s financial need. With the upcoming changes to the FAFSA, one of those biases will be removed, which is good news for families headed by same-sex parents.

Because of the Defense of Marriage Act, nearly all government forms fail to recognize the diversity of today’s families. Forms such as the FAFSA continue to use gender-specific language when collecting information about parents and spouses that preclude same-sex couples from being fully recognized.

The U.S. Department of Education’s leadership on this issue, however, shows that even with DOMA, federal agencies can take steps to help families with same-sex parents when the executive branch has the flexibility to modify government forms. It’s an authority that should be leveraged wherever possible.

Crosby Burns is a Policy Analyst for the LGBT Research and Communications Project at the Center for American Progress. David Bergeron is the Vice President for Postsecondary Education at the Center.

SOURCE: AP/Seth Perlman

Gloria Newton Davlantis speaks with students seeking employment during a University of Illinois Job Fair in Springfield, Illinois. Higher Education based on credit hours in the United States often leave graduate unprepared for jobs.

The credit hour is currently the basic unit of measurement for student progress in higher education in the United States. The credit hour informs aspects of administration of higher-education institutions throughout the United States, including establishing teaching loads and graduation requirements, and is the basic structural unit of most college-level courses as well as the basis for federal student aid.

Despite this fact, the term was formally undefined until 2010 when the U.S. Department of Education reluctantly defined a credit hour as the amount of work associated with intended learning outcomes that can be verified with evidence of student achievement.

There is growing dissatisfaction with credit hours, however, because they measure time instead of educational attainment and fail to provide any useful understanding of what students actually learned. This criticism is heard most loudly in the debate around credit transfers from one institution to another. In reality, however, this distrust of credits earned elsewhere reflects the fact that it’s difficult to place accurate value on earned credits even though those hours came at a great price to the student, his or her family, and taxpayers.

Consider this question: Why do so many graduates of highly regarded institutions need unpaid internships in order to demonstrate jobs skills before an employer will hire them? Often it is because the accumulation of credit hours, even in an appropriate field of study from a renowned program, does not necessarily demonstrate that the graduate has acquired the knowledge and skills necessary for performance in a specific job. College transcripts show courses and grades but shed little light on what students actually know in regards to a job.

A small but growing number of educational leaders are advocating a move away from assessing student progress by credit hours and toward clear demonstrations of competence. Such a change will profoundly effect not only our higher-education system but also the entire human-capital system in the United States.

The Department of Education’s recently approved associate’s degree in business administration at Southern New Hampshire University is an example of how programs can be delivered and assessed without the credit hour.  Typically, colleges and universities offer programs based on courses that they hope will prepare students for jobs with prospective employers in various industries. Southern New Hampshire University, however, intentionally sought help from employers by asking them to specifically explain the skills they desire in new hires. The program is structured around 120 different competencies—what students know and can do—that are measured by rigorous assessments to demonstrate proficiency, rather than by three-credit courses, which is the norm in most higher-education institutions. This system helps the school ensure that every student who completes the associate’s degree program demonstrates knowledge in every area represented by the degree.

The competency-based approach ensures that employers can hire graduates of the Southern New Hampshire University associate’s degree program with confidence. To the extent that unpaid internships reflect a need for assurance that graduates can perform professionally, any graduate under this model should be able to move directly into the paid workforce. This will make it more likely that every graduate will be able to begin repaying his or her federal student-loan debt without becoming delinquent.

Another significant benefit of transitioning to competency-based models will likely be that graduates will incur less debt. Consider the fact that a student who comes into the program with some relevant academic or work experience will be able to move through the program more quickly than those without such experiences. In the Southern New Hampshire University program, dubbed College for America, a student can conceivably complete an associate’s degree in six months and for only $1,250—far below the average length and cost of even community college programs.

Additionally, employers are more likely to invest in a competency-based degree program for continuing the education of current employees. Large-scale employers such as ConAgra Foods and FedEx already accepted this model. These employers are investing significantly in the development and early implementation of the competency-based program at Southern New Hampshire University and will no doubt continue to do so. Employers recognize that they will benefit from their contribution because they will be able to influence the ongoing improvement and regular updating of the program.

A 2012 study called “Education to Employment” by McKinsey & Company, a global management consulting firm, found that only 42 percent of U.S. employers believe college graduates are adequately prepared for work, while 72 percent of educational institutions think their graduates are ready for employment. Employers already think in terms of competencies, meaning these new competency-based programs offer educators and employers a common language and barometer of student achievement.

While it is unlikely that competency-based models will solve all the problems plaguing higher education today—and they certainly will not address all the inefficiencies in the current labor market—competency-based models will improve the connection between the higher-education system and employers. This will benefit current and future students, and that is what it ultimately is all about.

David Bergeron is the Vice President for Postsecondary Education Policy at the Center for American Progress.

SOURCE: AP/Paul Sakuma

A Stanford University student walks in front of Hoover Tower on the Stanford University campus in Palo Alto, California, February 15, 2012. The rise in student-loan debt could have a negative impact on the housing market, the broader economy, and Americans' future financial security.

The Center for American Progress and Campus Progress submitted joint comments to the Consumer Financial Protection Bureau in response to the agency’s request for information regarding an initiative to promote student-loan affordability. Read the full comment letter here.

We believe that the growing student-loan burden in this country could make it more difficult for families to achieve future financial security and, if left unchecked, could negatively affect the housing market and the broader economy. In our comments to the Consumer Financial Protection Bureau, we explored key characteristics of the growing student-debt burden and its potential impact on borrowers and the broader economy. We also offered recommendations to help contain the amount of student-loan debt incurred and make student-loan debt more manageable.

The rise in student-loan debt affects Americans of all ages

According to the 2010 Survey of Consumer Finances, 45 percent of all American families hold outstanding student-loan debt, up from 33 percent in 2007. While the majority of student debt is held by borrowers under the age of 35, the rise in student debt also affects older Americans. Thirty-six percent of families in a household headed by someone ages 45 to 54, 29 percent of families in a household headed by someone ages 55 to 64, and 13.3 percent of families in which the head of household is between the ages of 65 and 74 hold student debt.

The average student-debt obligation has also risen significantly, increasing by close to $3,000 for households under age 30 and $6,000 for households between the ages of 30 and 39. Student-loan delinquencies and defaults have risen alongside the increase in student-debt burden: Banks wrote off $3 billion in student-loan debts during January and February of this year alone, according to Reuters.

Economic obstacles for borrowers cause a ripple effect

Not surprisingly, declining incomes, rising housing costs, and higher student debt are all having a ripple effect across the broader economy. First, these factors may be delaying household formation. Two million more adults ages 18 to 34 live in a household headed by their parents than before the recession, an increase from 28.2 percent in 2007 to 31 percent in 2011. Moody’s Analytics estimates that each new household leads to $145,000 of economic activity, suggesting that this delay in household formation could be slowing broader economic growth.

Moreover, the delay in household formation and the financial challenges for adults in their twenties and thirties may alter the future of the U.S. housing market. The Bipartisan Policy Center estimates that Echo Boomers—those born between 1981 and 1995—will drive 75 percent to 80 percent of owner-occupied home acquisition before 2020, when Baby Boomers begin to sell off their homes. Yet homeownership rates for young people are among the lowest in decades.

While home prices and mortgage interest rates are both at historically low levels, the tightening of credit resulting from the housing crisis poses a double obstacle to young people with significant debt. First, due to the implementation of new mortgage regulations under the Dodd-Frank Act, lenders are often requiring that homeowners have a 43 percent “back end” debt-to-income ratio to get a loan. In other words, combined monthly housing costs and monthly debt payments must not exceed 43 percent of one’s monthly income in order to qualify for a loan. For those with significant student debt, this debt-to-income ratio cap may well put homeownership out of reach.

Second, even young borrowers who successfully meet debt-to-income ratios may not be able to set aside enough savings for a down payment. The Center for Responsible Lending calculates that median-income families of all ages take nearly 20 years to save enough for a 10 percent down payment and the closing costs for a moderately priced home. Younger workers may take even longer to save for a down payment, given their other immediate financial obligations, or they may simply never reach this goal.

Effects on retirement security

High student debt also threatens retirement security. According to the Center for Retirement Research at Boston College, 62 percent of workers ages 30 to 39 are projected to have insufficient resources in retirement. This is a far higher concentration than older age groups, and it has increased by 9 percentage points between 2007 and 2010. As nearly 20 percent of people in this age group hold more than $50,000 in student-loan debt, this burden could further undermine their ability to save for retirement.

The combination of inadequate retirement savings and the continued existence of housing debt or rent payments in retirement may be particularly damaging for retirees. In fact, families ages 65 to 74 with housing debt carry a median debt load of $70,000. What’s more, nearly 20 percent of households headed by someone age 65 or older are still renting. In short, more than half of families with a head of household who is at retirement age are still dealing with rent or mortgage payments. Historically, families have sought to pay off their mortgage by retirement to be free from shelter payments and have a source of funding for long-term care. This opportunity may be increasingly out of reach for many Americans.

Recommendations

The following recommendations, explored in detail in the full comment, would equip households with tools to better manage student debt so that they have the flexibility to invest sufficiently in their future financial stability:

• Develop a well-designed refinancing program for student-loan borrowers.
• Promote broader access to income-based repayment programs, which offer affordable payment schedules that correspond to the borrower’s income.
• Consider including private student loans under bankruptcy protection.
• Require school certification for private student loans.
• Encourage broader adoption of the college scorecard by postsecondary-education institutions.

Joe Valenti is the Director of Asset Building at the Center for American Progress. Sarah Edelman is a Policy Analyst with the Housing team at the Center for American Progress. Tobin Van Ostern is the Deputy Director of Campus Progress.

SOURCE: AP/Ed Andrieski

Students walk the campus at Metropolitan State University in Denver, Thursday, February 28, 2013.

Download the details of all 10 models (PDF)

Endnotes and citations are available in the PDF version of this issue brief.

As more students are struggling to pay back their student loans after graduation, it is now more important than ever for borrowers to have access to a student-loan-repayment plan that eases the burden of repayment and minimizes the risk of default. Students today face staggeringly high tuition bills, a youth unemployment rate of 12.5 percent, and a complicated assortment of student-loan-repayment plans that can be difficult to navigate even for the borrowers lucky enough to find well-paying employment. Recognizing these obstacles, President Barack Obama and Congress have expanded student-loan repayment options, and advocates have proposed various plans to make it easier for borrowers to pay back school debt. Even with these advances, however, it is clear that existing student-loan-repayment options aren’t working for many borrowers.

Borrowers of federal student loans are finding it increasingly difficult to make timely payments on their debt. With $864 billion in federal loans and $150 billion in private loans, student debt in America now exceeds $1 trillion. More than 13 percent of students whose loans came due in 2009 were in default on their debt as of September 2012, meaning that they hadn’t made a payment in at least nine months. What’s more, another 26 percent of borrowers were delinquent on their loans, meaning that they missed payments on their loans for more than 60 days. Borrowers who fall behind on their student-loan payments can face poor credit ratings and wage garnishment, and the federal government incurs additional costs as it attempts to recover the loans.

The Higher Education Act—which authorizes federal student-aid programs for postsecondary education and is up for reauthorization in 2013—provides an opportunity for policymakers to redesign the student-loan-repayment system. As Congress considers possible changes, it is important for everyone to understand the various options.

Everyone can agree that making it easier for students to pay back their loans will benefit both borrowers and federal balance sheets, and there are a number of existing and proposed plans designed to achieve this objective. As lawmakers evaluate the options, they should keep in mind that any student-loan-repayment system should be designed to provide a safety net to the low-income borrowers who need it most, to minimize defaults, and to be accessible and easy for students to use.

This issue brief will outline the parameters of 10 different student-loan-repayment plans, highlight the benefits of each, and suggest issues for policymakers to take into account when considering each plan.

10 student-loan-repayment plans

Existing repayment plans

Standard 10-Year Repayment Plan

The Standard 10-Year Repayment Plan is a plan that is currently available to all borrowers of federal student loans. Under the plan, the borrower fully repays the loan with interest by making the same fixed monthly payment every month for 10 years.

A borrower with a starting balance of $25,000 at 6.8 percent interest, for example, would make 120 payments of $287.70 each, for a total of $34,524.10.

The advantages of the Standard Repayment Plan are that borrowers will pay off their loans sooner—compared to most other repayment plans—and end up paying the least interest overall. The disadvantage of this plan, however, is that borrowers who start their careers with a low income may find making payments in the early years to be difficult or even impossible.

Graduated Repayment Plan

The Graduated Repayment Plan is also currently available to all borrowers of federal student loans. Under the plan, the borrower fully repays the loan with interest by making monthly payments that increase in time for 10 years.

The same borrower with a starting balance of $25,000 at 6.8 percent interest, for example, would make 120 monthly payments that start at $197.54 in the first two years of repayment and increase every two years until they reach $431.55 in the last year of repayment, for a total of $36,388.89.

The advantages of the Graduated Repayment Plan are that borrowers will still pay their loans off sooner than is the case with most other plans and are able to make lower monthly payments in the first years of employment, when their incomes are likely to be lowest. The disadvantages of the plan, however, are that borrowers will end up paying more interest than they would if they repay according to the Standard 10-Year Repayment Plan; borrowers who start off with a very low income may still find that the early payments are difficult or impossible to make; and borrowers must make payments in later years that are substantially higher than they would have been under the Standard 10-Year Repayment Plan.

Extended Repayment Plan

The Extended Repayment Plan is currently available to borrowers of federal student loans who have a starting balance of more than $30,000. Under the plan, the borrower fully repays the loan with interest by making either fixed or graduated monthly payments for up to 25 years.

A borrower with a starting balance of $45,000 at 6.8 percent interest, for example, could make 300 payments of $312.33 each, for a total of $93,699.73. Alternatively, he or she could make 300 graduated payments—starting at $258.93 in the first two years of repayment and ultimately reaching $435.36 in the last year of repayment—for a total of $100,910.03.

The advantage of the Extended Repayment Plan is that borrowers with more debt are able to make lower, more affordable payments by extending the length of the repayment period. The disadvantages of the plan, however, are that borrowers will pay more interest overall and borrowers who start off with a very low income may still find that the early payments are difficult or impossible to make.

Income-based repayment

Borrowers who took out loans before 2008 are eligible for income-based repayment, in which they may make monthly payments based on 15 percent of their discretionary incomes if they face financial hardship. Under income-based repayment, a borrower makes monthly payments equal to 15 percent of his or her income above 150 percent of the poverty line and any unpaid principal or interest is forgiven after 25 years. Under the plan, the minimum monthly payment may never be greater than what the borrower would have paid under the Standard 10-Year Repayment Plan. Under income-based repayment, borrowers employed full time in public service may qualify for loan forgiveness after 10 years.

A borrower with a starting balance of $25,000 at 6.8 percent interest, for example, would make monthly payments of $38 in his or her first year of repayment when his or her income is $22,000. Years later, when the borrower’s income increases to $70,000, he or she would only have to make minimum monthly payments of $289—the same amount he or she would have paid under the Standard 10-Year Repayment Plan.

The advantages of income-based repayment are that borrowers will have manageable payments when their incomes are low and loan forgiveness after 25 years of payments. The disadvantages of income-based repayment, however, are that borrowers will accrue more interest than they would if repay according to the Standard 10-Year Repayment Plan; they must submit annual documentation of income and family size to demonstrate eligibility; and they will have to pay taxes on any loan forgiveness that occurs after 25 years.

Pay as You Earn

Borrowers who took out loans after 2008 are eligible for Pay as You Earn, in which they may make monthly payments based on 10 percent of their discretionary incomes if they face financial hardship. Under Pay as You Earn, a borrower makes monthly payments equal to 10 percent of his or her income above 150 percent of the poverty line and any unpaid balance is forgiven after 20 years. As with income-based repayment, the minimum monthly payment may never be greater than what the borrower would have paid under the Standard 10-Year Repayment Plan. Also as with income-based repayment, borrowers employed full time in public service may qualify for loan forgiveness after 10 years.

Under Pay as You Earn, the borrower in the earlier example with a starting balance of $25,000 at 6.8 percent interest would make monthly payments of $25 in his or her first year of repayment when his or her income is $22,000. Even when the borrower’s income grows to $60,000, he or she would only have to make monthly payments of $284, less than the amount he or she would have paid under the Standard 10-Year Repayment Plan.

The advantages of Pay as You Earn are that a borrower will have low monthly payments when his or her income is low, although the payments for low-income borrowers are not significantly less than they would be under income-based repayment—$25 instead of $38 in the above example. The borrower also has the opportunity for forgiveness after just 20 years.

The disadvantages of Pay as You Earn, however, are that borrowers must submit annual documentation of income and family size to demonstrate eligibility and will have to pay taxes on any loan forgiveness that occurs after 20 years. As analysts at the New America Foundation have suggested, the biggest beneficiaries of the program might be high-income, high-debt borrowers who receive substantial loan forgiveness after 20 years.

Consolidation

Consolidation is currently available to borrowers who have multiple loans and would like to combine them into a single loan. Under consolidation, the newly combined loan carries a fixed interest rate based on the weighted average of the interest rates of the underlying loans rounded to the nearest higher one-eighth of a percent and not exceeding 8.25 percent. A borrower with $15,000 in unsubsidized federal Stafford loans at 6.8 percent and $20,000 in federal direct PLUS graduate loans at 7.9 percent, for example, would be able to consolidate his or her loans into one $35,000 consolidation loan at 7.5 percent.

After consolidating, a borrower repays the loan by making payments that are fixed, graduated, or income-based for up to 30 years, with the length of the repayment period depending on the size of the loan. Under the Standard 10-Year Repayment Plan, for instance, the borrower in our example would make payments of $281.96 per month, for a total of $67,669.83.

The main advantage of consolidation is that a borrower can combine his or her multiple loans into a single loan with a single monthly payment. The disadvantage of consolidation, however, is that a borrower will pay more interest overall by extending the length of the repayment period.

Options for repayment reform

New America Foundation plan

Under the New America Foundation’s new proposal to reform federal student aid, all borrowers would repay their loans based on a percentage of their incomes. A borrower whose income is less than 300 percent of the poverty line would make minimum monthly payments of 10 percent of his or her income above 150 percent of the poverty line. A borrower whose income is greater than 300 percent of the poverty line would make minimum monthly payments of 15 percent of his or her income. Unlike both income-based repayment and Pay as You Earn, there is no upper limit on the minimum payment amount—a borrower must always make payments equaling 15 percent of his or her discretionary income.

Under the New America Foundation plan, student-loan interest rates are set at the 10-Year Treasury rate plus 3 percent. Under that formula, the rate on loans taken out in the 2012–13 academic year would be 4.9 percent. Borrowers with an initial loan balance of less than $40,000 would have any unpaid debt forgiven after 20 years, and borrowers with an initial loan balance of more than $40,000 would have any unpaid debt forgiven after 25 years. Unlike the current system, the New America Foundation plan would eliminate taxes on loan amounts that are forgiven.

The advantages of the New America Foundation plan are that borrowers will have low monthly payments when their incomes are low, loan forgiveness after either 20 or 25 years, and will not have to pay taxes on debt forgiveness. Furthermore, the plan targets federal dollars toward the low-income borrowers who need the most help. A possible disadvantage of the plan, however, is that students who take out loans when Treasury rates are high will face significantly higher interest rates on their loans.

Australian model

Under Australia’s current student-loan repayment plan, all borrowers repay a percentage of their incomes through payroll withholding. When a borrower reaches a minimum income threshold equivalent to about U.S. $50,000, a payment of 4 percent to 8 percent of income is collected through routine payroll deduction. Instead of charging interest, all loans are assessed a set fee of 25 percent of the initial balance of the loan, and the balance of the loan is then adjusted annually for inflation.

The advantages of the Australian model are that borrowers have either low or no payments when their incomes are low, never pay more than 8 percent of their incomes, and do not have to worry about paying more in interest if they take longer to repay their loans. Furthermore, borrowers do not have to choose between multiple repayment plans, set up monthly payments, or document their income in order to qualify for low or no payments.

A disadvantage of the Australian model, however, is that—because repayment occurs through tax collection—graduates who leave the country do not pay back their loans. According to a recent report by Australia’s Grattan Institute, an estimated 20 percent of Australian student-loan debt will never be paid off due to borrowers either earning too little or moving out of the country.

Petri Bill (ExCEL Act)

Under legislation proposed late last year by Rep. Tom Petri (R-WI), all student-loan borrowers would repay 15 percent of their discretionary incomes through payroll withholding. The bill would combine all federal loans into one loan with a fixed interest rate based on the 10-year Treasury rate plus 3 percentage points for loans up to $31,000 and 4.1 percentage points for loans exceeding $31,000. A borrower would repay 15 percent of his or her income above 150 percent of the poverty line through routine payroll deduction. Unlike with current repayment options, interest accrued during repayment would not compound, and interest would stop accruing when the total amount of interest accrued equals 50 percent of the loan’s original balance. Under the plan, there is no loan forgiveness for public service.

A borrower with a starting balance of $40,000, for example, would make monthly payments of $103 when his or her income is $25,000. Later, when his or her income increases to $75,000, he or she would make minimum monthly payments of $728.

The advantages of the Petri model are that borrowers have either low or no payments when their incomes are low and can only accrue a limited amount of interest. Moreover, they do not have to choose between multiple repayment plans, set up monthly payments, or document their income in order to qualify for low or no payments.

Additional issues to consider with this model involve the interest-rate calculation, the treatment of loans held by public servants, and the lack of deferment or forbearance. While 10-year Treasury rates have recently been as low as 1.9 percent, rates were as high as 15 percent in the 1980s. Under the Petri formula, this would result in student-loan interest rates ranging from 4.9 percent to 18 percent. The cap on accrued interest, however, may offer some protection to borrowers from extremely high interest rates. The Petri bill also eliminates loan forgiveness for public service and the option for deferment or forbearance that is currently available to borrowers in other plans under special circumstances such as economic hardship.

Lumni model

Lumni is a social enterprise that provides loans to students who agree to pay back a set percentage of their incomes to the lender after graduation. Under the Lumni model, the borrower typically agrees to pay between 4 percent and 8 percent of his or her first 10 years of income, with the percentage depending on the size of the loan and the borrower characteristics. The loan does not accrue interest, and the borrower may end up paying back more or less than the original amount of the loan depending on his or her income over 10 years.

In one example provided by Lumni, a nursing student in Colombia borrowed $8,530 from Lumni in exchange for agreeing to repay 14 percent of his salary for 118 months. If he makes the expected salary for a nurse, he will end up paying the equivalent of a 17 percent interest rate. If he is unable to find employment for a portion of that time, however, he might only repay the balance of the loan—or repay even less, if his eventual earnings are low.

An advantage of the Lumni model for students is that a borrower who struggles to find work or ends up in a low-paying career will never have to pay more than a certain percentage of his or her salary. A disadvantage, however, is that high-income borrowers may end up paying the equivalent of extremely high interest rates. One issue to consider is how Lumni determines payments—is there a poverty exemption, for example, or is there a salary below which borrowers do not make repayments?

Conclusion

Rising student debt and high default rates on student loans indicate that the safety net for student-loan borrowers is insufficient. This brief outlines 10 commonly discussed models for student-loan repayment, ranging from existing repayment plans to foreign models to proposed legislation. Key principles for student-loan repayment are that the system should:

• Provide a safety net for borrowers who need it
• Minimize defaults and delinquencies
• Be easy to use

Easing the burden of repayment is only one piece of the puzzle when it comes to fixing America’s student-debt crisis. Reforms must also address the rapidly increasing cost of college, the rise of for-profit colleges offering worthless credentials, expensive private student loans, the inability of borrowers to refinance their student loans at lower interest rates, and the restriction against discharging student loans in bankruptcy. As part of these broader reforms, lawmakers should place a priority on creating a student-loan repayment system that provides an adequate safety net for borrowers.

Sarah Ayres is a Policy Analyst with the Economic Policy team at the Center for American Progress.

SOURCE: AP/ Stephen Morton

Savannah Country Day School student Frances Dales, left, and Director of College Counseling Mary Beth Fry, right, discuss Dales' college options.

Creating a one-size-fits-all fact sheet to help families choose among the multitude of colleges in the United States is not an easy task. We commend the White House and the Department of Education’s efforts to do just that by redesigning the college scorecard—a one-page summary of the cost, debt, and earnings potential of every degree-granting college in the United States. The scorecard—announced by President Barack Obama in his State of the Union address this week and released yesterday—addresses many of the concerns we raised about last year’s draft scorecard in our report, “Improving the College Scorecard.”

CAP brought the original college scorecard draft to focus groups with college-bound high school students, who identified potential problems with its design and content. The new scorecard responds to these students’ concerns in the following areas:

• Better layout. We asked for a more readable design, and the Department of Education delivered. The new college scorecard features easy-to-read, clearly labeled sections with simple graphics that give students an idea of how an institution measures up to other colleges nationwide. In addition, this scorecard contains a plain-language description of net price—a college’s tuition minus any discounts such as grants and scholarships, which totals what a student actually pays to attend any particular school—a concept that was particularly troublesome for some students.
• Customization. CAP found that students want to know what they specifically will pay to attend a particular college, not what the average student will pay. The new scorecard contains a link to the college’s net price calculator, which allows them to get a price estimate by entering information on each family’s particular financial circumstances.
• Alternative measures of debt. The original college scorecard draft measured student debt as “the percentage of total loan amounts being repaid by former students,” a concept that the students we spoke with found difficult to understand. The new college scorecard replaces that measure with student loan default rates and median student loan debt for each college. While the results of our focus groups did not support inclusion of default rates, they found that students responded very well to information about average loan debt. In particular, we recommended that loan debt be put in the context of students’ lives by including information such as average monthly payments for each institution. The new scorecard prominently features that information.
• Working toward better employment data. Our report emphasized students’ interest in employment outcomes—including average earnings, as well as employment rates and earnings by major. Though the scorecard does not currently include this information, the Department of Education plans to release earnings information this year, and the scorecard encourages students to seek detailed employment outcome information from the universities themselves.

Of course, there are still some areas for improvement. As the Department of Education makes changes to the scorecard over the coming year, we urge it to consider:

• Including institutional contact information. The college scorecard will never be able to answer everything—it may inspire more questions than it answers. So it is important to include the contact information for relevant offices at the college or university such as admissions and financial aid offices.
• Consumer testing. CAP’s focus groups were limited both in terms of scope and type of student. The Department of Education should continue testing the scorecard with students, especially nontraditional ones such as older adults and part-time students. It should also conduct focus groups with parents to gauge their reactions to the scorecard. In particular, the department should test whether both students and parents can easily understand the language included in the new draft, and whether the new graphics convey the appropriate messages.
• Collecting data specifically for the scorecard. The information presented in the scorecard is limited to the data currently available to the Department of Education. That’s why policymakers are likely to include in it information such as default rates, even though our focus groups show that most students will not use these data to inform their decisions. To improve the usability and relevance of the scorecard, the department should collect new data based on what families want to know and can easily incorporate into their college decisions.
• Finding ways to get the scorecard into students’ hands. The new version of the college scorecard is currently only available on federal websites. The Department of Education should work with Congress and college access advocates to find ways to put the scorecard in places where students are more likely to find it, starting with the places students already go for college information: high school guidance counselors’ offices and college websites.

CAP shares the president’s goal of helping students find quality, affordable postsecondary institutions. Access to easy-to-understand, comparable information about the value of a college’s programs will help families make sound choices about where to apply and how to pay for college. The new college scorecard is a significant step in that direction.

Julie Margetta Morgan is the Director of Postsecondary Access and Success at the Center for American Progress.

SOURCE: AP/Toby Talbot

Students walk across campus at the University of Vermont on Monday, April 30, 2012, in Burlington, Vermont.

Endnotes and citations are available in the PDF version of this issue brief.

Interest rates are at historic lows and everyone—homeowners, corporations, and even state and local governments—are refinancing their debts. Refinancing allows the borrower to replace his or her existing debt with a new loan with lower interest rates and better terms. This means that borrowers can lower their monthly payments, which frees up income for purchases and creates ripple effects throughout the entire economy. There is one critical group, however, that is getting left behind in the refinancing boom: students and families who take out loans to pay for higher education.

According to a recent Lumina Foundation poll, the majority of respondents without a certificate or degree beyond high school said that they would feel more secure in both their job and their financial future if they did have such education. Furthermore, the greater economic benefits of higher education include higher contributions to tax revenues due to higher rates of employment and wages, greater productivity, higher consumption, and reduced reliance on government financial support. And yet state governments are steadily disinvesting in public higher education. Rather than cutting their costs, colleges have responded to smaller public investments by increasing tuition, which shifts a larger percentage of the burden of college costs directly to students and families. Due to both marketing by lenders and the limitations of federal financial aid, many students have even taken on private loans, which can bear interest rates twice as high as federal loans.

Student loan debt now amounts to $1 trillion, $864 billion of which is backed by the federal government. The majority of federally backed student debt is at an interest rate higher than 6 percent, with more than three-fourths being at an interest rate above 4 percent. These rates are double or triple the less than 2 percent rate of government debt. The higher disparity between these two rates has resulted in increased revenue for the federal government and can add up to tens of thousands of dollars of additional costs to the average borrower.

Unfortunately, an increasing percentage of borrowers are failing to keep up with the repayment of their loans. More than 13 percent of students whose loans came due in 2009 defaulted on that debt within three years as a result of long-term failure to make payments. Another 26 percent of borrowers at five of the major loan-guaranty agencies became delinquent on their loans—one stop short of default.

It is in the nation’s best economic interest to ensure that students are able to make timely payments on their loans, and it’s time for federal policymakers to take action. We should enact meaningful reforms that include an interest-rate reduction and that provide a way for private-loan borrowers to consolidate their debt into the federal student loan program or otherwise modify the terms of their loans.

Refinancing is a pragmatic solution to the problem of mounting student debt in this country. Reduced student loan costs boost the likelihood of repayment while also stimulating the economy by freeing up income that can be used and spent in other sectors of the economy. Refinancing even just those federal student loans with an interest rate above 5 percent would result in a savings of $14 billion for individual borrowers in 2013 and pump $21 billion into the economy in the first year alone. (see Methodology)

Even though interest rates on government debt are remarkably low—currently 1.97 percent—interest rates on unsubsidized federal student loans are set by Congress through legislation. They remain stagnant at 6.8 percent.

It’s possible that the future will bring policies that decrease college costs and tighten government regulation of private lending. But those policies won’t help recent graduates who have already assumed too much debt to pay tuitions that are too high. Lowering interest rates on existing loans would help everyone—from the borrowers to all Americans, who would benefit from a boost to the economy.

The goal of these initial American Progress-Campus Progress products will be to start the conversation about how to lower student loan interest rates. There are a variety of different mechanisms for doing so, as well as corresponding variances in size and scope of a potential program. We will continue to put out products, conduct briefings, and hold meetings to call on a variety of sectors—from nonprofit organizations and for-profit institutions to the executive branch and Congress—to submit their own plans and suggestions for refinancing student loan interest rates. The following is a brief overview of some of the issues our products will address.

An opportunity for reform

From managing soaring tuition costs to streamlining federal student aid, the postsecondary education system in the United States needs reform. The current system does not work for the many Americans looking for access to and success in higher education. Middle-class families are frustrated by the increasing cost of college and the rising need to take out loans to finance a higher education. These problems need to be addressed both for future generations of Americans and for those students and families who have already been burdened with significant debt.

We must engage and provide relief to the 37 million borrowers who collectively owe more than $1 trillion in student debt. These borrowers are primarily over the age of 30, and 15 percent are over age of 50. Engaging this group on the issue of student loan debt provides us with an opening to achieve the critical mass of public engagement that will be necessary to enact further reforms of the higher-education system and address its rising costs.

A federally backed refinancing and loan-modification program would reduce the interest rates paid by borrowers, provide new options and protections to borrowers in the private-lending sector, and stimulate the economy. It would also provide direct relief to the tens of millions of current borrowers, engaging them in the effort to improve our higher-education system.

Right now, a 10-year Treasury bond has an interest rate of 1.97 percent. Most borrowers, however, are locked into interest rates more than three times higher. The federal government is generating significant revenue from existing loans rather than passing on a portion of those record-low rates to students and their families. According to the Congressional Budget Office, federal student loan subsidy estimates for fiscal year 2013 equal $35.5 billion in revenue. The same report estimates that the 2013 administrative costs for managing the loans are $1.7 billion, which would still result in a net revenue of $33.8 billion. The purpose of student loans should be to increase access to postsecondary education and invest in future economic growth—not to generate federal revenue.

There are a variety of ways to structure a refinance and loan-modification program that impact both scope and cost. The focus, however, should remain on easing the burden of educational debt repayment by shifting some of the billions of dollars that the government generates in revenue back to the individual borrowers.

Furthermore, lowering interest rates would reduce the amount of money borrowers spend each month on debt and would allow them to spend it elsewhere, which would help immediately stimulate the economy. Borrowers could, for example, purchase a home, a car, or products to meet their everyday needs. Additionally, lower interest rates going forward would help alleviate Americans’ concerns about their long-term financial stability when faced with the cost of higher education.

Not only would a federally backed refinance and modification program be a positive move for the economy and individual borrowers, but it would also strengthen a program whose primary purposes are to provide low-interest education loans to anyone who meets the basic criteria and to increase access to education, which allows people the opportunity to move up the economic ladder. Any student loan refinance and modification program would need to provide protections for borrowers, to guarantee lower interest rates, and to stimulate the economy.

As outlined below, the cost of such a program would vary significantly depending upon its exact structure. Previous estimates indicate that a swap of private loans for federally backed loans would generate billions of dollars of revenue for the federal government. Other models could blend private and public investment, which would allow the federal government to operate it at a low cost. Ultimately, though, the Congressional Budget Office will need to score various models and proposals for firmer cost projections.

Federal loans

The majority of student loans are federally backed loans. At the end of 2011, there were 35 million borrowers, approximately $364 billion in outstanding Federal Family Education Loans, or FFEL loans—loans that were guaranteed by the federal government but issued by private lenders—and $342 billion in outstanding Direct loans—loans that were issued directly by the federal government.

FFEL loans are no longer being issued and are now offered more efficiently as Direct loans. A significant amount of them, however, still exist at a range of interest rates. Interest rates for Direct loans could be directly lowered, but thanks to existing agreements between FFEL leaders and the federal government, the cost of a FFEL refinancing program could be borne by both the private lenders who hold the existing loans and the federal government. The exact ratio of payments and the net costs would depend entirely on the specifics of the refinancing mechanism.

Mechanisms for refinancing FFEL loans

FFEL loans could be refinanced in two ways:

• Directly swapping FFEL loans for Direct loans
• Providing a fund or incentive for FFEL lenders to refinance loans while retaining them in the FFEL market

Various models of swapping FFEL loans for Direct loans could in fact generate revenue for the federal government or be cost neutral. The entire federal loan system switched from FFEL loans to Direct loans because the latter are less expensive; it is also less expensive for the federal government to convert FFEL loans into Direct loans. Unlike FFEL loans, Direct loans are not issued by private lenders. The ultimate cost of the program would of course depend upon what new interest rates the loans acquired, but switching loan types would merely hasten the already inevitable end of the FFEL program.

On the other hand, the federal government could keep FFEL loans intact while still reducing interest rates by using a fund or incentives. This model by itself, however, would not pass along the better protections afforded to borrowers with Direct loans, and it would not generate the same levels of direct revenue for the federal government. The reason it still deserves some consideration is that it avoids some secondary consequences of a complete swap and could be designed with a similar structure to certain private student loan refinancing models. This could make it easier for a program for private loans and a program for FFEL loans to move in tandem.

One example of how such a loan-transfer mechanism could work in practice is the Ensuring Continued Access to Student Loans Act, which Congress enacted in 2008 in order to introduce liquidity into a secondary FFEL private-securities market. At that time student loans were still being made through private lenders. Because of the economic climate, however, lenders were running out of capital with which to make new loans. Due to that concern, the legislation was passed, allowing the federal government to purchase loan securities and ensuring the continued availability of student loans. The program expired in 2010, at which point the Department of Education had purchased more than $100 billion of student loan securities.

Between the act and its Direct loan program, the federal government ended up financing about 88 percent (by dollar volume) of the federal student loans made during the 2008-09 academic year. These loans were purchased at high reimbursement rates exceeding 95 percent and were therefore very desirable to the lenders. Furthermore, the Congressional Budget Office stated:

[The law’s] effect on the federal budget has been to lower the cost of the student loan programs. Purchasing guaranteed loans allows the Department of Education to avoid some of the payments it would have made to FFEL lenders. Once the loans are purchased, payments from the government to FFEL lenders cease, and the loans are serviced and administered by the department’s contractors. Thus, the purchased loans have the same costs as direct student loans.

While these loans did not result in any increased costs to the Department of Education, the reimbursement rates were likely significantly higher than they would have been if they had been purchased in the private market. Future use of a similar mechanism could be more efficiently priced to result in net savings for the federal government rather than simply being cost neutral.

One example of a loan consolidation and refinancing program is the Health Care and Education Reconciliation Act, which was passed in 2010 and expired in 2011. Under the Health Care and Education Reconciliation Act, eligible FFEL loans could be consolidated into Direct loans.  This temporary program provided borrowers the opportunity to simplify their loan repayment process. The program reduced interest rates on the total consolidated FFEL loan and Direct loan balance to 0.25 percent.

The Federal Reserve provides another example of the purchase of both FFEL loans and private student loan securities. In November 2008 the Federal Reserve announced the creation of the Term Asset-Backed Securities Loan Facility under the Federal Reserve Act. The program was intended to improve economic and market conditions by purchasing asset-backed securities. Originally, there were four categories of asset-backed securities that qualified, one being student loans. The program was closed on March 31, 2010, and all loans that the program extended will expire no later than March 30, 2015.

Private loans

Private student loans account for between $150 billion and $200 billion of outstanding student debt and 2.9 million borrowers. These loans tend to be the most egregiously harmful to borrowers, as they often have high variable rates and poor customer support. A study conducted by the Consumer Financial Protection Bureau found that interest rates for private student loans varied widely—from 2.98 percent to 19 percent.

Moreover, borrowers frequently submit complaints concerning customer support. The study cited borrowers who noted “challenging repayment experiences,” in addition to other negative experiences with private student loan providers. The Consumer Financial Protection Bureau concluded that there are significant “opportunities to improve customer satisfaction and reduce customer harm among some borrower segments.”

A subset of these private loans—the ones that have the highest interest rates and are made to the highest-risk borrowers—have a disproportionate drag on the economy, as these borrowers often become unable to make payments and thus find their loan amounts skyrocketing even further.

Mechanisms for refinancing and modifying private student loans

Turning private loans into Direct loans

One option is to simply swap all private student loans for Direct loans. A version of this mechanism has been proposed previously by Sen. Sherrod Brown (D-OH) as part of the Private Student Loan Debt Swap Act of 2009. The proposal would require that private education loans be exchanged for Direct loans for borrowers who were eligible for unsubsidized Stafford Loans under the FFEL program after July 1, 1994, or were eligible for PLUS loans for graduate or professional education after July 1, 2006.

There are many benefits of using this mechanism. First, it would give existing borrowers immediate access to the critical federal protections that do not exist for private student loan borrowers. They could, for example, gain access to Pay As You Earn—a plan that took effect in December 2012 and seeks to cap monthly payments for eligible loans at affordable amounts.

Depending on the exact interest rate, this mechanism could be low cost or even generate revenue for the federal government. The Congressional Budget Office scored Sen. Brown’s bill as generating nearly $10 billion in revenue for the government.

There are some challenges, however, that go along with this mechanism. It could, for example, result in a significant influx of a variety of different loans into the Direct loan program. As a result, the legislation would need to ensure that there are sufficient resources, staff, and processes in place at the Department of Education to handle the increased loan portfolios. The program would need to be structured in a way that would avoid a pure bailout of the private student loan industry and provide individual borrowers protections against abusive lending practices in the future. Pricing the loan purchases correctly would also be important. We address this issue in more depth in the decision points section of this document.

Another challenge for this mechanism: If the option to enroll in such a program were left to the individual borrowers, lending institutions would heavily market the refinance option to high-risk borrowers. If the lending institutions decided participation, they would offload the highest-risk borrowers and retain the lower-risk borrowers in order to maximize profits. This would result in the refinance program costing significantly more money for the federal government to administer.

Using a federally backed fund

Another option to refinance and modify private student loans is to use a federally backed fund to provide new incentives for private loan borrowers to refinance their loans. The federal government could do this by providing initial seed capital to create the fund or by providing specific lines of credit for a private entity to create a refinance fund. These funds could then be used to refinance a smaller number of eligible private loans. Furthermore, if enrollment in the federally backed fund were optional to the individual borrowers, then lending entities would be incentivized to provide refinancing options of their own to their lower-risk borrowers. This allows the capital investment to be leveraged to have a broader impact on the market.

Conversely, if the enrollment criteria were decided at the institutional level or based upon security purchases, the refinancing fund could potentially be started using a combination of both federal and private resources. The benefit of using a fund is that it could ensure that numerous parties, including private entities, still share the risks for loans they issued because they would have to invest some capital in the outcome of the loans.

Using a federally backed fund, however, has its share of challenges. It would need to be structured to ensure that those in greatest need of assistance are not ignored by a pool or program. And the fund could require a certain blend of risk, for example, in the makeup of refinanced loans. Another option would be to make specific funds that are only eligible to certain income groups. It would also create a new category of hybrid loans that would need to be regulated akin to new regulations on private loans. These loans would be the first to be partially owned by both the federal government and a private entity at the securities level, as Federal Family Education Loans, for example, were simply guaranteed by the federal government.

Regardless of the mechanism, however—whether it is implemented through new congressional action or through executive action based upon existing authority—upon its implementation it is important for the refinancing mechanism to be paired with new regulations for the private lenders who are marketing education loans. This would help prevent a similar dramatic increase in defaults and interest rates for a large set of borrowers from occurring in the future. These protections might include new bankruptcy rules, loan-certification requirements, a universal Pay As You Earn (formerly known as income-based repayment) repayment system, and automatic enrollment in Pay As You Earn.

Decision points

One benefit of a federally backed student loan refinancing and modification program—whether by turning private loans or FFEL loans into Direct loans or by creating a federally backed fund—is that it is relatively simple to grasp—many Americans are familiar with similar mortgage-refinancing programs. There are many viable options for designing the size, scope, and mechanism of a federally backed refinancing program. Below are some of the overarching questions that need further discussion.

• What should the mechanism be for refinancing or modifying student loans? As explored throughout this issue brief, there are many options. All of these options, along with new ones, should be debated and proposed in the coming months in order to determine the best path forward.
• 

  What interest rate should be the refinance rate? One key decision is where to set the new interest rate. The lower the rate, the more the proposal will cost. There are several tipping points, however, because it is not an even distribution, as shown in Figure 2.

• What would the impact of the refinance interest rate be on loans going forward? The interest rate on subsidized Stafford loans is set to double to 6.8 percent in 2013. Proposals are needed to determine a long-term system for setting interest rates that ensures the continued subsidization of college for America’s students. This question also brings up the need for additional reform of the federal financial aid system going forward, even as a refinance and modification program attempts to make improvements on past loans.
• What should be the size of the program? As outlined above, there are a variety of options for using a pool approach or a larger change. Therefore the program could be set at any size from a $1 billion pool to a $100 billion swap. The broader secondary impacts of such decisions—such as the economic impact and market impact—needs to be further explored.
• When dealing with FFEL and private loan purchases, how should loan portfolios be valued? Previous purchases of private loan securities—from the Ensuring Continued Access to Student Loans Act, to the Term Asset-Backed Securities Loan Facility, to the Health Care and Education Reconciliation Act—all handled and valued the private loans differently. This formula would be highly important for ensuring the most efficient usage of federal resources.
• How long should the program last? Some elements of the program could be short term, but it would be possible to put in place some elements of a program that lasted indefinitely. There could also be options for an extended period of time for refinancing. This is particularly important if the program has any opt-in elements.
• How can the proposal be structured to maximize its potential as economic stimulus? The savings to the consumer will be spread out over the life of the loan. Due to the current economic climate, however, it may be beneficial to concentrate more of the benefits in the short term via a loan holiday or a similar program. Since loan payments tend to take place over such a long period of time, rather than evenly reducing payments as the result of a refinance, it would be possible to frontload the savings and therefore increase the immediate stimulus even if the net impact remains the same.
• What kinds of loans should be refinanced? Many types of loans should be refinanced, including FFEL loans, Direct loans, private student loans, and loans such as Stafford or PLUS loans.
• Should there be a cap on the income of those eligible to participate in the program? One way to limit the size of the program is to target it to those who are most in need of assistance.
• What new protections should be put in place? As outlined throughout this issue brief, new protections clearly would be needed as part of a refinance and modification program. The best package of options would need to be paired with the specific refinance scope and mechanism.

There are additional decision points regarding mechanisms; impacts on the loans market; secondary impacts on the economy; the scope and scale of existing borrowers to include in a federally backed refinancing and modification program; consumer protections; the capacity of the Department of Education to handle an increased volume of loans; and more, which will explore in the coming months. These questions do not change the underlying concept of passing along the current low interest rates to the tens of millions of Americans struggling with student debt. This would not only help them but it would stimulate the economy as well.

Conclusion

Borrowers need relief, and reductions in their monthly loan payments will boost the entire economy. While there are a variety of different ways to structure a student loan refinance and modification program, the end result must be the same: Any student loan refinance and modification program would need to provide protections for borrowers, guarantee lower interest rates, and stimulate the economy. As we move forward with improving the educational system for those currently or about to enroll in higher education, it is important to not leave behind the tens of millions of Americans who still possess student debt.

We will be issuing additional products in the coming months as part of our efforts around the “It’s Our Interest” campaign, through which we hope to provide a platform and opportunities for the numerous stakeholders—from nonprofits and businesses to Congress and the federal government—to submit their own opinions and plans for how to best deal with student loan debt.

Anne Johnson is the Director of Campus Progress, the youth division of the Center for American Progress. Tobin Van Ostern is the Deputy Director of Campus Progress. Adam Hersh, Brian Stewart, Gadi Dechter, Julie Margetta Morgan, and Stephen Steigleder also contributed to this report.

Appendix

Methodology

We estimate the potential increase to aggregate disposable income from refinancing the existing U.S. student loan portfolio at a 5 percent interest rate. This rate is chosen, for illustrative purposes, as the recent average 10-year Treasury bond interest rate (approximately 1.8 percent) plus 3.2 percentage points. Setting the refinance rate at 5 percent covers 71 percent of outstanding student loans.

Based on the estimated average age of the loans, we calculate annual interest payment in 2013 for each category of student loan at the existing rate and compare this to interest payments if refinanced at 5 percent. In total, refinancing would increase disposable income in the United States by an estimated $14 billion. Finally, we employ a conservative spending multiplier of 1.5 to estimate that interest payment reduction from student loan refinancing could boost economic activity in 2013 by an additional $21 billion.

SOURCE: AP/Steve Manuel

American higher education would be more inclusive and results driven if colleges and universities formed a league to establish rules of competition and progress in the public interest.

Endnotes and citations are available in the PDF version of this report.

The process of college admissions does not suffer from lack of attention. Students and families often obsess over it, media coverage is plentiful, and commercial enterprises that offer test preparation, private counseling, rankings, and guidebooks capitalize on it. Yet admission is but one aspect of how colleges and universities manage their enrollments and impact educational attainment in the United States. How colleges determine who is recruited, who merits admission, who receives student aid and of what variety, which classes are offered and when, and what kind of assistance is provided to students all comprise a complex system and an emerging field known as enrollment management. Outside of the world of higher education administration, however, the term enrollment management has little meaning. But as the United States looks to increase the percentage its population entering and graduating from college, this larger process must be more fully understood.

That colleges manage their enrollments only makes sense. After all, enrollments make up the bulk of institutional revenue at universities and colleges and students bring the energy, diversity, and talent that comprise the potential for learning and academic success. So it is to be expected that colleges and universities will manage enrollments to meet their particular missions, needs, and interests. What can be said, however, about the way college enrollments are managed on behalf of the public and national interest? This paper addresses this question by examining institutional enrollment goals and the enrollment decisions and strategies that are used in service to them. Further, the paper addresses how institutional goals may be directed in greater measure toward the public interest. In doing so, a framework is provided for better public information and more informed public policy with respect to college enrollment in the United States.

Specifically, this paper begins with a focus on the imbalance in higher education results in relation to the educational-attainment needs of the country. Next it identifies fundamental conditions to which institutions respond when establishing enrollment goals and highlights the strategies that enrollment managers employ in balancing the competing demands of equality of opportunity with institutional ambitions and revenue requirements.

The paper establishes that enrollment strategies favor economically advantaged students and identifies public disinvestment, poor economic conditions, and the highly competitive positional marketplace of higher education as factors that drive enrollment strategies and lead to lopsided educational results for the nation. It then takes a novel turn by adapting the unlikely example of the National Football League as a promising model to moderate harmful competition, regain public trust, and focus on educational results as measures of quality, as opposed to the present rankings-centered emphasis on characteristics of the incoming student body.

It’s common knowledge that the NFL establishes rules that temper competitive practices that could harm the game of football and its member franchises. These rules include the banning of illegal performance-enhancing substances that could result in a competitive advantage, establishing the roster size and payroll limits of teams, and putting in place revenue sharing by all franchises. The intent of these rules is to focus competition on the field of play, contain costs, and permit small-market teams to compete with those teams with greater resources. Drawing on this example, this paper develops the concept of a “league” of member institutions to establish mechanisms of public information, public policy, and institutional goal setting in order to focus attention on educational results and broaden the service of higher education to the nation. It also calls on education policymakers and others to provide favorable conditions to allow such cooperation to occur.

Specifically, this paper suggests that American higher education would be more inclusive and results driven if colleges and universities formed a league to establish rules of competition and progress in the public interest. The goals of this “Higher Education League” would be broader participation, increased rates of success, and reduced costs. League rules would ensure better and more relevant public information about college characteristics and college choice, clear and consistent recruitment and application guidelines, full disclosure and uniform methods in the determination and delivery of student financial assistance, educational quality measured by student learning and student readiness to realize personal and societal goals, and the nurturance of the talent in the K-12 pipeline.

This paper concludes by suggesting that higher education leaders, public policymakers, philanthropic foundations, corporate entities, and others engage in and support the exploration, formation, and start up of the league.

In sum, this paper examines the conflicts and tradeoffs in college-enrollment management and presents a case for how the goals and strategies pursued can be recalibrated to address the national priorities of educational access and completion.

Jerome A. “Jerry” Lucido is research professor and executive director of the University of Southern California’s Center for Enrollment Research, Policy, and Practice in the Rossier School of Education.

SOURCE: AP/L.G. Patterson

University of Missouri senior Kristen Overmyer studies on the columns on the Columbia, Missouri, campus Friday, September 28, 2007. Overmyer, a journalism student, didn't take out enough student loans during her freshman year and so turned to credit cards, compounding her debt.

It seems as though everyone—homeowners, corporations, and even state and local governments—is taking advantage of the current historically low interest rates by refinancing their debt. Refinancing allows the borrower to replace his or her existing debt with a new loan that has better terms. It’s a win for individuals and for the nation as a whole, easing the burden of loan repayment and freeing up income for purchases that stimulate the economy. But one group is getting left behind in the refinancing trend: students who take out loans to pay for their higher education.

These students are increasingly struggling. Student loan debt now amounts to $1 trillion—$864 billion of which is backed by the federal government—and an increasing percentage of borrowers are failing to keep up in repaying their loans. More than 13 percent of the students whose loans came due in 2009 defaulted on that debt within three years as a result of long-term failure to make payments. Another 26 percent of borrowers at five of the major loan-guaranty agencies became delinquent on their loans—a stop just short of default.

It is in the nation’s best interest to ensure that students are able to make timely payments, and it’s time for federal policymakers to take action. Congress should enact a program that allows alumni to refinance their existing student debt. This reform should include a meaningful interest-rate reduction and ought to provide a way for private-loan borrowers to consolidate their debt into the federal student loan program or otherwise modify the terms of their loans.

Refinancing is a pragmatic solution to the problem of mounting student debt in this country. Reduced student loan costs boost the likelihood of repayment while also stimulating the economy by freeing up income that can be used and spent in other sectors of the economy. They will also boost trust in government among young Americans.

Students are frustrated by the fact that neither colleges nor the government are curbing rising college tuition. They are doing quite the opposite, in fact. State governments are steadily disinvesting in public higher education. And rather than cut their costs, colleges have responded by increasing tuition, shifting the burden to families. Some students have even taken on private loans, which may bear interest rates twice as high as federal loans.

Groups such as Campus Progress are catching on to a new source of frustration for students: Interest rates on government debt are remarkably low—currently below 2 percent—yet interest rates on unsubsidized federal student loans remain stagnant at 6.8 percent.

It’s possible that the future will bring policies that decrease college costs and tighten government regulation of private lending. But those policies won’t help recent graduates who have already assumed too much debt to pay tuition that is too high. Giving existing borrowers a break would be a gesture of good faith—a gesture that says policymakers recognize the unsustainable path student debt has taken, and that they are doing what they can to right the wrong.

The Center for American Progress and Campus Progress will release a proposal this month for large-scale modification of existing student debt that will bring greater equity and protection to the student loan industry while at the same time easing the burden of repayment. Congress would do well to take these policy ideas into consideration and lend a hand to hardworking recent graduates starting their careers in this tough economic climate.

Julie Margetta Morgan is Director of Postsecondary Access and Success at the Center for American Progress. Tobin Van Ostern is Deputy Director at Campus Progress.

SOURCE: AP/Robert F. Bukaty

Prospective students and their parents tour the campus of Bowdoin College in Brunswick, Maine, in 2009.

When students use the calculators that colleges post on their websites to estimate the net price of attendance, these students expect that in exchange for a few minutes of their time, they will get a fairly reliable estimate of the cost of college. But students may be giving up far more than they receive. Net price calculators can be used to collect names, contact information, and detailed financial data that colleges or vendors can use or even sell, turning the calculators from a consumer resource into a powerful marketing tool.

Congress required colleges to develop and post these calculators as part of the reauthorization of the 2008 Higher Education Act. As such, federal legislators are responsible for ensuring that the calculators operate in the best interest of consumers and protect their privacy. Furthermore, federal policymakers will likely continue to develop tools that give consumers customized college information based on their own personal data. If net price calculators are only the tip of the iceberg when it comes to encouraging students and families to share private data, privacy protections need to be strengthened before more tools are developed.

Net price calculators offer users a customized estimate of the net cost of college attendance based on data such as the user’s income, savings, family size, and other key financial information. But the law mandating the calculators set out only basic requirements for their development, leaving room for colleges to add their own questions and to contract with vendors that develop the calculators’ technology.

As a result, it was up to the colleges themselves to decide how the student data collected through the calculators would be stored, analyzed, and distributed. As The Institute for College Access and Success noted in its 2011 report, “Adding It All Up: An Early Look at Net Price Calculators,” colleges have opted to design their net price calculators in a variety of ways, with different strategies for data collection.

Some net price calculators ask for the user’s name, mailing address, e-mail address, and phone number without mentioning that this information is, by law, completely optional. Other colleges invite students to enter contact information in order to save the user’s data or to receive further information from the college (here is an example). In both cases, colleges are able to create databases with users’ names, contact information, and financial data without ever disclosing these activities.

The use of net price calculators to collect, store, analyze, and potentially even distribute student data should be of concern for many reasons. At the top of this list is the age of the users. Users include high school students, a majority of whom are under the age of 18. The federal government has recently undertaken efforts to ensure children’s privacy online; the Federal Trade Commission, for example, released a report this week raising concerns about the collection of personal data through apps aimed at kids. And in 2011 Reps. Ed Markey (D-MA) and Joe Barton (R-TX) examined the information-collection methods used by standardized test giants the College Board and ACT, Inc. Surely the same kind of careful consideration should be given to the collection of information through a tool mandated by the federal government itself.

Age aside, the use of net price calculators to collect information that is not necessary to achieve a net-cost estimate—things such as name, birth date, or address—should concern advocates of both data privacy and college access. Students and parents should be able to get a decent estimate of the cost of college without having to give up anything but the information absolutely necessary for that calculation. And users should be informed of what the college or vendor plans to do with the data collected.

That is not to say that colleges cannot ask for contact information or save the data collected for further analysis. But any request for identifying information should be accompanied by a clear statement describing the use of that information, as well as how contact information will be connected to the financial information provided through the calculator. To evaluate the protections afforded through net price calculators, policymakers should reflect on these key questions:

•  Does the calculator ask for identifying information such as name, address, phone number, or birth date?
• Does the calculator make clear which pieces of information are optional and which are essential to completing a cost estimate?
• Does the calculator clearly disclose all of the ways in which the data will be stored and used, or does it link to a generic privacy policy?
• Who owns the data—the college itself or the vendor who developed the calculator? Is this clearly disclosed to the user? What are the implications of data ownership by vendors?
• Are there sufficient protections for users under the age of 18?
• Do the guidelines for net price calculators sufficiently prohibit or discourage the sale of information to lead generators, private lenders, or other companies?

There is an emerging consensus among higher education policymakers that students will benefit most from customized college information sources that take into account individual circumstances. This may well be true—in fact, CAP’s own research suggests that students want more customization in their college information sources. But each time the federal government mandates or encourages tools that use students’ personal data, the issue of privacy and the potential for misuse will arise. Policymakers should use the rise in net price calculators as an opportunity to consider how they can ensure that students get more out of these tools than they give up.

Julie Margetta Morgan is the Associate Director of Postsecondary Education at the Center for American Progress.

SOURCE: AP/Butch Dill

At a time when student loan debt has exceeded $1 trillion, fewer than 60 percent of college freshmen graduate within six years, and the wages of recent grads have declined by nearly 5 percent since 2007, it’s more important than ever that students make good decisions about where to go, what to study, and how to pay.

Endnotes and citations are available in the PDF version of the report.

The White House will soon unveil a final version of its “college scorecard”—an online tool giving college-bound students and their families a hype-free snapshot of reliable information about any U.S. campus: real costs, graduation rates, student debt statistics, and earning potential of graduates.

The college scorecard is a good idea and it has the potential to make college-bound students smarter consumers. The scorecard is part of a major effort by the White House and the U.S. Department of Education to understand and improve the college selection process. At a time when student loan debt has exceeded $1 trillion, fewer than 60 percent of college freshmen graduate within six years, and the wages of recent grads have declined by nearly 5 percent since 2007, it’s more important than ever that students make good decisions about where to go, what to study, and how to pay. But to help students make better decisions, the scorecard must be easy to understand and relevant to their decision-making processes.

Though policymakers are working diligently and conscientiously to design a scorecard that will help students and families, the college scorecard has not been subjected to systematic testing by actual students and parents. Unfortunately this is typical of many disclosures government agencies require in the hopes of improving consumer choice. (CAP has previously written about a similar problem with the Securities and Exchange Commission’s recent revamp of disclosures that money managers must provide to prospective clients.) Without consumer testing, disclosures risk being overlooked and misunderstood.

At the White House’s invitation, many college admissions and financial aid experts, including some from CAP, are weighing in on the college scorecard design. These experts are making every effort to put themselves in the shoes of prospective college students and are scrutinizing the draft scorecard for potentially confusing language or missing information.

But designing an effective information sheet about college costs, debt, and graduation rates is hard without feedback from actual users. Consider one student’s reaction to the draft scorecard after it had been through several rounds of experts: “What am I looking at? It looks like a bill or something but I’m not sure what it is,” said Kendra, a high school student, after examining a sample college scorecard. “This is why I hate college stuff.”

Kendra’s comments show that even the best-intentioned policymakers can miss the mark. And if they do, students like Kendra may not give the college scorecard a second glance.

This report uses the government college scorecard project as an opportunity to explore how testing might lead to more effective disclosures. We took the college scorecard to college-bound high school students, asking them for feedback on design, content, and overall effectiveness. In the pages that follow, we discuss the findings of these focus groups, make recommendations specific to the college scorecard project, and draw some overall recommendations for improving the readability and usability of government disclosures.

Here’s a summary of our recommendations.

General recommendations

• Congress can encourage better disclosure through the way it legislates the development of effective disclosures by delegating to an agency both the authority to design the disclosure and the responsibility to prove its effectiveness through consumer testing.
• The White House should require agencies to test their disclosures, and it should ensure that research on disclosure design and efficacy is available to the public.
• Whenever possible, agencies should use standard, commonly used terms in disclosures to promote better understanding of confusing terms and concepts.

Selected college scorecard recommendations

• The scorecard should include an introductory description, name, or logo that immediately communicates its purpose.
• The scorecard should be redesigned by professional graphic designers to improve visual hierarchy for readability.
• The government should test ways of communicating the confusing concept of “net price” and adjust the scorecard accordingly.
• The scorecard should emphasize four-year graduation rates, not six-year rates if further testing confirms that the shorter timeframe is more relevant to students’ decision-making.
• The government should develop alternative measures of student debt that matter to students if further testing confirms that traditional measures such as repayment rate or default rate are not meaningful to students.
• The online version of the college scorecard should include links to other outcomes such as graduates’ average salary and employment outcomes by major or department.
• In general, the government should subject the college scorecard and other college-choice communication initiatives to rigorous testing—including focus groups, cognitive interviews, and surveys of parents and students—and make changes accordingly.

The college scorecard is a key part of the Obama administration’s broader commitment to providing students and families with useful data in the college decision-making process. We hope the suggestions contained in this report are helpful contributions to this important project.

Julie Margetta Morgan is the Associate Director of Postsecondary Education at the Center for American Progress. Gadi Dechter is Managing Director of Economic Policy at the Center.

SOURCE: AP/ =John Raoux

Aubrey Marks, left, helps a University of Central Florida student to register to vote in Orlando, Florida.

The Millennial generation is the largest (95 million compared to 78 million Baby Boomers), most diverse, and most progressive in American history.

In 2008 many in this generation of 12- to 29-year-olds played a key role in deciding who would be the next president through support at the polls and mobilizing other voters to build support. This year, with 46 million potential voters, not only are Millennials now a full quarter of the voting-age American public, but they also surpass the 39-million-strong bloc of voters older than age 65.

While the Millennials may have gotten older over the past four years, they haven’t lost their passion for all the issues that brought them to the polls in 2008—and could again play a significant role this year.

As this generation continues to play a larger role in determining who is elected to lead our country and the issues on which our leaders focus, journalists and pundits are dedicating more column inches and air time to this group of Americans—but who they are and what motivates them can get lost in the noise.

For all the effort by the media to paint this generation with a single—and often unflattering—brush, one of the features that defines the generation more than anything else is how incredibly diverse it is—and how that informs so many of the decisions it makes and the issues it fights for. 2020 will be the first presidential election in which all Millennials will be of voting age. They will total about 90 million eligible voters, will comprise nearly 40 percent of the electorate, and nearly half (44 percent) will be people of color.

This paper will discuss the makeup of the Millennial generation, the issues it cares about, the challenges it faces, and the role it will play in leading the country in the decades ahead.

Millennial demographics

In addition to being the largest generation in American history, the Millennial generation is also the most racially and ethnically diverse. As more minorities enter the electorate, policymakers will be challenged to deliver progressive and inclusive policies to satisfy the needs of all their constituents—some of whom have felt the brunt of marginalization in the past.

In terms of race and ethnicity, the share of Millennials who are people of color is greater than any previous generation. A 2010 Pew report found that minorities made up nearly 40 percent of Millennials—a similar share to Generation Xers (ages 30 to 47)—but a higher percentage when compared to the 27 percent of people of color Baby Boomers (ages 48 to 66) and 20 percent of people of color Silents (ages 67 to 87). In 2012, 43 percent of voting-age Millennials are people of color (including 19 percent Hispanic, 14 percent black, and 5 percent Asian), while 60 percent are white. Further, by 2020—the first presidential election where all Millennials will have reached voting age—44 percent of voting-age Millennials will be people of color.

Perhaps one of the most significant projections about the demographics of the electorate, the Millennial generation, and the direction of our country in the decades ahead is that by 2050 those ages 65 and older are expected to have just reached the 40-percent-minority threshold that Millennials have already reached. Seniors have historically had higher voter-turnout rates than any other age group and accordingly have consistently been a group of voters with which candidates prioritize engaging (as seen by the time spent discussing Medicare). With Millennials now outnumbering seniors, however, the younger generation now has the potential to play a larger role at the polls.

According to research from the Center for Information and Research On Civic Learning and Engagement at Tufts University, Millennial voters are diverse in many more ways than race—a growing number of young people of color are identifying as gay* and transgender, and the majority of Millennials support expanding rights and equality for the gay and transgender community. Additionally, though more Millennials are unaffiliated with a religious tradition compared to previous generations, most still consider themselves religious and are finding new ways to define what that means for them as they embrace more progressive positions than previous generations.

Another key aspect of this age group is its social interaction, which plays a central role in the way it participates in politics. Millennials spend more time online than any other age group, and this colors their activism and the way that candidates and advocacy organizations engage them in discussion and debate. A full 75 percent of Millennials have created a profile on social networking sites, while only 50 percent of Generation Xers, 30 percent of Baby Boomers, and 6 percent of Silents have done the same. This is why both advertisers and political campaigns are increasingly turning to social media to reach Millennials.

Education

Higher education is becoming crucial for competing in today’s job market, and a growing number of Millennials understand the lifelong benefits of a college degree.More of them are earning college degrees, and nearly 80 percent still believe they can achieve the American Dream—but many of them know that it’s only possible through hard work and education.

While the cost of attaining a college degree has increased substantially over the past three decades, Millennials remain the most educated generation in the country’s history. Pew recently reported that more than half (54 percent) of Millennials—when they were ages 18 to 28—had attained at least some college education. Each previous generation had lower levels of higher education, with 49 percent of Gen Xers, 36 percent of Boomers, 24 percent of the Silent generation obtaining at least some college education when they were those ages. Additionally, Millennials are also more likely to have completed high school and—similar to the generation before them—are continuing the trend of women outpacing men in graduating from or attending college.

But just as important as race, sexual orientation, education level, and social interaction are the beliefs and attitudes that Millenials hold about the major issues our country faces and the best ways to address them. We details these positions held by many Millennials below.

Attitudes and values

Social issues

The majority of Millennial voters hold progressive views on social issues. From supporting hard-working undocumented immigrants to touting equality for young gay and transgender Americans, this generation embraces a brand of politics that is inclusive and supportive—one that unifies and believes America is better when people work together.

Of the 21 core values and beliefs that a majority of young Americans said they support, only four were classified as conservative, according to research conducted by the Center for American Progress. Some of the key findings about Millennials’ values and beliefs include:

• 64 percent of 18- to 29-year-olds say they support the DREAM Act, a bill to provide a pathway to legal status for eligible young people who were brought here as children and who complete high school and some college or military service
• 84 percent agree that “We should do everything we can to make sure that people who want to use prescription birth control have affordable access to it and that cost is not an obstacle”
• 62 percent of young people favor allowing gay and lesbian couples to get married

With the media so often portraying religion and progressivism as opposites, it’s important to note that for Millennials, this couldn’t be further from the truth. While fewer young Americans view their faith as the single path to salvation than do older generations, Millennials are more open to multiple ways of interpreting their religion. Three-quarters of young people said there’s more than one true way to interpret the teachings of their faith, according to aPew survey, compared with 67 percent of affiliated adults (ages 30 and older). For those who are young and religiously affiliated, for example, almost twice as many (65 percent) say that society should accept the gay and transgender community, compared to those in the Baby Boomer generation and older (35 percent).

These numbers reaffirm the widely held belief that young people are more progressive than older generations, especially when compared to the larger population. How much impact this has on public policy and the future of the country depends entirely upon how politically active and engaged Millennials are and how much political candidates and elected leaders engage with and respond to Millennials.

The core values shared by Millennials undoubtedly impacts the way they view government, particularly on issues such as abortion, contraceptives, same-sex marriage, and immigration—often considered wedge or “hot” button issues. But these progressive values don’t mean a strict allegiance to one party. Though Millennials have more confidence in the government’s ability to solve both social and economic issues, it also wants to see a more efficient and effective government that helps bring the solutions our country needs.

Economy and support for government

When compared to older generations, Millennials place more faith in the government to deal with the issues it cares about most, including the economy, higher-education reform, and income inequality. Research by the Center for American Progress, in a report titled “The Generation Gap on Government,” shows that Millennials are the generation most likely to reverse the trend of distrust in government—they actually want a strong government to handle the economy. More than 60 percent of Millennials, compared to just 46 percent of older voters, believe “we need a strong government to handle today’s complex economic problems.” Fifty percent of Millennials say government should do more to solve problems, while only one-third of non-Millennials share that view. And 44 percent of Millennials voice confidence in the federal government’s ability to solve problems—14 percent more than do older generations.

While it’s true that government can’t solve every problem, Millennials believe the government would be most effective at intervening in economic issues such as closing the wealth gap, bolstering the workforce, investing in education, and addressing soaring college costs:

• 80 percent agree that “government investments in education, infrastructure, and science are necessary to ensure America’s long-term economic growth,” compared to 6 percent who disagree
• 73 percent of college-age Millennials ages 18 to 24 agree that “the economic system in this country unfairly favors the wealthy”
• 72 percent favor “increasing the tax rate on Americans earning more than $1 million a year”
• 69 percent agree that “the government should do more to reduce the gap between rich and poor”
• 75 percent of Millennials are more likely to call for increased government involvement in improving public schools, compared to 54 percent on non-Millennials.
• 73 percent of Millennials are more supportive of governmental involvement in making college more affordable, in contrast to 56 percent of other segments of the population

A major part of why Millennials are more in favor of government than their older counterparts can be attributed to the shift in demographics—particularly a jump in young Hispanics, who typically favor government intervention. Since the current administration announced the Deferred Action for Childhood Arrivals policy—which will delay the deportation of DREAM Act-eligible youth and permit them to work legally in the United States—many mixed-status families have first-hand experience with the positive impact the government can have on a community. Elected officials, however, shouldn’t take Millennials’ progovernment stance for granted. Instead they should see Millennials’ view of government—as having a place in broadening people’s access to opportunity—as a chance to not only engage and mobilize but also to demonstrate that when young people make an investment in democracy, they get returns.

Engagement and activism

The ability of a generation to change the country and the policies it enacts is rooted in its political engagement and activism. As previously noted, one of the defining characteristics of Millennials is their diversity, with nearly one in two being people of color. It is because of this diversity that this generation will likely be the one to take up the torch of fighting for greater equality—for themselves and for other communities that have been historically marginalized and unable to pursue the opportunities that make the American Dream possible. Millennials will take up these fights using new forms of activism and organizing tools, with more and more of everyday life moves online, as we detail below.
Additionally, as seen above, Millennials are especially progressive on social issues and are particularly engaged and vocal on these issues. A recent study of first-year college students by the University of California, Los Angeles, found that:

• 71.3 percent said they supported gay and lesbian couples’ right to get married. That’s a stark contrast with a poll from last fall of the general public that only showed 46 percent support for marriage equality.
• 57 percent of students do not believe undocumented immigrants should be denied access to public education. Compared to a 2010 Gallup poll that showed support for the DREAM Act among voters older than age 34 as just more than half of those polled and still firmly divided along partisan lines, this result show increasing recognition and support for undocumented peers.
• 60.7 percent of freshmen think abortion should be kept legal. This is an even clearer example of the difference between young people and general public, which has grown less supportive of a woman’s right to choose in recent years.

More than just highlighting the electoral potential of this demographic, the 2008 election showed how engaged young people are with their communities on issues that impact them. Nearly one in five Millennials are highly engaged in “service, community-change, and political activities,” according to a study by the Center for Information and Research on Civic Learning and Engagement. The study, which looks at Millennials’ political and civic participation in 2008 and 2010, also found that 17.9 percent of Millennials were actively focused on the election and candidates, and were discussing politics frequently and voting on Election Day.

While Millennials are taking active roles in organizing and advocacy on a number of issues, there remains much untapped potential among these young Americans. But the Center for Information and Research on Civic Learning and Engagement study found that when you directly engage young people and ask them to participate, they do. In each new election cycle, more politicians are recognizing and acting on this fact. With 46 million young people ages 18 to 29 years old eligible to vote (compared to the 39 million seniors who are eligible to vote), it comes as no surprise that more politicians are pivoting toward this undermobilized demographic.

Aside from sheer volume—18- to 29-year-olds now make up 24 percent of the voting eligible population—much of the past four decades of presidential cycles has shown a tepid rise in youth turnout. From 1972 to 2000 the youth turnout rate declined by 16 percentage points, but the 2004 election marked the beginning of a comeback for youth participation, with turnout soaring by 11 percentage points. The trajectory has been ticking upward ever since.

• 40 percent of young people ages 18 to 29 turned out in 2000, compared to 65 percent of those 30 and older
• 49 percent of young people, compared to 68 percent of those 30 and older, turned out in 2004
• 51 percent of young people turned out in 2008, marking the third-highest youth turnout rate since the voting age was lowered to 18

While youth turnout has nudged up, turnout among older voters has relatively flatlined.

Each of the past three presidential election cycles, more young people are casting votes, with 15 million casting their ballots in the 2000 general election and 20 million in the 2004 presidential election, a surge of more than 5 million. But it was the 2008 presidential election that really marked the turning point in youth participation: Out of 41 million eligible voters, 22.4 million showed up at the polls. While this was an increase of 2 million votes cast compared to 2004 and more than 6.5 million from 2000, the real impact was even larger, with so many—some too young to vote—playing an active role in get-out-the-vote efforts across the country. Additionally, each election cycle, Millennials have also made up more of the electorate: Approximately 14 percent of votes cast 2000 were by young people, and that number continued to climb in 2004 (16 percent) and 2008 (17 percent).

Even during midterm election season, when expectations are lowest for overall turnout, the trend for youth voter turnout actually remained relatively stable in the past three cycles, according to data from the Center for Information and Research on Civic Learning and Engagement:

• 22 percent of young people turned out in 2002
• 25 percent of young people voted 2006
• 24 percent of Millennials (ages 18 to 29) turned out in 2010

One interesting figure that highlights the diversity of Millennials—specifically in the context of political participation—is that in 2010, as in 2008, young African Americans led the way in youth voter turnout. During the 2010 midterm elections, when turnout is typically far lower, young African Americans voted at a rate of 27.5 percent, compared to 24.9 percent of young whites, 17.7 percent of, and 17.6 of young Latinos. Turnout among white youth actually declined more than that of any other race or ethnicity between 2006 and 2010.

For all the pundits who would write off this generation and the role it will play in elections and the political process, Millennials are engaged in varied and sometime nontraditional ways. In fact, as many as three-quarters of young people cling on to various rungs of political engagement:

• 21 percent of young people voted and were broadly engaged in the political process
• 18 percent focused narrowly on political activism and voting
• 14 percent registered to vote in 2010 but weren’t mobilized to hit the polls and led to other ladders of engagement
• 13 percent intensely followed and commented on politics online but missed opportunities to vote or take direct action

The Center for Information and Research on Civic Learning and Engagement study found, however, that the remaining 23 percent of Millennials were not engaged at all, which presents a clear example of untapped potential for elected officials. This diversified approach to civic action demonstrates that young people are engaged but are in many ways undermobilized and just starting to appreciate their influence in political participation; many have simply been politically marginalized due to lack of education or privilege. The majority of young people who were alienated from politics only held a high school diploma, and notable majorities were people of color.

Diversity, consistent turnout, and growing voter eligibility mean Millennials are the best chance to make progress on the issues that will keep our country moving forward. But an investment in mobilizing the potential of this powerful voting bloc is key. The Millennial generation can be a powerful contender for the electorate if politicians seize opportunities to reaffirm young people’s belief in bigger and better government; work to close gaps in income, racial, and education disparities; and consistently engage in mobilizing around issues that matter most to young people. But politicians won’t succeed at driving young people to the polls if they fail to recognize one crucial element when it comes to civic engagement: Millennials do things differently.

For all the pessimistic predictions and dismissing of Millennials’ impact in this election, nearly 70 percent say it is extremely or very likely they will personally vote—up from about 60 percent in July. What’s more, 72.6 percent of young people believe they have the power to change things in this country. There should be no mistake: Millennials will play a critical role in deciding the outcome on November 6.

Conclusion

Plenty has been said and written in the weeks leading up to the election about whether Millennials will turn out to vote and which candidate they’ll be supporting. But little of that coverage takes a deeper look at what is motivating this generation and the many ways beyond voting that the generation is making a difference in its communities. Millennials face real challenges and understand that the future is uncertain, but as the most diverse and best-educated generation the country has ever seen, they are driven, confident, and ready to work for better policies and a more progressive society.

Anne Johnson is the Director of Campus Progress at the Center for American Progress.

*In this column, we use gay as an umbrella term for those who identify as gay, lesbian, and bisexual.

SOURCE: Center for American Progress

With $864 billion in federal loans and $150 billion in private loans, student debt in America now exceeds $1 trillion.

Endnotes and citations are available in the PDF version of this report.

Higher education is an integral part of the American Dream. But today more and more young people increasingly have to finance their education through student loans.

In the past three decades, the cost of attaining a college degree has increased more than 1,000 percent. Two-thirds of students who earn four-year bachelor’s degrees are graduating with an average student loan debt of more than $25,000, and 1 in 10 borrowers now owe more than $54,000 in loans.

African American and Latino students are especially saddled with student debt, with 81 percent of African American students and 67 percent of Latino students who earned bachelor’s degrees leaving school with debt. This compares to 64 percent of white students who graduate with debt. With $864 billion in federal loans and $150 billion in private loans, student debt in America now exceeds $1 trillion.

Many factors have contributed to the dramatic increase in student debt, including the global economic recession of 2008, which led to a dramatic rise in college enrollment and consequently more students borrowing to pay for school.

One of the major self-inflicted causes is the consistent decline in state funding for higher education, which had helped colleges keep tuition affordable. The steadily and rapidly increasing cost of college nationwide prompted a dramatic rise in student borrowing—a natural result as families could no longer rely on scholarships, grants, and personal savings, which cannot keep up with the rapidly increasing tuition costs that have far outpaced the rise in other basic costs like those of health care, gas, and food.

Beyond the job losses and decreased savings, the recession also had a major impact on state colleges and universities directly. One major effect was a drop in colleges and universities’ endowment values, which meant that they had fewer dollars to distribute in grants and scholarships to the students who rely on them to pay for school. The recession also led to significant cuts in state higher education funding and consequently a further uptick in tuition.

Another cause has been the rise of the for-profit college sector. Students at non-four-year, for-profit colleges have seen the largest increase in student loan debt among any group of student borrowers. In 2001, 62 percent of freshmen at these schools took out student loans—and just eight years later, that number jumped to 86 percent. These trends are a result of a lack of oversight of private lenders and the marketing practices of these loans by for-profit schools in particular.

These practices include direct marketing to borrowers who are often unaware of all their options, a tactic that has been widely criticized for the part it’s played in saddling borrowers with unmanageable levels of debt. Additionally, these schools have made a concerted effort to market to and recruit veterans, even relying on third-party marketing firms who create the illusion that they are part of or endorsed by the federal government—using websites like GIbill.com—and that these for-profit colleges are the only ones accepting Post-9/11 G.I. Bill education benefits. The result is often exhausted benefits and unnecessary student debt.

One of the most troubling segments of student lending, however, is the private student loan sector. Defaulted private loans alone currently total more than $8.1 billion, representing 850,000 individual loans. Because these loans often carry high and variable interest rates, many students can end up paying far more than the cost of tuition.

Private student lending has become so great a concern among students, schools, and higher education advocates that the Consumer Financial Protection Bureau dedicated an entire report to the subject. Over the last decade, the demand for securities backed by these loans led to a dramatic growth in private student lending. From 2005 to 2011 alone, total private student loan debt more than doubled from $55.9 billion to $140.2 billion.

Regardless of which kind of loan students take out (federal or private), all student borrowers face the challenge of repaying their loans—specifically, navigating the bureaucracy involved with the private companies contracted by the original lender (federal and private) to oversee and facilitate repayment. But the problem is more than these loan servicers being unresponsive or unhelpful. Over the last year 1 million borrowers saw their loans arbitrarily assigned (some only notified after the fact) to a new company, which has resulted in fluctuation of their payments, being put in forbearance, and other inaccuracies in their statements.

Major progress was made with the student loan reforms President Barack Obama signed in 2010, which eliminated $60 billion in unnecessary subsidies to private lenders. Those funds were put toward grants for low-income students and the federal government began making fixed, low-interest loans directly to students.

Behind these stark national numbers is the impact these trends are having on students. In fact, the impact often extends beyond the students, burdening their families for decades. This threatens the ability of current and future generations to build successful careers and contribute to the economy, and it affects the ability of previous generations to save for their own future.

Indeed, the overwhelming debt many students face leave them unable to wait for higher-paying jobs and forces them to take lower-paying jobs in order to stop the payments and interest from ballooning. This results in fewer graduates starting their own businesses and negatively impacts the economy. Though many with federal student loans have the option of income-based repayment—a recently expanded program which caps borrowers’ required monthly payments at an affordable amount based on income and family size—the majority of borrowers with federal student loans are either unaware or do not understand the program. Additionally, this is not even an option for those with private student loans.

Furthermore, the escalation of college costs has resulted in many students and families barely scraping by, having to turn down admissions to their top-choice schools they couldn’t afford, or delaying college altogether. Worse still, some students leave school with debt and no degree.

Despite these issues, higher education remains critical for millions of students and their families. Recent reports from the Bureau of Labor Statistics now show that college graduates are nearly twice as likely to find work as those with only a high school diploma. The current unemployment rate for those with a college degree—4.1 percent—is about half of the national average. For individuals, it provides a clear path to the middle class, a higher likelihood of gainful employment, and life-long financial and personal benefits. An advanced degree also provides for a skilled workforce that is crucial to rebuilding the American economy.

This report will provide an overview and analysis of:

• Existing student debt
• The factors contributing to the rise in student debt
• Changes in student debt over time
• The role lenders have played in the current student debt crisis
• Who has the debt
• The impact of student debt

We begin with student loans.

Anne Johnson is the Director of Campus Progress, Tobin Van Ostern is the Deputy Director of Campus Progress, and Abraham White is the Communications Associate for Campus Progress.

SOURCE: iStockphoto

Tools such as service blueprinting are part of an emerging solution set that can help college leaders meet society’s demands for a more educated populace.

The September 22 issue of The Economist included an intriguing article, “The magic of good service,” highlighting the growing trend of large companies to employ “chief customer officers,” or CCOs. Chief customer officers are responsible for “look[ing] at the business from the customer’s point of view” and evaluating the customer experience from end-to-end. The article noted that successful companies such as Disney, Cisco, and Home Depot have implemented this type of customer-centric approach to improve their services and to create a better overall customer experience.

One of the techniques used by chief customer officers is to create a visual map, or service blueprint, of a customer’s experience to identify any problems the customer encounters and then work with the company to eliminate those problems.

The Center for American Progress believes this service blueprinting technique could be a powerful tool for improving services in all kinds of industries—including higher education. Service blueprinting could help colleges and universities improve their own services in areas such as admissions, financial aid, academic and career advising, and student learning experiences such as online courses, among many other possibilities.

In fact, in 2011 CAP released a paper in collaboration with the Center for Services Leadership at Arizona State University about this specific topic. The paper, “Leveraging Service Blueprinting to Rethink Higher Education,” introduced our higher education audience to service blueprinting and outlined its potential to improve a variety of higher education-related services.

The paper was written by Arizona State professors Amy L. Ostrom, Mary Jo Bitner, and Kevin A. Burkhard—all of whom are experts in service blueprinting and have consulted for dozens of private-sector companies, helping them improve services and build customer loyalty. Although the service blueprinting technique was pioneered by for-profit businesses, the authors demonstrated that it has become an increasingly valuable tool for nonprofit organizations as well.

That’s why the Center for American Progress again partnered with Arizona State University and HCM Strategists, a public policy and advocacy consulting firm, to host a recent workshop on service blueprinting for college leaders. Sixteen college leaders from across the country—including chancellors, provosts, and deans—gathered on Arizona State’s campus last Wednesday to learn more about service blueprinting and to discuss ways in which it could be used to improve services for college students.

At the workshop Ostrom and Bitner outlined the six components that are used in the service blueprinting technique (click here for an example):

1. Customer actions: All steps that customers take or experience as part of the service being examined
2. “Onstage” technology actions: The actions by customer-facing technology (for example, websites, automated telephone systems, kiosks) that customers experience as part of the service
3. “Onstage” contact employee actions: The contact employee actions that involve face-to-face interactions with customer
4. “Backstage” contact employee actions: Other contact employee actions (not involving face-to-face customer interactions), including email and telephone contact with customers, preparation work, and any activities that facilitate the service process
5. Support processes: Activities that facilitate the service and are done by individuals who are not contact employees. This also includes technology-based and other systems that are needed for the service to be delivered
6. Physical evidence: All tangibles that customers come in contact with during the service experience that impact their customer quality perceptions

During the workshop college leaders learned how to apply the service blueprinting technique to services offered through the higher education system. Small groups discussed issues such as academic advising and financial aid services, and in each case participants put together a visual blueprint of the experience from the student’s perspective using the components listed above. The goal of each exercise was to focus exclusively on the student experience—as opposed to the experience of faculty or administrators—and then determine the various services necessary to provide that experience.

Creating a service blueprint of the different functions related to higher education—from admissions to financial aid to course enrollment—allowed workshop participants to identify “pain points” along the way that complicate or diminish the student experience and make it less likely that the student will persist to a degree.

The workshop enabled college leaders to hone their service blueprinting skills while gaining a better understanding of the student experience. The goal was that workshop participants would return to their home campuses and become catalysts for transforming the delivery of services at their individual schools.

It’s no secret that higher education is under pressure due to rising tuition, ever more diverse student populations, and the demand for greater accountability from policymakers. Tools such as service blueprinting are part of an emerging solution set that can help college leaders meet society’s demands for a more educated populace. CAP believes that participants in the Arizona State University workshop are the frontrunners in an effort to empower higher education practitioners with the cutting-edge tools they need to develop institutional practices designed to provide students with experiences that will make it more likely they will complete their education. In so doing, they will add to our national competitiveness and their own economic mobility.

Stephen Steigleder is a Policy Analyst with the Postsecondary Education Program and Louis Soares is a Senior Fellow at the Center for American Progress.

SOURCE: iStockphoto

A service view of the university ecosystem recognizes the relational nature of exchange between students, faculty, staff, higher education institutions, government, and other related actors.

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Read the full brief in your web browser (Scribd)

Introduction

Policymakers are currently wrestling with fundamental but complex questions about the future of higher education, including how to hold colleges responsible for the billions of dollars in federal financial aid money they receive and how to encourage lower tuition to increase affordability for low- and middle-income families. Answering these questions requires a better understanding of how colleges operate and how we can measure their productivity and efficiency. Marketing and education experts Robert Lusch and Christopher Wu explain how thinking about college education as a service can begin to answer some of these questions.

Let’s start with the basics and answer this question: What is a service and how important is service in society?

Standard economic theory holds that the economy is divided into three major industry sectors: extractive (primary); manufacturing (secondary); and services (tertiary). The extractive sector includes agriculture, mining, timber, and fisheries—basically the extraction of natural resources. The next major industry sector is manufacturing of both durable and nondurable goods for either the industrial, government, or consumer market. Manufacturing is called a secondary sector because it relies upon the primary production of the extractive sector for many of the raw material inputs.

The third or tertiary sector, services, although often thought of as an intangible output, is essentially, for national accounting purposes, viewed as a residual of the other two industry sectors—in essence, what is not extractive or manufacturing is services. It includes many public (government employees) and private organizations across many industries such as finance, insurance, transportation, wholesaling and retailing, health care, entertainment, professional services such as legal and architecture, and literally hundreds of others.

Employment in advanced economies and those with high average household income usually have more than 65 percent of their employment and gross domestic product, or GDP—the largest measure of growth in an economy—attributed to the tertiary or services sector, with some economies being as high as 80 percent. And while the world’s poorest countries continue to rely heavily on employment in extractive industries, the services sector is growing rapidly in developing nations as well.

Because of the rise in ascendance of the services sector, there has been an increased interest by industry, government, and academia on understanding the determinants of productivity in service industries as well as service innovation. During the agricultural and industrial revolutions, economists focused a lot of their research and innovation efforts on these sectors and services were largely ignored. This began to change, however, around 15 to 25 years ago. Arizona State University was at the forefront of this change with the establishment in 1985 of an academic center focused on services research (co-author Robert Lusch was one of the center’s founding faculty members), which later became known as the Arizona State University W.P. Carey School of Business Center for Services Leadership.

Later in 1998, Roland Rust, the distinguished University Professor David Bruce Smith chair in marketing at the University of Maryland, launched the Journal of Service Research, which today is undoubtedly the leading scholarly journal in the world in service research. Shortly after 2000, efforts at IBM Corp. accelerated around understanding services and Paul Maglio and Jim Spohrer at the IBM Almaden Research Center led up an effort to advance the research and teaching of service, which was identified as service science, management, and engineering, or SSME.

Following IBM’s lead, in 2007 the University of California, Berkeley, developed a formal service science, management, and engineering program around information and service design. In 2008 a special issue of the IBM Systems Journal was released with 14 articles from thought leaders across various disciplines that intersect with service science, management, and engineering. In March 2009, 104 participants, representing 68 institutions from 31 countries, gathered in Helsinki, Finland, for a program focused on the development of SSME. This seminal event resulted in the publication of “Making Service Mainstream: A White Paper Based on the 2009 Service Science Summit.” Today universities and countries around the world are accelerating their efforts to understand service and service systems.

An interesting development arising out of service science, management, and engineering is a broadened and more sophisticated view of service—one that moves beyond merely viewing services as a residual to the extractive and manufacturing industries. More broadly and abstractly, service is being viewed as the process of doing something for another person (or entity) that is beneficial. Think of it as the act of helping another. Services (plural) often refer to intangible units of output that a firm produces.

For a university, for example, that could be the number of credit hours of education produced or number of degrees awarded. In what has become known as service-dominant logic, or S-D logic, service (singular) is the focus. Too many universities are overly focused on producing credit hours or degrees efficiently (units of output) rather than offering and providing a set of services—instruction, credentialing, career support, food services—that lead to these outputs (credit hours and degrees) as an end result. To explain this better, let us discuss the different ways a service can be provided.

A service can be provided directly by doing something for the benefit of another person as in the case of a nurse or physician treating your illness or a restaurant chef preparing you a nutritious meal. Service, however, is also provided indirectly through a good. Thus a pharmaceutical drug provides health recovery service, while a pre-packaged nutritious meal that you can microwave provides nutrition service, and a textbook provides a knowledge-enhancing service.

In brief, service-dominant logic views goods as appliances or things you use to obtain a service. This may seem a bit extreme to the nonresearcher; however, in the global economy many manufacturing companies think of their offerings in this way. The American multinational conglomerate General Electric Inc., for example, measures the output of its airplane engine business in hours of thrust service for its airline industry customers and not just in terms of the number of turbines coming off the production line. For GE this is a competitive necessity as it allows for a far better understanding of how its customers actually use the manufactured good in the service delivery of their own businesses. In fact GE now focuses not on selling jet engines but on charging customers for hours of thrust service. Let’s examine how this all fits in with approaching education as a service.

Higher education seen through a service science lens

This expanded view of business output allows for a much more holistic view of how, when, and where education actually happens and how individual student preferences and characteristics can drive the experience. No longer would we just view the teacher as the entity providing the service of education. The classroom and all of its tangible artifacts such as seating, lighting, and whiteboards are all part of the service provision. Thus the instruction itself combined with other supporting services (for example, tutoring, library assistance) constitute the bundle of offerings that make up the service of education. Thinking of education in these terms, a chair that is uncomfortable or a stifling hot and unventilated classroom can all become barriers to receiving the benefit of education. A chair can be viewed as a place to sit but it can also be viewed as a learning enhancement service.

For this reason, in service-dominant logic, all individuals and entities are viewed as resource integrators or service bundlers. The student in the classroom listening to a lecture is bundling many resources such as other students in the classroom, their notepad (electronic or otherwise), snacks they may be eating, pharmaceuticals they may have taken before or during class, and more. At first, expanding or extending the service of education to include students’ health and nutrition circumstances may seem far-fetched, but the data on preschool and early childhood education are clear that investments in health care and healthy food for young children improve their learning outcomes. Importantly, understanding the importance of investments in early childhood health care and nutrition integrated with education investments is essential to obtaining the higher-level cultural capital that education yields and that leads to a more productive workforce and, hence, economy.

At the very least, a service perspective provides us a means of holistically perceiving students’ needs. Therefore, the value of a lecture is not something the instructor produces alone. The value of a lecture as service is always co-created with the students. Let’s elaborate on this concept of value co-creation.

Value co-creation in a higher education setting

We need to begin by recognizing that any value that is partially dependent on the involvement of others is, by definition, a co-created value. And the increasingly specialized and differentiated division of labor in contemporary society creates more dependencies on others. Therefore much of the value that accrues from a service between multiple parties is co-created.

Let’s consider the student-teacher relationship to illustrate this concept. A student and a teacher in the classroom are actually a part of a complex ecosystem extending beyond the classroom and its tangible artifacts described earlier. Consider that the student had to either travel to class or go online and this involved a variety of appliances such as computers, the Internet, transport vehicles, and roadways to name a few. For working adult learners who seek to enroll in institutions of higher education, the data suggest that how they get to school from work is a very important factor in their ability to participate and persist in education experiences.

The needs of adult learners seen through this service perspective have clear implications for public policy from providing transportation services to decisions on where to locate new college campuses. Service-dominant logic provides an analytical framework for perceiving this issue as a key to successful service delivery.

Further, the student most likely had to purchase a book, pay tuition and fees, and obtain a loan or credit to pay these costs. For the professor to deliver a lecture, many other employees are behind the scenes such as administrative staff, IT specialists, janitors, and landscapers with each having to be compensated for their service. Service-dominant logic encourages an expanded view of the service, going beyond just the service provider and the beneficiary of the service (in this case a teacher and student) to be able to see the co-creative nature of value and service exchange as it is embedded in the education ecosystem.

To make this perspective even more realistic, it needs to be recognized that the co-creative nature of value is dynamic and unfolds over time. Unlike the “goods” conception of a degree (a definable and explicit valuable output), the service view of a degree recognizes the longitudinal and dynamic nature of the degree—affording knowledge, practices, and capabilities over the degree holder’s life. Hence, the value of a degree is co-created by the use of the knowledge and skills the degree represents and that value is “time-released” over the lifetime of the degree holder.

It is essential that higher education recognize that what the university produces on campus, in the classroom, or online and packages to create an output (a college degree) is only the starting point of a longer process that co-creates value. A recent example of the unbundling of the college degree is edX, the free online course of study that is the joint effort of the Massachusetts Institute of Technology and Harvard University. edX will offer certificates of course completion but will not issue credits through either Harvard or MIT. edX is an attempt by MIT and Harvard to provide service to those who are unable to gain admission or pay for courses at either of these elite schools but who still want to acquire education, skills, and recognition from these renowned institutions. edX is likely to compete with community colleges for a specific segment of the higher education service market—the segment that offers targeted instruction and credentials, without the bells and whistles of “traditional college.”

As edX becomes established it may offer value to students who would never have access to Harvard or MIT but who will benefit from lecture and instruction services provided by elite professors (such as the current course offering in integrated circuits and electronics). We will discuss how service science performance metrics can assist higher education in this dynamic co-creation of value in the following section.

Developing a service mindset

When we mentioned that goods are appliances or things you use to obtain service, another way to view this is that customers “hire” products to get jobs done. When you want clean clothes, you “hire” a washing machine and detergent to help you do your laundry. Likewise, you “hire” Zipcar to provide automobile transportation service. With this approach in mind, colleges need to ask themselves: What is the job that students need to get done? In answering that question we’ll begin with the individual student and then expand outward to discuss the role of higher education in society at large.

As we discussed earlier, in an interdependent, specialized economy, every person uses and provides service. Therefore an individual needs to be able to develop talents that encapsulate knowledge and skills that they can then exchange in a market economy for the things they need for their survival and well-being. Therefore, the job to be done for students by colleges and universities is the development of a variety of marketable talents in addition to preparing them for “life-long learning,” which is a shorthand that recognizes the unpredictability of career paths and economies. And while this is the case, frequently young adults 18-to-22 years old (recognizing there is a wider age range and more diverse work experience in community colleges) do not have a clear idea of the purpose of their schooling.

Let us take a moment and expand on this thinking. When we provide service in a market economy, we obtain “service rights”—the rights or means to receive service from others through the exchange of wages or pay for that service. One way to look at the student’s job to be done via higher education is the student’s ability to translate knowledge into employable knowledge and skills that can be used for earning a living that in turn translates into obtaining service rights. In a larger societal sense, the job to be done by higher education vis-à-vis a student is economic growth and societal well-being. Economic growth is easier to measure than the improvements in societal well-being; however, service science attempts to recognize both. For societal well-being there needs to be some means to support the public good or commonwealth. In a democratic society this means that informed and responsible citizens are needed and thus from a societal perspective one of the jobs to be done by universities is the development of these types of citizens.

By developing a service mindset, universities are more easily able to recognize the interactive nature of education in delivering the economic and societal well-being outcomes noted earlier. Each actor in the system (whether student or institution) must bring awareness of these outcomes and how a service journey would be co-created to deliver each with the particular actor/student in mind. The actor then develops a shared vision and plans to get that job done.

Drawing on notions of performance-based contracting, which is growing in popularity in service science and management practice, universities can begin by engaging students or other relevant stakeholders in a conversation about how they define the job they are trying to accomplish utilizing their college education. What they are likely to discover is that the typical metrics for higher education productivity (see the National Research Council’s “Improving Measurement of Productivity in Higher Education” for a traditional discussion of graduation rates, completion-to-enrollment ratio, time to degree, cost per credit/degree, and student-faculty ratio) do not address the “job to get done” perspective of the student and other stakeholders. This gets back to the old marketing adage: People don’t want to buy a quarter-inch drill. They want a quarter-inch hole.

The product form is simply a medium to achieve a certain end or outcome, as such the college degree is a means to some job the student or stakeholders need accomplished. The challenge, therefore, will be defining meaningful post-degree completion objectives and collecting performance data on these objectives for colleges and universities in order to set up appropriate incentive structures for higher education.

We are always careful about suggesting for any industry or enterprise what customer- or stakeholder-defined value comprises and how to measure it. What we can emphatically state, however, is that it must reflect some measure beyond a measure around units of output (degrees, credit hours, and the like). In the spirit of getting you thinking about alternate measures, consider a measure of the percentage of graduates that are able to begin paying off educational loans six months after completion (this would exclude those whose loans are deferred because of further graduate or professional education). A longer-term measure may be the percentage of graduates who have incomes above the median income (adjusted for age) for the country. A noneconomic measure might be the percentage of graduates who believe they are properly employed and not underemployed, measured at 12 months, 48 months, and 96 months after graduation.

Guidance for university leadership

A service view of the university ecosystem recognizes the relational nature of exchange between students, faculty, staff, higher education institutions, government, and other related actors. Universities, therefore, need to develop an architecture of participation where actors connect and collaborate through a shared vision. For this to occur there must be a pervasive fabric of trust between the various actors comprising the university ecosystem. This means higher education leadership must develop a strategic approach to building and enhancing their institutions in a way that is much more focused on collaborating, sensing, responding, and learning from the journeys of students through education experiences as they accomplish the “jobs to get done” perspective.

Higher education institutions must be much more prepared with each student to articulate a sustainable shared vision. In a sense-and-respond world, speed drives decision making, making agility and resiliency critical determinants of success. There is little time for formal and time-consuming strategic planning when the world is changing quickly and often chaotically. A university leadership team needs to develop meaningful collaborations with all stakeholders, develop the capability to sense shifts in stakeholder wants and needs, develop relatively rapid responses to improve service offerings, and learn from both mistakes and successes while celebrating accomplishments. In a service science framework, strategic and tactical distinctions become intermingled as real-time collaboration, sensing, responding, and learning continuously unfold. Strategy is no longer engineered but is more of an emergent property of the collaborating, sensing, responding, and learning enterprise.

In a university ecosystem the network is the strategy. The typical institution-based boundary of external environment and internal organization is recognized as a conceptual rather than “hard” boundary. The “internal” university infrastructure may be viewed as a talent marketplace—an economy of resources that can be exchanged. The “external” environment may provide collaborations that are mutually beneficial rather than purely competitive, but also where graduates must market their talents.

In other words, the actors (other colleges, government, alumni, prospective students, and faculty) that the university develops its relationships with result in a university ecosystem without a hard organizational boundary. Consequently, strategy will increasingly be about joint ventures and collaboration in a system of open innovation and co-creation of value. The example given of edX represents an online example of elite co-creation (using MIT’s online learning platform and joining with Harvard’s prestigious brand). Unlike elite institutions, the less-selective colleges and universities, which serve close to 85 percent of all college students, need to recognize how they might leverage partners to co-create valuable education experiences with and for students.

Service logic changing higher education policy

A service perspective, in which students and higher education institutions co-create value, certainly encourages policy analysts and policymakers to consider several issues in the realm of higher education.

Firstly, if service is applying knowledge and skills for the benefit of another person or entity, then society needs an inventory of the knowledge and skills (talents) of its citizens. The industrial notion of labor forecasts for particular occupations may give way to ensembles of service that are not easily categorized by traditional job titles. This can be clearly seen in the fluid changes in information and communications technologies professions. From a service perspective we may find the knowledge and skills of a master auto mechanic to be similar to those of a computer technician. Likewise the knowledge and skills of a market researcher could be comparable to those of a policy analyst. In brief, what are the knowledge and skills the nation needs over the next few decades and where are the gaps?

It is no longer sufficient to set higher education goals in terms of degrees and types of degrees produced—this is an overly output-based focus. The more important metric is the development of knowledge and skills that get bundled into a package that we call a degree. Recent work by the Georgetown Center on Education and the Workforce takes a fresh look at what skills underpin given credentials and what credentials are of more value than others. This early work provides an opportunity to begin to unpack the knowledge and skills needed in the service-oriented global economy. Also the emphasis on T-shaped skills, where a person has breadth across multiple disciplines but depth in a specific discipline, helps develop people who can better work in the cross-disciplinary collaborative teams that are increasingly a part of all organizations and work settings.

Secondly, if a college education is not a solitary service but is instead a dynamic, time-released value, co-creation process, then how do we evaluate a university or higher education institution? Are we too focused on students rolling off the college and university production line and the cost of their education, versus focusing on the time-sequenced benefits as they dynamically unfold? What does this mean for outcome-based education, when the real outcome occurs over decades? And how do we evaluate co-created value played out over a working life of 40 to 50 years? At the very least, policymakers, students, and family members need to consider measures of value that incorporate future returns.

The Center for American Progress’s Quality/Value Index, introduced in the paper “Disrupting College: How Disruptive Innovation Can Deliver Quality and Affordability in Postsecondary Education,” is an initial attempt to incorporate this type of “service-dominant” metric. One component of the Quality/Value Index is to divide the total cost of a college education by a student’s earnings over a 10-year period. While such a metric necessitates consideration of exogenous factors, it begins to get at key issues in the co-creation of value in college education experienced over time.

Thirdly, how do we pay for higher education? The current model is that a college degree or credit hours are units of output that need to be priced and paid for or financed today. This is the way that GE used to sell jet engines but today they sell thrust service and airlines pay for thrust by the hour. It is the same model used by the car-sharing company Zipcar, where their customers pay for car service by the hour. Essentially these are performance-based contracts where the beneficiary pays for the performance of a service as it occurs.

So what is the analogy for financing higher education? Well, unlike a jet engine or the use of a car for an hour, the service provided by a university education is time-released over decades. Consequently, is it now possible to begin thinking of a system where a university offers, in lieu of tuition paid upfront, a “service-level agreement” binding contract requiring a graduate to pay a set percentage of his or her income for life to the university? Or how about a system where the government rebates to a university a percentage of the income taxes paid by its graduates if the university provided them a free or heavily subsidized education?

While these approaches are at present theoretical, in light of current higher education funding models, they take into consideration approaches to managing service performance from other sectors and as such provide a new way of thinking about higher education funding and accountability. In fact, initiatives such as the Student Achievement Initiative, enacted in September 2007 by Washington’s State Board for Community and Technical Colleges, are moving to performance-based funding by making higher education institutions responsible for students achieving key milestones along their education journeys as a prelude to completion (receiving a degree). If other states follow suit, we may begin to see a funding regime that much more closely fits a service paradigm.

Finally, what can be done to foster a resilient and adaptive education ecosystem? Specifically, how do we encourage collaborations between key service providers? Additionally, how do we move from proprietary systems to more “open-source” components for mutual and beneficial gain (value co-creation)?

Public policymakers and institution leaders are struggling with these issues at this very moment. As they search for answers, we suggest there are lessons to be learned from the health care industry. There is now a continuum of integrated delivery systems from full integration—for example, Kaiser Permanente’s closed system—to unbundling ownership of hospitals—as is being done at Seattle-based Group Health cooperative—to Michigan’s Grand Valley health plan, where there is an analogy for these integrated health delivery systems to “rent” rather than “buy” their hospitals.

Higher education is also evolving through traditional online models such as the University of Phoenix and Western Governors University, in which virtual (online) higher education continues to grow, along with the rise of massive open online courses such as Coursera, edX, and Udacity. The possibility of unbundling the bricks-and-mortar brand of higher education from the online brand is analogous to how transportation services can enable greater access to a university education. Currently, a number of bricks-and-mortar universities have online brands that provide access at a lower cost (especially for special population segments such as military personnel and stay at home parents) by unbundling the classroom and residential experiences, while still providing credentials of completion (degrees and certifications). Moreover, massive online open courses, which are still in the formative stage in their business models, promise a scalable and lower-cost model of higher education. This approach may have its greatest growth in low-density population areas—for example, rural communities—where institutions are scarce, and in developing countries where Internet access continues to rise.

Conclusion

Dominant logics or set interpretations of how to succeed are hard to change. But in times of turbulence and upheaval, it is important to be receptive to changing frames of reference and alternate ways to be responsive to new logics. Higher education is experiencing one of these turbulent upheavals where it is difficult for university and college leaders to separate the noise from the signal. We suggest an increasingly audible and clear signal is emerging that provides a strong message: The “product” of education is a co-created learning service. The new logic that can guide thinking, strategy, and public policy in this era is service-dominant logic.

Robert F. Lusch is professor of marketing in the Eller College of Management at the University of Arizona. Christopher Wu is the principal at Metacyber, a higher education consulting firm.

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Students walk through the campus of Claremont McKenna College in Claremont, California.  Going forward, it is imperative that states and the federal government continue to explore performance-based funding options for higher education, particularly in the context of a series of outcomes-focused reforms.

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Today’s fiscal environment has forced states to carefully consider how their limited dollars are spent on higher education. States have commonly allocated funds on the basis of enrollment, a process that reinforces their commitment to college accessibility and ensures a relatively equitable distribution of per-student spending across institutions. Enrollment, however, is a poor predictor of overall institutional performance. Ongoing budget cuts, combined with stagnating graduation rates and a rising national demand for highly educated workers, make it increasingly important for states to invest in completion too.

It’s time to rethink the current postsecondary funding model. To ensure that taxpayer investments yield the best possible returns, states must incentivize both college access and college completion.

Performance-based funding is a system based on allocating a portion of a state’s higher education budget according to specific performance measures such as course completion, credit attainment, and degree completion, instead of allocating funding based entirely on enrollment. It is a model that provides a fuller picture of how successfully institutions have used their state appropriations to support students throughout their college careers and to promote course and degree completion. Furthermore, this funding structure incorporates both enrollment and performance metrics as incentives for colleges to continue to make progress on these important objectives.

Though many new performance-based funding policies have yet to produce meaningful data, several best practices have emerged in the policy discussion. Many education leaders involved in performance-based funding have made the following recommendations:

• Gain the support and involvement of key stakeholders early on in the process.
• Ensure that enough money is apportioned for performance to create incentives that are sufficiently strong to change institutional behavior.
• Develop different funding formulas for community colleges and universities or use the same formula but weight it differently depending on the type of institution and characteristics of the student population.
• Integrate all metrics and provisions into the state higher-education-funding formula, as this makes it more durable when states are faced with budget cuts.
• Use indicators that measure both progress (course completion, momentum, credit attainment) and completion (degrees conferred, program completion), with an emphasis on progress.
• Incorporate stop-loss provisions that prevent institutions from losing more than a certain level of funding each year.
• Implement a year of learning during the first year that the policy is in effect, a period in which state spending does not change but colleges receive reports detailing how their funding would have been impacted under the new measures; and/or gradually phase in over a multiyear period the percentage of total funding allocated based on performance.
• Subject the system to frequent evaluation and make adjustments where needed.

As higher education spending continues to decline, states face growing pressure to demonstrate that they are fully invested in the long-term success of their students. Going forward, it is imperative that states and the federal government continue to explore performance-based funding options, particularly in the context of a series of outcomes-focused higher education reforms.

The following issue brief will summarize the history of performance-based funding in higher education at the state level, outline in further detail a subset of state experiences, and recommend that states continue to explore performance-based funding options in their higher education systems.

A brief history of performance-based funding

Between 1979 and 2007, 26 states experimented with measures that attempted to incor- porate institutional performance as a determinant of higher education funding. During this period 14 states that had enacted performance-based funding programs eventually discontinued them, although two of the discontinuing states later re-established new programs. The states’ dissatisfaction stemmed from the fact that these early funding models were plagued by a number of fatal design flaws. In particular, many programs were inflexible to institutional differences, resulting in rigid and seemingly arbitrary requirements that focused too heavily on degree completion and failed to reward intermediate progress. Furthermore, many models failed to allocate enough funding to create genuine incentives for colleges to improve.

After that initial wave of ineffective models, performance-based funding has once again begun to gain popularity. Careful to avoid the mistakes of the past, proponents of “performance-based funding 2.0″ tend to emphasize the need to reward progress over completion, to recognize the differences that exist between community colleges and universities, and to partition off larger percentages of base funding in order to incentivize transformative change.

Current state policies

Despite their common goals, states that currently incorporate “performance-based funding 2.0″ in their higher education systems differ widely in the structure of these programs. In particular, they vary in the percentage of total funding allocated toward performance-based measures, the types of behaviors that are incentivized, and the funding formula used to measure performance between different types of institutions. Some states have had more success than others; however, most policies are too new to produce significant results at this time.

The diverse nature of current performance-based funding policies provides a useful landscape by which to analyze the effects of a variety of levers. As meaningful data begins to accumulate, policy leaders can identify best practices and develop stronger frameworks for future programs. Let’s look at the experiences of several states.

Ohio

Prior to 2010 Ohio’s higher education funding system relied on challenge grants, which rewarded institutions with additional funding if they met various enrollment and completion objectives. The state began to realize, however, that this system failed to properly incentivize colleges for three reasons:

• The funding came from additional sources rather than from the base allocation.
• The amount of performance-based funding that colleges could receive was too low in proportion to enrollment-based funding.
• Every school received some sort of benefit.

Ohio’s new performance-based funding model takes significant steps to address these and other issues. The state has allocated 5 percent of its total higher education funding for performance in 2012, an amount that is expected to rise to 30 percent by 2015. To recognize institutional differences in mission, student body composition, and goals, Ohio developed three unique funding formulas for its universities, regional university campuses, and community colleges. While the universities are primarily funded based on course completion and, over time, degree completion, the formula for community colleges is more nuanced. It includes indicators such as the completion of developmental education courses, the transition between developmental and college-level courses, the completion of 15 credit-hours and 30 credit-hours of college-level coursework, the number of associate’s degrees awarded, and the transfer rates into a four-year college or university. Furthermore, all of Ohio’s funding formulas reward the achievements of “at-risk” students, as defined by economic, demographic, and college-preparedness data collected by the state. Doing so encourages rather than penalizes colleges for enrolling these students by recognizing that they often face greater barriers to completion.

The new model also includes several provisions that address many colleges’ concerns that their funding would be dramatically impacted. It contains a stop-loss provision that caps the amount of money an institution can lose in the first year at 1 percent. Furthermore, the model incorporated a learning year during which funding was not impacted but all institutions received detailed reports on what the financial impact would have been under the new policy. The state has also taken steps to make all performance results publicly available to ensure heightened accountability.

Pennsylvania

Pennsylvania is an example of a state that has successfully incorporated performance- based funding into its higher education system. The Pennsylvania State System of Higher Education achieved these results by setting aside 8 percent of its state appropriation, equivalent to about $36 million, to reward schools for meeting or exceeding certain targets. The Pennsylvania State System of Higher Education developed eight performance measures that encompass a variety of key areas such as degree completion, retention, and faculty productivity. All of these targets had to be met in order for colleges to receive a share of these funds, and those schools that exceeded performance requirements received a larger portion. Since the approach was adopted in 2000, Pennsylvania’s public colleges have experienced a 10 percent increase in overall graduation rates and a 15 percent increase in retention rates for Hispanic students. Many college officials have also noted a positive change in institutional culture—one that is more clearly focused on solving issues and increasing efficiency.

In 2011 the Pennsylvania State System of Higher Education made several improvements to its performance-based funding model to better incorporate specific institutional goals. Beginning in 2012 colleges are measured against 10 separate performance indicators, half of which are unique to the institution. The five metrics that remain across all institutions are the number of degrees awarded, graduation rates, reduction in achievement gaps, diversity of the faculty, and private donations. Colleges are also measured against national performance standards where appropriate.

The improved model also reduces competition over performance funds by eliminating additional funding for colleges that exceed performance measures. Of course, progress is still accounted for—particularly through the institution-specific metrics, which are based on the strategic goals of the institution and encourage improvement. The Pennsylvania State System of Higher Education also adjusted their funding formula so that the percentage of funding allocated toward performance is now calculated from the total education and general budget, instead of the smaller appropriations pot. This allows total funding to remain more stable in the face of declining state appropriations. Under the improved formula, overall funding based on performance remains unchanged at approximately $36 million annually

Indiana

Indiana’s Reaching Higher initiative allocates 5 percent of its total higher education budget for 2011–2013 performance-based funding. Unlike Ohio, the state’s performance-based funding system does not distinguish between different types of institutions; rather, it uses the same benchmarks across the board. Indiana assesses college completion based on several performance indicators, including the number of degrees conferred, degree completion of low-income students, and the number of community college transfers. Institutions receive $5,000 and $3,500 for each additional bachelor’s and associate’s degree produced the previous year, respectively.

Indiana has also taken an important step toward restructuring how the enrollment portion of higher education funding is measured: The state determines enrollment levels at the end of the semester, rather than at the beginning, to emphasize the importance of course completion. Doing so incorporates a stronger element of accountability into enrollment-based funding. As a result, Indiana essentially allocates a much larger portion of funding based on performance than it would appear.

Tennessee

Tennessee has implemented the most aggressive performance-based funding model— over several years 80 percent of total state higher education funding is expected to be allocated on the basis of performance. The Complete College Tennessee Act of 2010 introduced performance-based funding as one item in a package of reforms centered on college completion. Performance is measured on the basis of student retention, degree attainment, and completion of remedial courses. The state also incorporates a 40 percent premium in its funding formula for adults and students receiving Pell Grants. To address institutional differences between community colleges and four-year universities, funding formulas are adjusted to weigh various factors—such as retention, research, or job placement—more heavily depending on the institution’s focus. Tennessee’s formula is output based and sets no specific targets.

Washington state

Washington initially implemented a performance-based funding program in 1997 for all of its higher education institutions, but the program was discontinued just two years later in 1999 due to a lack of popular support. College leaders and the higher education boards were frustrated that they had little voice in the legislative discussion, which left them unable to propose institution-specific metrics or have time to prepare for the impacts of the policy once it was implemented. Furthermore, as a simple budget provision, performance-based funding could be easily eliminated.

The Washington State Board for Community and Technical Colleges made a second attempt at performance-based funding in 2007 and adopted a new model as part of its Student Achievement Initiative for community and technical colleges. After a learning year in 2008, the board began to implement these measures in 2009.

The Student Achievement Initiative was developed by a task force of higher education board members and institutional leaders. Under this model, colleges receive money for each so-called achievement point attained. This money is allocated through supplemental funds, leaving base funding untouched. Achievement points are accrued based on the number of students who:

• Improve their scores on basic skill tests
• Make progress in remedial courses
• Complete a college-level math course
• Earn 15 college credits and 30 college credits
• Receive a degree or certificate
• Complete an apprenticeship training program

Washington’s model—elements of which have been adopted in Ohio, as well—attempts to recognize the challenges associated with educating at-risk populations by rewarding incremental gains such as the attainment of pre-college skills.

From 2007 to 2011 the Student Achievement Initiative has delivered relatively strong results. During that period, colleges increased their achievement point total by an average of 31 percent and experienced moderate gains in momentum. At the same time, however, only about 50 percent of students contribute any points.

Louisiana

In 2010 Louisiana implemented a controversial performance agreement system called the GRAD Act that allows institutions to increase their tuition by 10 percent each year if they meet certain goals for performance. These targets encompass a variety of objectives relating to student performance, articulation and transfer, workforce development, and efficiency and accountability. The GRAD Act is expected to eventually comprise 25 percent of an institution’s total budget.

Developing a system

As evidenced by the range of state policies in existence today, there are a variety of factors that influence the structure of a performance-based funding system. Some of these design considerations include:

• Who is implementing the system? Given the political and fiscal climate of individual states, it may be better that performance-based funding is legislated by the state, as was the case in Tennessee. At the same time, education boards such as the Pennsylvania State System of Higher Education might find it more appropriate to voluntarily implement a policy, either as a pre-emptive measure to future legislation or to encourage institutions to assume greater accountability for performance.
• Who are the key stakeholders that should be involved in the discussion? Many leaders of performance-based funding stress the necessity of attaining widespread support prior to implementation. Though they vary between states, many of these key stakeholders include board members, legislative offices, institutional leaders, faculty members, businesses, and education organizations. These individuals and groups should be actively included in the system design process.
• What state- and institution-specific performance goals should be incorporated in funding? When developing performance metrics, policymakers should consider both overarching state and national goals for higher education performance and the goals of individual colleges. Consideration must also be given to how an institution’s unique mission and student population affect performance, as these factors are critical to setting reasonable targets and performance indicators. State goals and institutional characteristics should also determine how much more emphasis is placed on progress than completion.
• How can states allocate funding toward performance most effectively? The majority of performance-based funding models have provided a financial incentive for improved performance in the form of state appropriations to institutions that meet certain goals. Other models incentivize performance by rewarding greater institutional autonomy such as a heightened authority to adjust tuition prices. There are three basic types of performance-based funding models:

–  Output-based funding formulas such as the one used in Tennessee incorporate performance metrics into the state funding formula. Rather than set specific targets, these models create a financial incentive for institutions to generate positive outcomes in certain areas such as increasing the number of students who attain credit and degree completion milestones. Institutions can boost their total funding by improving their results on these metrics. Output-based formulas are often weighted to recognize differences in institutional mission and student population.

–  Performance set-asides allocate a percentage of the higher education state appropriation for performance-based funding. Money may be drawn from either the base funding or from additional sources. Institutions compete for shares of the performance fund by producing results that meet or exceed certain targets. This model is in use by Pennsylvania’s colleges.

–  Performance contracts are personalized agreements between states and individual institutions in which a certain level of funding is guaranteed if the institution meets specific goals. Louisiana’s GRAD Act, for example, establishes a performance contract between the state and its public colleges.

• What additional funding provisions are necessary to remain sensitive to the needs of individual colleges? Policymakers should take careful steps to ensure that the funding formula incorporates provisions that recognize and address potential institutional concerns. One commonly expressed fear is that performance-based funding undermines an institution’s autonomy. Many states with successful policies have dispelled these concerns by working closely with institutional leaders and the community during the design and implementation period.

Another frequent worry is that performance-based funding creates uncertainty for colleges during the fiscal planning process. To address this concern, some states, including Ohio and Washington, have incorporated a learning-year into the process and have provided detailed reports in order to familiarize colleges with the expected funding impacts of the policy. Many states have gradually increased the amount of funding allocated based on performance to provide colleges with more time to adjust their behavior. Many policies also include stop-loss provisions that prevent dramatic fluctuations in funding. Other funding formulas calculate allocation based on multi-year averages rather than just on the previous year.

Another complaint is that it is unfair to hold colleges to certain performance standards because their differing student populations and missions affect completion rates and other measures of performance. There have been a variety of different approaches to ensuring that the performance-evaluation process is a fair representation of this diversity in mission and student body. States such as Ohio use different funding formulas for community colleges and universities. Others, including Pennsylvania and Tennessee, adjust their metrics based on institutional differences or weigh certain factors differently. Many policies also include additional incentives and premiums for reducing achievement gaps or demonstrating progress in low-income or minority student persistence and completion.

Best practices

The multitude of state experiences with performance-based funding reveals a number of best practices in the system design-and-implementation process. The following lessons should help guide states that are looking for ways to hold higher education institutions accountable for success.

• Actively involve key stakeholders in the funding model’s design. Much of the success of Ohio’s, Pennsylvania’s, and Washington’s newer programs can be attributed to the widespread support those states received from institutional leaders and the important contributions they made to ensuring the metrics were a fair representation of performance.
• Ensure that enough money is apportioned for performance to create strong incentives. Enough of an institution’s funding should be determined by performance to compel actions that would significantly change institutional behavior. Models that allocate performance money from the base budget, as opposed to creating supplemental funding, are more likely to result in stronger incentives.
• Recognize institutional differences with separate funding formulas or differently weighed metrics. Community colleges and universities are each unique in their student population, mission, and goals. They therefore require separate funding formulas or should be evaluated against metrics that are weighed differently, depending on their specific characteristics.
• Integrate all metrics and provisions into the state formula. Incorporating performance funding into the state’s higher education funding formula, rather than as a set of add-on provisions, makes the overall system more durable when states are faced with budget cuts.
• Use indicators that emphasize progress. Early performance-based funding models placed too much emphasis on completion rather than progress, creating unfair and inflexible targets for colleges that serve large at-risk student populations. Newer models stress the importance of progress indicators such as course completion, momentum, and credit attainment, which allow institutions to exhibit performance through incremental measures of individual student progress. Indicators of completion such as degrees conferred and program completion should also be used in a progress context by allowing institutions to demonstrate their improvement over time.
• Incorporate stop-loss provisions that prevent institutions from losing more than a certain level of funding each year. A stop-loss provision can help to assuage a major concern by colleges that the new system will create dramatic fluctuations in funding. It also provides institutions with greater leeway to adjust to the new policy.
• Gradually phase in new measures. During the implementation phase, states must take care to reduce fiscal uncertainty for colleges. Many models incorporate a learning year before the policy goes into effect, and states such as Ohio also worked closely with colleges to help them understand the impacts of the new funding model. As colleges begin to adjust to new measures of performance, states can also gradually increase the percentage of total funding allocated based on performance.
• Subject the system to frequent evaluation. After the new policy goes into effect, colleges may encounter unexpected difficulties with achieving certain performance targets. Institutions producing results that already meet or exceed national standards may also find it difficult to achieve continued progress over extended periods of time. As a result, performance-based metrics and the overall higher education funding model should be subject to frequent review and adjustments should be made where necessary. Doing so provides institutions with more reasonable challenges and greater flexibility over time.

Going forward, a careful analysis of the impacts of “performance-based funding 2.0″ measures should help revise and expand on these best practices.

Recommendation

The ongoing policy debate on higher education budget cuts has compelled an increasing number of states to adopt performance-based funding models. Although it is short-sighted to reduce state budgets for higher education, the shift toward experimentation with performance-based funding is a welcome result and should be encouraged.

The U.S. Department of Education should direct a research study that more closely examines the costs and benefits of “performance-based funding 2.0″ programs and identifies best practices. The department might also use the experimental site authority granted to it by the Higher Education Opportunity Act of 2008 to develop pilot projects in states that lack performance-based funding measures. Doing so would help policymakers understand if a need for a federal role exists and, if it does, how to move forward with policies that encourage states to embrace performance-based funding. Linking performance to funding in the higher education realm may also have analogies to other sectors and are worth exploring at the federal level.

Conclusion

The recent wave of “performance-based funding 2.0″ measures signals a change in the way states are prioritizing goals in higher education. Institutions must go beyond simply raising enrollment; they must also ensure that students complete their degrees and graduate with the skills to be successful in an evolving economy. As the national conversation on higher education shifts toward completion, it must be accompanied by equally significant changes in institutional behavior. Performance-based funding is a necessary step toward aligning the objectives of state and institutional leaders, while ensuring that states are investing their limited funds wisely and productively.

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Kysie Miao is an intern with the Economic Policy team at the Center for American Progress.

SOURCE: AP/J. Scott Applewhite

"We basically have the student loan issue worked out," Sen. Harry Reid (D-NV) told reporters on Tuesday. The deal would keep the interest rate steady on federally subsidized Stafford loans.

With just a few days before student loan interest rates are set to double, party leaders in the Senate have reached a deal to keep the rate steady for 7.4 million students.

“We basically have the student loan issue worked out,” Senate Majority Leader Harry Reid (D-NV) told reporters on Tuesday.

The $6 billion agreement would be paid for primarily through savings from a change in how employer pension payments are calculated. Some savings will also come from tying the amount of time students can borrow at the low rate to the length of their degree program.

Congress must pass this legislation by July 1 to prevent the interest rates from doubling from 3.4 percent to 6.8 percent on federally subsidized Stafford loans. This would keep rates steady for 7.4 million students this fall, saving the average borrower $1,000 over the life of the loan.

The map below shows how students in your state benefit from keeping the Stafford interest rate steady.

The deal

Under the deal, a 25-year stabilization range would be created that could be used to reduce dramatic fluctuations in calculating companies’ pension contributions. When the two-year corporate bond rates that companies have previously used to determine their pension liabilities fall outside of this 25-year range, they can now be computed using the closest two-year rate within that timeframe. This will result in businesses taking fewer tax deductions for their contributions and is estimated to generate roughly $5 billion in tax revenue.

Additionally, employers will be required to pay an increased rate to insure their pensions through the Pension Benefit Guaranty Corporation, the federal government agency that oversees millions of employees’ pensions. The change is expected to generate $500 million.

The agreement also changes the amount of time students can borrow Stafford loans at the 3.4 percent interest rate, capping borrowing at 150 percent of the length of the degree program. For instance, a student earning a four-year bachelor’s degree would be eligible for subsidized Stafford loans for up to six years. Previous estimates have indicated this could save as much as $1.2 billion over the next decade, but specifics of this change have not yet been released.

This cap was originally included in President Barack Obama’s 2013 budget and was to be used to fill part of a $6 billion shortfall in Pell Grant funding for fiscal year 2014. As a result, Congress will need to find additional offsets to fill the Pell shortfall.

Path to victory

For months, both Democrats and Republicans supported keeping interest rates on student loans at the current 3.4 percent but disagreed on how to pay for it.

Both the Senate and the House of Representatives will likely vote on the student loan rate extension as part of the transportation-funding bill this week.

“We’re moving, I think, towards an agreement on a transportation bill that would also include a one-year fix on the student loan rate increase scheduled to go into effect July 1,” House Speaker John Boehner (R-OH) told reporters this morning.

The legislation must be passed by Congress and on President Obama’s desk by the weekend to meet the July 1 deadline.

“We’re pleased that the Senate has reached a deal to keep rates low and continue offering hard-working students a fair shot at an affordable education. Higher education has never been more important to getting a good job,” White House Press Secretary Jay Carney said in a statement. “We hope that Congress will complete the legislative process and send a bill to the President as soon as possible.”

The president has made keeping Stafford rates from doubling a core message of his work recently, traveling to college campuses around the country to discuss the issue and even inviting 150 young people to the White House last week, where he made a final push for Congress to act.

Support for higher education

Millions of Americans—college students, young Americans, and their allies—have spent the past few months calling on Congress to keep higher education affordable. Hundreds met in person with their senators and staff, asking them to prioritize students, and thousands more turned to social media outlets, online petitions, and phone banks to make sure Congress heard their voices.

On the whole, Americans strongly support making student loans more affordable and increasing available financial aid. According to a recent report by Campus Progress and Young Invincibles, an overwhelming 88 percent of Americans ages 18–34 said affordable higher education helps make our economy stronger. (see table)

Anne Johnson, the Director of Campus Progress, the youth outreach arm of the Center for American Progress and a leading voice in the fight to keep Stafford rates steady, applauded Senate leadership for reaching the deal.

“We know that higher education is a proven pathway to success and keeping it affordable and accessible for every interested American is crucial to strengthening the middle class and cultivating long-term economic growth,” Johnson said. “When Congress passes this legislation, millions of students will be able to return to school knowing that they will not face higher interest rates.”

Brian Stewart is the Journalism and Online Communications Manager, Tobin Van Ostern is the Advocacy and Communications Manager, and Abraham White is the Communications Associate for Campus Progress.

See also:

• Campus Progress Director Anne Johnson on the Student Loan Deal
• Infographic: What Does 7.4 Million Students Look Like? (Campus Progress)
• How Student Debt Impacts Students of Color

SOURCE: AP/Eric Gay

Increasing support for job training that builds human capital and leads to stable middle-class employment is a wise investment that should appeal to policymakers across the ideological spectrum.

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The Great Recession rapidly accelerated two long-term challenges facing American workers. The first challenge is that middle-class jobs are increasingly out of reach for workers who lack education and skills training beyond high school. Income and unemployment data make that clear enough.

The second challenge is that finding a job is no longer as easy as opening the classified ads or going to monster.com. Today’s labor market requires peer and professional networks and a better understanding of the opportunities available in our modern economy. This lesson applies to workers at all education levels—but it is particularly acute for low-skill workers, who are more likely to rely on public resources.

Put together, these challenges underscore why workers with low levels of human capital—such as education, skills, and peer and professional networks—are extremely disadvantaged in their efforts to achieve upward mobility in an increasingly knowledge-based economy.

Workforce training is part of the solution

Historically we have solved these challenges by expanding our federal investment in postsecondary education. As a result of successful federal initiatives such as the Morrill Land Grant Acts—which established land-grant colleges across our nation over the course of the past 150 years—and investments such as the G.I. Bill and the Pell Grant program, postsecondary education is generally considered to be the most effective vehicle in history for building a strong middle class and a skilled workforce.

But postsecondary education is not limited to a four-year bachelor’s degree. As President Barack Obama outlined in his American Graduation Initiative, postsecondary education includes many forms of education and training, including:

• Community colleges
• Vocational training
• Registered apprenticeships

Each of these options offers the potential for increased economic mobility and access to a stable middle-class livelihood.

Arguably the most underutilized route to achieving a valuable postsecondary education is through our nation’s workforce training and counseling system. Our adult workforce includes 80 million to 90 million full-time workers who lack sufficient skills, human capital, or personal interest to pursue a bachelor’s degree. Many of these adult workers would benefit from a high-quality hybrid workforce program that combines the educational rigor of postsecondary education with the flexibility and labor-market focus of workforce training. Such a hybrid program for adult workers is most effectively implemented through the workforce system.

It is also increasingly important to our economy to boost educational attainment among adults. Economists predict a growing shortage of skilled workers that cannot be filled through the traditional education pipeline. According to the Aspen Institute, for instance, two-thirds of our expected workforce in 2020 is already beyond our elementary and secondary education systems. In other words, it will not be enough to solve the problems in our elementary and secondary education systems since two-thirds of our workforce will be unaffected by those changes—it is equally crucial to boost the education and training of adult workers who are currently aged 25 to 55.

For these adult workers, the workforce system needs to provide a dependable way to attain a postsecondary education. It should offer a more flexible option for adult workers to acquire associate’s degrees, technical certificates, and industry-recognized credentials with documented value in the labor market. It’s time for the workforce system to take its place alongside preschool, kindergarten, elementary school, high school, and traditional four-year college as an institution for promoting education and developing human capital throughout our lives.

The existing workforce system is out of date

Unfortunately our workforce system is not meeting its potential to help adult workers build their human capital. It is excessively focused instead on providing short-term crisis intervention to unemployed workers. The core services most often provided to unemployed workers—such as basic labor market information and job search assistance—do little to boost the underlying human capital of these workers, who need the skills, credentials, and networking capabilities that should serve as the foundation for their future economic mobility.

This is because the most recent congressional update to the workforce system was in 1998 through the Workforce Investment Act under substantially different economic circumstances. At that time our economy was experiencing significant economic growth and across-the-board wage gains. The unemployment rate stood at 4.5 percent. Private employers wanted a workforce system that provided basic work readiness skills so that millions of workers could immediately enter the labor force. Congress thus chose to design a system around “work-first” policies—to help workers take advantage of plentiful job opportunities and high wages— instead of human capital development policies.

Almost 15 years later our economy has undergone significant changes. Our primary labor market challenge is no longer the need to connect millions of low-skill workers with plentiful job openings in a booming economy. Instead, our new challenge is to develop millions of low-skill workers into a highly skilled workforce that will continue to drive economic growth and upward mobility for decades to come. And the message from the private sector is clear: Employers are now looking for skilled workers with hands-on experience who are ready to make an immediate contribution in the workplace.

The reality is that our current workforce system—and its emphasis on “work-first” policies—is woefully out of date. Among the workforce system’s defining features are its failure to help workers build human capital, its chronic underfunding in comparison to the economic challenge, and its systemic complexity spanning multiple cabinet departments and numerous agencies. The workforce system is badly in need of reform.

Getting serious about human capital

In this paper we propose a plan to overhaul and reform the workforce training and counseling system. Our plan drastically simplifies this system in an effort to highlight its most important mission—human capital development.

Our plan is guided by five basic principles:

1. Most workers need some type of education or skills training beyond high school.

2. The workforce system should prioritize training partnerships leading to degrees, certificates, and credentials.

3. The workforce system should provide professional career navigation services to all workers seeking assistance to help them build human capital over time.

4. The existing workforce system is chronically underfunded.

5. The existing workforce system is unnecessarily complex.

We embrace views from both sides—supportive and critical—in an effort to bridge the longstanding impasse that is blocking reform and modernization of the workforce system.

The purpose of our plan is to shift the top priority of the workforce system to long-term training and human capital development. This is a departure from the existing system’s overemphasis on short-term job search activities and rapid re-employment at any cost. In reality, however, it should not be a controversial change in policy since legislators across the political spectrum have acknowledged the need for a more skilled workforce. There is a general consensus among experts that placing long-term human capital development at the center of the workforce system will be mutually beneficial for workers, employers, and our nation’s long-term economic growth. Now it is a matter of designing a new system to accomplish those broadly recognized goals.

Our plan restructures the workforce system according to the premise that workers should receive education, training, and career-planning services based on their unique human capital needs. Under our proposal, individuals would enroll in college-level training, career pathways, or contextualized basic education depending on a standard assessment of their skills and need for support services—as opposed to the current system that determines an individual’s eligibility for services according to a potentially unrelated list of legislative criteria. Our proposal to accomplish this shift in eligibility and implementation is briefly outlined below.

To focus on building long-term human capital, we propose restructuring much of the existing workforce training and counseling system into two distinct agencies with independent budgets. These agencies are designed to address the two core competencies of the workforce system—workforce training and career services. We believe that separating these core competencies will create a dedicated funding stream for each activity, thereby increasing transparency about how funds are being spent and whether those funds are achieving results. (At this point, it is worth noting that our proposal targets only adult-serving programs and does not address workforce training programs focused on youth, including Job Corps, YouthBuild, and WIA Youth.)

The first agency, which we would call the Workforce Investment Bank, would be responsible for developing an additional 2.5 million skilled workers annually— leading to an additional 1 million credentials. These workers would complete education and training programs through:

• Sector partnerships
• Registered apprenticeships
• “Learn and earn” training models
• Career pathways
• Contextualized education and training programs

Programs would be implemented with private-sector partners and linked to projected job openings in high-growth regional industries. Participants would earn associate’s degrees, technical certificates, and industry-recognized credentials.

The second agency, which we would call the Career Navigation System, would be responsible for upgrading our nationwide system of existing One Stop Career Centers to ensure that long-term career navigation services—including skills assessments, career counseling, and individual case management—are available to all workers seeking assistance. It would also develop a more integrated self-help system for individuals to track their human capital investment through online portfolios.

To maintain safeguards for vulnerable populations, we suggest establishing strict requirements so that all states, regions, and training partnerships report disaggregated data by sex, race, ethnicity, socioeconomic status, disability, and English-language proficiency. Results should be integrated into longitudinal data sets, including both education and workforce training programs. In addition, regions should be required to develop performance-based funding incentives to reward programs that help disadvantaged populations to complete training programs.

It is important to note, however, that our proposal does not resort to combining all workforce programs into a monolithic block grant. In our plan, reform is predicated on a core objective—developing human capital—and all policy recommendations flow from this core objective. In a block-grant proposal, by contrast, reform is based on a different goal—holding down costs.

Obviously these approaches are very different. On one hand, our plan begins with the premise that workers need to increase their education and skills, which leads us to create two agencies dedicated to workforce training and professional career services, respectively. On the other hand, plans to consolidate the work-force system into a block grant begin with the premise that our system spends too much money on workforce training, which leads to proposals to cap funding. Our approach is a means to develop a more skilled workforce; a block-grant approach is a means to manage long-term stagnation.

We believe our more thoughtful approach, combined with a commitment to fully fund a reformed workforce system, is a better way to address the serious challenges facing our workers, our business community, and the long-term competitiveness of our economy.

The following sections offer a brief overview of our proposed new agencies.

Workforce Investment Bank

The Workforce Investment Bank would focus exclusively on developing more than 2.5 million skilled adult workers at all levels and would be funded at $10 billion a year. It would include three programs:

• College for Working Adults would help 1.5 million college-ready adult workers to enroll in community college, technical college, and registered apprenticeship programs leading to associate’s degrees and technical certificates.
• Career Pathways for Working Adults would help 1 million low-skill adult workers to enroll in career pathway programs, integrated basic education and skills programs, or preapprenticeship programs that lead to industry-recognized credentials.
• Targeted Communities Workforce Investment Fund would help 150,000 disadvantaged workers in specific communities—such as Native Americans, migrant farmworkers, and ex-offenders—who do not have access to traditional work-force training and counseling programs. This program would also fund coordinated outreach efforts to military veterans.

The Workforce Investment Bank would be overseen by the Department of Education, thereby emphasizing the program’s focus on postsecondary credentials. The majority of funds would be allocated to regional authorities, which would be responsible for developing, implementing, and overseeing public-private training partnerships in their regions. These regional authorities would, in turn, be held accountable to the Workforce Investment Bank through performance measures that would track both progression and completion of postsecondary credential-bearing courses of study.

With regard to vulnerable populations, performance measures would ensure that public-private training partnerships are working with the hardest-to-serve groups and are being rewarded for working with adults who face multiple barriers to employment.

Career Navigation System

The Career Navigation System would be responsible for combining labor market information and career services for all adult workers seeking assistance. This new system would be funded at $2.25 billion a year and would redefine universal services to include comprehensive skills assessments, individual career counseling, case management, and prevocational training services. All job seekers would be assisted in creating an online career development account, or a “Career GPS,” to facilitate long-term career planning and communication with employers. This system would continue to offer basic services such as job-search assistance and work-test assessments for unemployment insurance as part of its comprehensive services.

The Career Navigation System should be overseen by the Department of Labor, thereby emphasizing the program’s mission to deliver high-quality career services. The system would be based on the existing network of 2,800 One Stop Career Centers and also would create connections to Educational Opportunity Centers located on community college campuses. The Department of Labor would support these bricks-and-mortar centers by developing and maintaining online tools and infrastructure that would be available to all career navigation centers, as well as providing technical assistance to develop the skills of professionals who provide career services.

Regional authorities

Evidence suggests that skilled workers, investors, and infrastructure tend to come together at the regional level—crossing political boundaries—as opposed to the local or state level. But the existing workforce system is managed locally by more than 600 workforce investment boards. We believe this proliferation of local administrative bodies contributes to the overall complexity of the workforce system.

Our reform plan supports a regional governance structure for the Workforce Investment Bank—substituting regional authorities for local workforce investment boards. Regional authorities should cut the number of administrative bodies in half—reducing the number to about 300. More importantly, it would align workforce development activities with natural labor markets and economic growth models, which would improve coordination and effectiveness.

These regional authorities would act as fiscal agents for the Workforce Investment Bank and would take the leadership role in developing training partnerships. By combining multiple funding streams and emphasizing human capital development, regional authorities would become primary stakeholders in the education and training systems—able to bring together workers, employers, education and training providers, and public officials to implement long-term economic development plans for their regions.

Regional authorities would continue to be led by private-sector business leaders, with additional expertise coming from sector experts, workforce system professionals, local elected officials, community college and technical college representatives, and labor representatives. Their efforts would focus on developing partnerships between community colleges and industry sectors leading to associate’s degrees and credentials; expanding the use of registered apprenticeships; supporting “learn and earn” training models; and using career pathways strategies and contextualized basic skills programs to help low-skill workers earn credentials. In addition, regional authorities would be responsible for overseeing implementation and data reporting of training programs to ensure quality and results.

Budgeting for a workforce system that solves our challenges

Our proposed budget for a reformed workforce system is designed to address the challenges confronting American workers in the modern, innovation-based economy. Our economy is already suffering a shortage of skilled workers, and it is only getting worse. Closing that gap will require new priorities—outlined in the preceding sections—and the resources to develop an additional 1 million skilled workers annually.

Our redesigned workforce system is intended to enroll more than 2.5 million workers in long-term education and training programs leading to associate’s degrees, technical certificates, and industry-recognized credentials, along with universal access to career navigation services. The increased enrollment in education and training programs should result in more than 1 million credentials earned annually. The Workforce Investment Bank would support:

• One million workers training in sector partnerships
• One million workers training in career pathways and contextualized programs
• Half a million workers training in registered apprenticeships

To ensure a sufficient level of funding to train an additional 2.5 million workers while expanding access to career navigation services, we combine workforce programs currently managed by the departments of Labor, Education, Agriculture, and the Interior, along with the Lifetime Learning Tax Credit, and direct those resources to our new workforce system. But simply reorganizing existing funds will not be enough to resolve our looming shortage of skilled workers. Therefore we incorporate a pending proposal from the Obama administration—the Community College to Career Fund—into our reform plan as well.

Of course, we recognize that such a significant overhaul of the workforce system will be difficult to enact—serious reform is never easy. But we also know it is possible.

A recent opinion piece in The New York Times demonstrates that political ideology should not be a barrier to reforming the workforce system. Two leading economists—Dean Baker, a liberal, and Mark Hassett, a conservative—joined forces to highlight the human and economic costs of long-term unemployment. They listed a number of impacts of long-term unemployment—including higher rates of suicide, higher incidence of serious illness, and future earnings losses of children whose parents experienced job losses—and issued a call for serious policies to resolve the crisis.

According to Baker and Hassett, “A policy package that as a whole should appeal to the left and the right should spend money to help expand public and private training programs with proven track records.”

We couldn’t agree more. Increasing support for job training that builds human capital and leads to stable middle-class employment is a wise investment that should appeal to policymakers across the ideological spectrum. The only remaining question is how to do it.

In the pages that follow, this report presents our plan to overhaul and reform the federal workforce system. We start by highlighting the looming shortage of skilled workers and the importance of postsecondary education and training to developing a skilled workforce. We then discuss the deficiencies in the current workforce system that are preventing it from focusing on human capital development. Finally, we outline in detail our plan to reform the workforce system.

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