A Monopoly for Non-Profit Lenders

SAFRA, the latest acronym in financial aid, refers to the Student Aid and Fiscal Responsibility Act - a large and ambitious piece of legislation released in the House this week. The legislation follows President Obama's budget proposal to move all future federal student loans to the Direct Loan Program, eliminating private loan companies from the business of making and holding student loans.

But, it keeps private loan companies in the business of servicing loans - keeping track of borrowers, collecting payments, and communicating with schools and students. The companies that get to service student loans will be chosen through a competitive bidding process run by the Department of Education. Well, almost all of them that is - the legislation allows non-profit loan companies in some states to be guaranteed a monopoly on the servicing of loans in those states.

A small section of the 181-page bill guarantees loan servicing business to eligible non-profit loan companies in each state, and in states with only one eligible non-profit, it allocates the lesser of 100,000 borrowers or all borrowers in the state. When I read this, I wondered how many states this might effect - in how many states would students have no choice in who services their loans?

Fortunately, I didn't have to do the math on that. Student Lending Analytics posted about this yesterday and estimated that 24 states might end up with one non-profit servicer in the state. SLA estimates that this would be 13 percent of all borrowers - 13 percent of borrowers would not have a choice in the company they rely on for help with repayment, to get a forbearance if necessary, and for communications about their loans.

Monopolies don't lead to the best customer service, and students need very good customer service when repaying their loans. These non-profit loan companies should compete with other servicers, rather than be guaranteed business in their state. And students should have the right to decide which company will do the best job of helping them repay their loans.

Charts You Can Trust - Revised

Earlier this week, the National Center for Education Statistics announced technical changes in the measure of student loan amounts for the 2007-08 NPSAS - the survey conducted every four-years on student financial aid. I won't get into technical details (you can find them here), but the end result limits the ability to compare the most recent data from 2007-08 to prior years of data using the publicly available DAS system.

These changes impact the data presented in Drowning in Debt, the CYCT published by ES last Thursday in which we compare student loan data from the 5 most recent NPSAS surveys, from 1992-93 to 2007-08. NCES has already revised the data for 2003-04 and will finish updating the 1999-2000 and 1995-96 data sets by October 2009. Once NCES finishes revising the publicly available data sets so that they can be compared with each other, ES will re-publish adjusted charts.

Despite this change, the primary conclusion of our report - that student debt is rising - remains unchanged. The revisions to the 2003-04 data reduce the average total loan amount presented in Chart 2 of our report by an average of $600. This means that the increase from 2003-04 to 2007-08 was even steeper than we originally presented.

Briefly,

En route to Pitchfork music festival in Chicago so blogging via blackberry and limited to short post:

1) David Brooks' column today about community colleges is quite good, much more so than yesterday's higher ed piece in the Post from E.J. Dionne.

2) The Post review of the Dead Weather concert @ 930 club misses the point spectacularly, the whole enterprise is clearly a controlled experiment to see if rock greatness can be achieved through sheer force of charisma, stage presence, and overwhelming cool. (Answer: Indeed it can!)

3) Neal McCluskey's arguments seem to deliberately ignore the actual history of higher education in America over the last 50 years, more on this next week.

Only In The Military?

A report released by the National Center of Education Statistics on Tuesday provides a more detailed account of states’ failure to close the achievement gap between blacks and whites. While 15 of 35 states closed the gap in 4th grade math, only four states closed the gap in 8th grade math. Reading performance is even worse, with only three states narrowing the margin in 4th grade, and none closing the gap in 8th grade. The failure to close the achievement gap is old news. However, the report does uncover a possible solution for closing the gap at a faster pace.

Black students at the Department of Defense Education Activity (DoDEA) have consistently scored at the top or near the top in math and reading on the National Assessment of Educational Progress (NAEP) when compared to their peers attending non-military schools. The chart below shows how black students at DoDEA measure up to their peers on the NAEP assessment. Besides 4th grade math, black students at DoDEA have the highest scores in 8th grade math, 4th grade reading, and 8th grade reading.

The DoDEA's success is not an isolated event. The system serves over 84,000 students in 12 foreign countries, seven states, Guam, and Puerto Rico. According to a 2007 Education World article DoDEA schools share many characteristics of typically found in low-performing public schools. Forty percent of students are minorities, 50 percent of the students eligible for free lunches, and a 35 percent annual mobility rate. "Yet, the schools have a 97 percent high school graduation rate, and the majority of students go on to higher education," Education World finds. DoDEA's success is attributed to factors inside and outside of the classroom.

Within the school, DoDEA has high academic expectations of students and regularly assess students’ progress. All schools use the same curriculum and have standardized classroom procedures to make students’ transition process less stressful. External factors might play an even more important role. Behavioral problems are not an issue due to the values students are taught at home. This in turn allow teachers to spend more time on teaching.

Militarizing all public schools is not a practical approach to school reform. This view might be one of the reasons there has been a lack of collaboration between military and civilian schools. However, this is changing. The latest round of base realignments and closures in 2005 has forced some military personnel to send their children to civilian schools. These changes prompted the Defense Department to create an Education Partnership Directorate in 2007 to work with local school districts to adopt aspects of DoDEA's curriculum to ease students' transition from military to public schools. "I feel there’s a real spirit of cooperation now," and "they [defense education officials] don’t want to be a hollow force," says John Deegan, superintendent of the Bellevue Public Schools near Offutt Air Force Base, Nebraska, and executive director of the Military Impacted Schools Association in the Army Times.

With a healthy budget and support from the Department of Defense, the Department of Education, and state education departments to form partnerships with local school districts, the DoDEA's Directorate has the arsenal it needs to help improve civilian schools that need it the most. Hopefully, the DoDEA does not limit itself to partnering to schools that are already high-performers. By showing that it can turn around low-performing schools with large minority populations, the DoDEA will make the military a more attractive place to raise families, produce a successful school model that can be implemented throughout the country, and perhaps help more states close the achievement gap.

-- Tim Harwood

Teachers First, Kids Second?

In a recent Education Sector online discussion, Laura Bornfreund states, “the challenge of teachers’ unions has little to do with the professional nature of the work and everything to do with the product they are producing: a public good.” I’d say the challenge has to do with both professionalism and the end product. But does this production of a public good mean that the union should be expected to lead or unreservedly support reform initiatives in the school system? Absolutely not. Let’s be real. That is not the union’s job, nor should it be.

Now I’ll be the first to admit that the union has its problems as the Citizens’ Commission on Civil Rights so accurately lay out. Unions (NEA in particular) are wrong to create a system that can encourage complacency and resistance to instructional improvement in schools. The real problem is that some unions oversimplify their function to protect teachers, creating a blanket protection for all teachers without accounting for teacher effectiveness. On the face of it, this egalitarian aim may seem favorable to its membership but the reality is that it does more to decrease the professionalism of teaching, backfiring on unions in the long run. A “protection for all” attitude may do more to delegitimize demands for higher compensation and increased funding, which is in everyone’s best interest. As in any profession, accountability is absolutely necessary to ensure productivity. There needs to be a way to evaluate teacher performance, providing incentives to teachers that are successful and getting rid of teachers who are not. However, the unions’ apprehension about increased accountability is not completely unfounded, and it is unfair to demonize unions for this reason. Reforms that are not backed up with resources and implementable strategies for improvement can do more harm than good to teachers AND students. I’ve seen it, experienced it, and it’s not pretty.

So yes CCCR, it would be great if unions would support or help shape more effective reforms like these. And yes, they need to be more rational in their resistance to certain reforms. (This might happen if more teachers, who agree with these reforms, had more of a voice in their union…but that’s another discussion). However, we must not expect unions to accept every reform idea thrown at our school system and condemn them if they do not. Most (not all) teachers want what’s best for the students or we wouldn’t have entered this extremely challenging (and underpaid) profession. So the union’s perspective is one that definitely needs to be heard and respected in these reform debates, making sure that while we figure out what’s best for the students, the teachers who are the implementers of reforms do not get lost in the shuffle.

--Marilyn Hylton

A Next Step for School Choice?

A fascinating proposal is being considered by the Los Angeles school board (here). Yesterday was the first meeting on it. The district has 50 schools that will come on line in the next couple of years. Instead of having the district run all of these new schools, Yolie Flores Aguilar, the vice president of the board, has proposed that there be a competitive process to determine who runs these new school sites. The school district itself could be one of the bidders, but would have to compete against others including charter school providers, union run schools, the mayor, and other non-profit/community groups. The thought of having the school district itself compete to run these schools would truly by a new evolution in thinking about the role of a school district. Finding adequate facilities is one of the biggest barriers to creating a new charter school. Some charter schools have been able to gain access to existing school facilities in LA, but generally these schools have been the bottom of the barrel facilities. Under this proposal brand new schools would be in play. As can be expected, this proposal will face much union opposition, and would likely create a lot of foundation support. As the LA Times editorial board concluded, this is a proposal worth consideration especially for the school sites that are located in parts of the districts where students do not currently have viable high quality school choice options. Setting up an effective set of criteria to determine who would operate the schools and expectation benchmarks that would need to be met to continue to operate the school would be a must. The specifics of the proposal start on page 7 (here).

Calculating Costs

Last fall Congress passed the Higher Education Opportunity Act (HEOA) which included, among other things, a requirement that colleges and universities supply an online calculator of expected net costs. These calculators would enable prospective students and their parents to get a prediction of their actual costs, after subtracting a family's probable financial aid package from the institution's gross tuition and fees. The US Department of Education is developing a template, set to be released later this summer, that colleges could adopt with only minor adjustments. The HEOA requires the calculators to be live three year's after the law's passage (a little over two years from now). From this morning's Chronicle ($), we find that two colleges have already adopted their own versions and made them available to prospective students, and it wasn't all that hard to do:

Purdue built its calculator with the help of the university's IT office, and it took about two months, [the university's senior associate director of financial aid] said.

A common complaint of university officials is that families will not understand that these calculators return only expected numbers and are not binding guarantees. Both Purdue and Smith College, the other early adopting institution, have found that not to be the case. Smith, for example, used to publish in its viewbook sample financial aid packages awarded to hypothetical families of different incomes. Real families often complained that their situation was similar to these hypothetical examples; the new calculator has reduced complaints and Smith now gets far fewer calls from families asking for explanations on how different assets are treated. At Purdue, more than 125,000 people used the calculater between September and March.

The true costs of higher education have been increasingly obscured by complex pricing models under which institutions list high tuition and fee costs but then distribute large financial aid packages. Other than national trends, families have been left in the dark about how much aid they should expect. The new calculators are one way of removing the guesswork.

Update: A commenter asked whether these calculators will be available to the public or only for applying students. The answer is they must be made available to the general public, but, in thinking about how to respond to the question, I thought it would be nice to be able to link to the fine work done by Purdue and Smith.

It turns out I can't. Purdue has a Web site up saying its calculator is not currently available, and I cannot find any evidence of Smith's site (it could exist, but I get paid to do things like this. If I can't find it, how likely are prospective students and parents to find it? I digress). There are, however, similar calculators available for Princeton, MIT, Yale, Williams, and Amherst. The College Board runs its own version to calculate Expected Family Contribution, but that is a far cry from a predicted cost at a specific institution.

The Libertarian's Dilemma

A couple of weeks ago I was invited to attend a meeting at the Cato Institute to discuss a new paper that explores why higher education is perpetually becoming much more expensive and what do about it. I was happy to attend; while my politics are pretty far from Cato's and I often think they're wrong, they tend to be wrong in interesting ways. And in this case I thought the paper was quite good (more on why below). Its top-line recommendations track closely with something I write about a lot: the need for more transparency and public information about how well colleges and universities serve their students and help them learn.

The problem is that colleges aren't just going to unilaterally release lots of new information on their own. Nor would it help matters much if they did; for data to matter it has to be standardized in a way that allows for comparison. That's why companies report one set of quarterly financial results to the SEC, not 50 different sets to each state. Given that higher education is a national market this leads to a similar national solution: the federal government should compel colleges to release much more information about success as a condition of receiving direct or indirect federal aid.

This puts libertarians in somewhat of a box. On the one hand, they tend to be hostile toward the tens of billions of public dollars that flow into colleges every year. The more colleges cost, the greater the claim on the average citizen's hard-earned money and thus reduction in their precious liberty etc., etc.

But the best way to bend down the long-term higher education cost curve and thus reduce government spending is to increase government regulation in the form of mandatory reporting. So it's a pick your poison situation for the Cato folks--would you rather have Big Brother's hand in your wallet or his eye on your business? You really can't avoid both.

The paper itself, by Robert Martin, is admirably clear and concise, running through a lot of basic economic theory and how it applies to spiralling college costs. Some of it is familiar--the principal / agent problem, Bowen's revenue-to-cost hypothesis, etc.--but it's always nice to see these ideas restated in compelling ways. Good parts include:

Unlike for-profit firms, the nonprofit organization is accountable to a number of groups. It not only serves its “customers” (in the case of higher education, students) but also its third-party payers (taxpayers or private donors). The nonprofit’s customers know about the quality of the product or service, but third-party payers have very little firsthand knowledge about quality. For example, the taxpayers who support a state university are subsidizing the cost of students’ education. If the students minimize their efforts, spending more time at football games and parties than in learning, or if educators shirk their responsibilities, giving outdated lectures and not showing up for office hours, they may deliver results well below what taxpayers and donors expect. But taxpayers and donors probably do not know about it.

And:

In higher education, the principals are taxpayers, students, parents, alumni, and donors, while the agents are faculty, administrators, and board members. As is always the case, the interests of all of these parties are not perfectly aligned.

One rarely encounters a venal person in higher education. Theft is rare in the ivy halls. Most people working in higher education are dedicated, sincere, and conscientious. But they are also human beings subject to normal human failings.

The particular human failing that leads to the agency problem is the assumption that whatever is in our own interest is also in the institution’s interest. Often we are unaware that our interests do not coincide with those of the institution.

I’ve experienced this lack of awareness myself. As a faculty member at a private liberal arts college, I welcomed lower teaching loads and smaller classes, telling myself that these benefits gave me time and opportunity to improve my teaching and research. I also welcomed liberal sabbatical policies, more research funds, reduced contact hours, and liberal travel funds for much the same reasons.

Similarly, senior administrators can persuade themselves that lavish offices, extensive building projects, expensive public relations events, luxury travel, and high compensation are in the institution’s interest. Board members may consider expensive social events to be in the institution’s interest. The inability to recognize when our personal benefit deviates from the institution’s benefit leads
to excessive costs.

And:

To understand the incentives that operate in higher education, we need to recognize that the chief objective of the producers may not be education per se, but maximizing the school’s reputation...[This leads]to a bias against reform and a bias toward increasing revenues rather than cutting costs...Pointing out problems leads to controversies, and controversies damage reputations; hence, reform damages reputations. Even admitting that there are unresolved problems at the institution can damage its reputation...Suppose you are a faculty member, an administrator, or a
board member. Fixing a serious problem will take years, and it will involve considerable controversy. Alternatively, the problem and the controversy can often be temporized by applying more cash to the institution. With more money, for example, more appealing courses can be added without eliminating those with low registrations. Faculty members, administrators, and board members ask themselves: Do I want my tenure to be known for controversy or to be known for an increasing flow of new funds into the institution? The answer is obvious. More funds trump controversies. Thus, board members hire presidents for their fund-raising abilities and pay lip service to cost control.

And:

Bowen’s revenue-to-cost hypothesis is sometimes compared to another traditional explanation for rising higher education costs, “Baumol’s cost disease” (Baumol and Bowen 1967). The two explanations are not competing hypotheses, but Bowen’s appears to have more direct relevance to higher education...higher education finance is a black hole that cannot be filled. The relationship between revenues and subsequent costs has a dynamic feedback effect. Higher education responds to higher costs by raising tuition and fees or initiating fundraising campaigns. But because costs in higher education are capped only by total revenues, there is no incentive to minimize costs. The costs go up in tandem with revenues. The next year, the cycle begins again because the higher costs mean that the new programs must be financed by additional revenues. There is thus a never-ending spiral effect between revenues and cost.

Taking a Close Look at the Middleman

The New America Foundation released a report yesterday looking closely at the confusing and slightly mysterious role of guaranty agencies in the federal student loan program. These non-profit entities play several roles in administering federal loans - some are vestigial and no longer necessary for the federal loan program to function, while others are ill-defined and poorly monitored. And, as the report describes, the payment structure for the agencies' various functions can run counter to the interests of taxpayers and borrowers.

The report makes it clear that it is time to overhaul the role of guaranty agencies in the federal loan program in order to remove unnecessary activities (and federal payments for them) and focus guaranty agencies' energies and money on a truly important task - helping students repay their loans and preventing students from defaulting.

TIME Act Reintroduced

Kennedy’s back with round two of the TIME---Time for Innovation Matters in Education---Act. The acronym could use some work but the proposed legislation looks pretty good and is well-timed following declarations by both Obama and Duncan about the need to expand school time.

The TIME Act expands school time in high-need schools so low-income students have more opportunities to learn. It’s based, and not loosely, on the model used by Mass2020 -- planning and evaluation are front and center, there is a lot of flexibility in how time is used, and schools must increase time for core academics, enrichment activities, and teacher planning and collaboration. In total, TIME authorizes $350 million in the first year and up to $500 million in 2014 for competitive grants to state education agencies, who will match a percentage of the grant (10% in first year and up from there) and then distribute at least 90% via subgrant process to locals—the rest is for state planning, evaluation and technical assistance (on tech assistance, look for a lot of groups stepping up to offer their services to states—besides the obvious National Center on Time & Learning which is intimately tied to the TIME Act.

Things you should know about the TIME Act:

• It targets high poverty schools (50% or more students FARM eligible) so it’s going to reach the kids who need it most. I’m very glad to hear less of the talk about how American kids can’t compete and the whole public school calendar is antiquated and therefore we should extend school from dawn to dusk and birth to death—and hear more about the fact that poor kids need shorter breaks and better opportunities to learn. This is what it’s always been about, this is what the research backs, and this is the only way to budge the big hand on the clock (there are still plenty of parents and teachers in happy middle class suburbs that have no intention of expanding the schedules or calendars in their schools—maybe in ten years, or twenty, but not yet). Risk of targeting high-poverty schools of course is that these schools are likely to be low-performing and may not have the capacity they need to pull it off. See further down…

• Grants are for 6 years. This type of initiative needs time, no pun, since it’s a major shift in custom and culture to see school as more than a 6-hour a day Labor to Memorial Day endeavor. And years are necessary to determine, at the district, state and national level, which time models are the most sustainable and effective as reforms—again, the idea of redesigning school schedules and calendars is no small thing so if we’re going to do this we should figure out what works and what doesn’t. On this note, TIME Act includes money for a national evaluation.

• The 6 years includes a full year for planning with a subset of schools. This year of planning is essential—not every school is ready for this and the potential for wasted money and time is enormous. Planning year, plus competitive nature of grants should help avoid the “bad schools now open longer” problem. This is very real risk--increasing student learning is of course the goal here but there are incentives to keep kids in school, even if they’re not learning anything. Parents want to know their kids are safe, businesses don’t want to be responsible for policing kids in the afternoon, and police don’t really want this responsibility either. [As an aside, I once asked the principal of a high school where I worked why students were watching Jerry Springer from 4-5pm every afternoon—just watching, not discussing, not thinking. The principal said it was a reward for good behavior all day and helped keep them engaged in school. I'll stop there].

• Restrictions on how the time can be used are few and intentionally imprecise, although there is a hard fast number for the amount of time schools must extend time by--- at least 300 hours (an arbitrary number). Still, schools have a lot of leeway in choosing how they use those hours-- to enhance learning in core academic subjects, or for enrichment, or for teacher planning and collaboration. Schools can extend by hours in the day, days in the week, weeks in the year—or any combination. And there is additional flexibility built in for high schools---elementary and middles must extend for all kids, but high schools have to do so for only kids in at least one grade—likely this is aimed at younger students, so ninth-grade academies and small school initiatives will align nicely with this. This kind of flexibility is important not only in an operational sense—schools have different needs---but also in an experimental sense—again, to learn what works in what context. Risk here is that flexibility puts a lot of pressure on the leadership to build a schedule and organize staff with some serious strategy in mind.

• There are also few restrictions on who is doing what to extend time--so partnerships can be forged between LEAs and universities and community agencies. This will bridge the worlds of school-based and out-of-school learning, which is good. But it will be messy at first—who provides which services, who hires and oversees staff, who serves as the fiscal agent, and who's accountable for what outcomes? All questions that the extended time movement will stir up and hopefully help answer.